Accounting in Business - Chapter 1

A set of vocabulary flashcards covering Chapter 1: Accounting in Business, detailing accounting principles, assumptions, ethics, business structures, accounting equations, and financial statements.

Accounting

An information and measurement system that identifies, records, and communicates an organization's business activities.

External Users

Individuals and groups who are not directly involved in managing or operating an organization, such as shareholders, lenders, external auditors, nonmanagerial employees, and regulators.

Internal Users

Individuals directly involved in managing and operating an organization, such as purchasing managers, human resource managers, production managers, research and development managers, and marketing managers.

Private Accounting

The area of accounting where employees work directly for a single business entity, offering the majority of accounting career opportunities.

Public Accounting

The field of accounting that involves offering auditing, taxation, and advisory services to a variety of external clients.

Ethics

Beliefs that distinguish right from wrong, serving as accepted standards of good and bad behavior to ensure accounting information is trusted.

Fraud Triangle

A model showing the three factors that must exist for an individual to commit fraud: opportunity (low perceived risk of detection), pressure (incentive such as unpaid bills), and rationalization (justifying the act or failing to see its criminal nature).

Generally Accepted Accounting Principles (GAAP)

The concepts and rules that govern financial accounting to ensure that information possesses both relevance and faithful representation.

Relevance

A qualitative characteristic of accounting information signifying that it has the capacity to affect the decisions of users.

Faithful Representation

A qualitative characteristic of accounting information indicating that the reporting accurately reflects underlying business transactions and results.

Financial Accounting Standards Board (FASB)

The independent private-sector group that has the primary responsibility to set GAAP, with authority delegated by the SEC.

Securities and Exchange Commission (SEC)

A U.S. government agency that oversees GAAP compliance by companies that sell stock and debt to the public.

International Accounting Standards Board (IASB)

An independent global organization that issues International Financial Reporting Standards (IFRS) to identify preferred accounting practices worldwide.

International Financial Reporting Standards (IFRS)

A set of accounting practices and principles issued by the IASB designed to facilitate international comparison of financial statements.

General Principles

The foundational assumptions, concepts, and guidelines applied when preparing financial statements.

Specific Principles

Detailed rules and procedures used in reporting individual business transactions and events.

Measurement Principle (Cost Principle)

An accounting principle requiring financial statement information to be based on actual cost, which is considered objective.

Revenue Recognition Principle

An accounting principle requiring revenue to be recognized when goods or services are provided to customers, recorded at the amount expected to be received.

Expense Recognition Principle (Matching Principle)

An accounting principle requiring a company to record its expenses incurred to generate the revenue reported in that same period.

Full Disclosure Principle

An accounting principle that mandates reporting details behind financial statements that would impact users' decisions, typically disclosed in statement notes.

Going-Concern Assumption

An accounting assumption that presumes a business will continue operating indefinitely into the future instead of being closed or sold.

Monetary Unit Assumption

An accounting assumption stating that transactions and economic events are expressed in monetary, or money, units.

Time Period Assumption

An accounting assumption stating that the ongoing operations of an organization can be divided into distinct time intervals, such as months, quarters, or years.

Business Entity Assumption

An accounting assumption stating that a business must be accounted for separately from other business entities and distinct from its owner.

Sole Proprietorship

A business owned by $1$ individual that is easy to set up, is not a separate legal entity, confers unlimited personal liability on the owner, incurs no additional business income tax, and terminates upon owner choice or death.

Partnership

A business owned by $2$ or more partners that is easy to establish, is not a separate legal entity, carries unlimited joint personal liability for debts, incurs no separate business income tax, and dissolves upon a partner's withdrawal or death.

Corporation

A business organized as a separate legal entity possessing the same rights and responsibilities as a person, owned by stockholders/shareholders who enjoy limited liability, subject to separate corporate taxation, and possessing an indefinite business life.

Limited Liability Company (LLC)

A separate legal entity owned by one or more members who receive limited personal liability, incurs no additional business income tax, and possesses an indefinite life.

Cost-Benefit Constraint

An accounting constraint providing that only information with benefits of disclosure greater than the cost of gathering and reporting it need be disclosed.

Materiality Constraint

An accounting constraint stating that only information significant enough to influence the economic decisions of a reasonable person need be disclosed.

Accounting Equation

The foundational equality that balances total enterprise claims and assets: $\text{Assets} = \text{Liabilities} + \text{Equity}$.

Assets

Economic resources owned or controlled by a business that are expected to provide future economic benefits, including Cash, Supplies, Equipment, Land, Buildings, and Accounts Receivable.

Liabilities

Creditors' claims on a company's assets, reflecting obligations to transfer assets or provide future goods/services, including Accounts Payable, Notes Payable, and Unearned Revenue.

Equity

The owner's residual claim on the assets of an entity after deducting liabilities, increased by Owner Capital and Revenues, and decreased by Owner Withdrawals and Expenses.

Income Statement

A basic financial statement describing a company's revenues and expenses, computing net income or net loss over a specific period of time: $\text{Net Income} = \text{Revenues} - \text{Expenses}$.

Statement of Owner's Equity

A financial statement explaining the net changes in owner's equity over a period of time resulting from investments by the owner, net income or loss, and owner withdrawals.

Balance Sheet

A financial statement describing a company's financial position at a single point in time by detailing the specific types and amounts of assets, liabilities, and equity.

Statement of Cash Flows

A financial statement identifying cash inflows (receipts) and cash outflows (payments) over a period of time, classified into operating, investing, and financing activities.

Return on Assets (ROA)

A financial ratio measuring operating performance and efficiency, calculated as: $\text{Return on Assets} = \frac{\text{Net Income}}{\text{Average Total Assets}}$.