Chapter 1: Starting a Proprietorship: Changes That Affect the Accounting Equation

A collection of key terms and definitions from Chapter 1 regarding starting a service business, fundamental accounting concepts, and the accounting equation.

Accounting

Planning, recording, analyzing, and interpreting financial information.

Accounting system

A planned process for providing financial information that will be useful to management.

Accounting records

Organized summaries of a business's financial activities.

Financial statements

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

Service business

A business that performs an activity for a fee.

Proprietorship

A business owned by one person, also referred to as a sole proprietorship.

Business Entity concept

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

Asset

Anything of value that is owned.

Equities

Financial rights to the assets of a business.

Liability

An amount owed by a business.

Owner's 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, stated as $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$.

Ethics

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

Business ethics

The use of ethics in making business decisions.

Transaction

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

Unit of Measurement concept

The accounting concept applied when business transactions are stated in numbers that have common values—that is, using a common unit of measurement.

Account

A record summarizing all the information pertaining to a single item in the accounting equation.

Account title

The name given to an account.

Account balance

The amount in an account.

Capital

The account used to summarize the owner's equity in a business.

Revenue

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

Sale on account

A sale for which cash will be received at a later date; also called a charge sale.

Realization of Revenue concept

The accounting concept applied when revenue is recorded at the time goods or services are sold.

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.

GAAP

Generally accepted accounting principles; the standards and rules that accountants follow while recording and reporting financial activities.