Accounting Principles - Chapter 1: Accounting in Action

Vocabulary and key concepts from Chapter 1: Accounting in Action, covering activities, users, principles, assumptions, and financial statements.

Accounting

A process consisting of three activities: identification, recording, and communication of economic events relevant to a business.

Identification

The accounting activity of identifying economic events that are relevant to a specific business.

Recording

The accounting activity that involves recording, classifying, and summarizing economic events.

Communication

The accounting activity of preparing accounting reports and analyzing and interpreting the reported information.

Internal Users

Individuals within an organization who use accounting data, including departments like Finance, Marketing, Human Resources, and Management.

External Users

Individuals outside of a company who use accounting data, primarily investors and creditors.

Investors

External users who use accounting data to decide whether to buy, hold, or sell ownership shares of a company.

Creditors

External users, such as suppliers and bankers, who use accounting data to evaluate the risk of granting credit or lending money.

Ethics

Standards of conduct by which actions are judged as right or wrong, honest or dishonest, and fair or not fair.

Sarbanes-Oxley Act (SOX)

A law passed by Congress to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.

Generally Accepted Accounting Principles (GAAP)

Standards that are generally accepted and universally practiced, indicating how to report economic events.

Financial Accounting Standards Board (FASB)

A primary accounting standard-setting body in the United States.

Securities and Exchange Commission (SEC)

A government agency that oversees U.S. financial markets and accounting standard-setting bodies.

Historical Cost Principle

A principle stating that companies should record assets at their cost, and continue to use that cost in later periods.

Fair Value Principle

A principle stating that assets and liabilities should be reported at the price received to sell an asset or settle a liability.

Monetary Unit Assumption

An assumption that requires companies to include in accounting records only transaction data that can be expressed in terms of money.

Economic Entity Assumption

An assumption that requires the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities.

Proprietorship

A business owned by one person who receives all profits, suffers all losses, and is personally liable for all debts.

Partnership

A business owned by two or more persons that is often a retail or service-type business with unlimited personal liability.

Corporation

A business organized as a separate legal entity under state law, with ownership divided into transferable shares of stock and providing limited liability.

Basic Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$$

Assets

Resources a business owns that provide future services or benefits, such as Cash, Supplies, and Equipment.

Liabilities

Claims against assets representing debts and obligations, such as Accounts Payable and Notes Payable.

Owner’s Equity

The ownership claim on total assets, often referred to as residual equity.

Revenues

Increases in assets or decreases in liabilities resulting from the sale of goods or performance of services in the normal course of business.

Expenses

The cost of assets consumed or services used in the process of earning revenue.

Drawings

The withdrawal of cash or other assets from a business by the owner for personal use.

Transactions

A business's economic events recorded by accountants which have a dual effect on the accounting equation.

Income Statement

A financial statement that reports revenues and expenses and shows net income or net loss for a specific period of time.

Owner’s Equity Statement

A financial statement that reports the changes in owner's equity for a specific period of time.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity at a specific date, acting as a snapshot of financial condition.

Statement of Cash Flows

A financial statement providing information on cash receipts and payments for a specific period of time.

Net Income

The result when revenues exceed expenses ($\text{Revenues} > \text{Expenses}$).

Faithful Representation

A quality of financial information meaning it matches what really happened and is factual.

Forensic Accounting

A field that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.