Accounting Chapter 1: Accounting Equation, Terminology, and Concepts

Comprehensive vocabulary flashcards covering fundamental accounting concepts, equations, forms of business ownership, GAAP, CPA exam models, and ethics.

Accounting

The language of business; planning, recording, analyzing, and interpreting financial information for an organization.

Revenue

An increase in equity resulting from the sale of goods or service

Accounting System

A planned process designed to compile financial data and summarize the results in accounting records and reports.

Financial Statements

Financial reports that summarize the financial condition and operations of a business.

Income Statement

A financial report that shows revenue and expenses.

Balance Sheet

A financial report that shows the accounting equation.

Net Worth Statement

A formal report that shows what an individual owns, what an individual owes, and the difference between the two.

Assets

Anything of value that is owned, such as cash, supplies, or equipment.

Liabilities

An amount that is owed by a business.

Equity

The amount remaining after the value of all liabilities is subtracted from the value of all assets.

Accounting Equation

An equation showing the relationship among assets, liabilities, and owner's equity: $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$.

Account

A record that summarizes all the transactions pertaining to a single item in the accounting equation.

Account Title

The name given to an account.

Account Balance

The difference between the increases and decreases in an account.

Equities

Financial rights to the assets of a business.

Creditor

A person or business to whom a liability is owed.

Transaction

A business activity that changes assets, liabilities, or owner's equity.

Accounts Payable

Amounts owed to creditors of the business when buying on account.

Revenue

An increase in owner's equity resulting from the operation of a business.

Accounts Receivable

Amounts to be collected from customers who buy on account and pay later.

Expense

A decrease in owner's equity resulting from the operation of a business.

Withdrawals

Assets taken out of a business for the owner's personal use, which are not considered business expenses.

Service Business

A business that performs a task for a fee (e.g., Delgado Web Services).

Merchandising Business

A business that buys finished products and resells them to individuals or other businesses (e.g., ThreeGreen Products).

Manufacturing Business

A business that buys raw materials and transforms them into finished products to sell to individuals or other businesses (e.g., Spirol International).

Sole Proprietorship

A business owned by one person.

Partnership

A business owned by two or more persons.

Corporation

A business recognized by law to have a life of its own, owned by shareholders/stockholders.

LLC

Limited Liability Corporation.

Realization of Revenue

The concept that revenue is recorded at the time goods or services are sold, regardless of whether cash is received.

Business Entity

The concept that a business's financial information is recorded and reported separately from the owner's personal financial information.

Unit of Measurement

The concept that business transactions are stated in numbers that have common values.

Generally Accepted Accounting Principles (GAAP)

The standards and rules that accountants follow while recording and reporting financial activities.

Securities and Exchange Commission

The federal agency that established GAAP along with the Financial Accounting Standards Board (FASB) to guide the accounting profession.

Big Four

The four major accounting firms: Ernst & Young, KPMG, PricewaterhouseCoopers, and Deloitte & Touche.

American Institute of Certified Public Accountants (AICPA)

A professional organization that promotes job opportunities in accounting.

Core + Discipline Model

The CPA Exam structure starting in January 2024 requiring three Core sections (AUD, FAR, REG) and one Discipline section (BAR, ISC, TCP).

Compound Interest

Interest paid on an original amount deposited in a bank plus any interest that has been paid.

Ethics

The principles of right and wrong that guide an individual in making decisions.

Business plan

Formal written document that describes the nature of a business and how it will operate

Capital account

Account that is used to summarize the owner’s equity in a business