Chapter 1 accounting terms

Account

A record of the business activities related to a particular item

Accounting

A record of the business activities related to a particular item

Accounting equation

Equation that shows a company’s resources (assets) equal creditors’ and owners’ claims to those resources (liabilities and stockholders’ equity).

Assets

Resources of a company

Auditors

Trained individuals hired by a company as an independent party to express a professional opinion of the conformity of that company’s financial statements with GAAP.

Balance sheet

A financial statement that presents the financial position of the company on a particular date. Also, statement of financial position.

Capital Markets

A composite of all investors and creditors who provide funds to businesses who need them

Common Stock

Amounts invested by stockholders when they purchase shares of stock; external source of equity.

Comparatability

The ability of users to see similarities and differences between two different business activities.

Consistency

The use of similar accounting procedures either over time for the same company, or across companies at the same point in time.

Corporation

An entity that is legally separate from its owners

Cost constraint

Financial accounting information is provided only when the benefits of doing so exceed the costs.

Creditors

Lend money to a company, expecting to be paid back the loan amount plus interest

Decision usefulness

The ability of the information to be useful in decision making.

Dividends

Distributions to stockholders, typically in the form of cash.

Economic entity assumption

All economic events with a particular economic entity can be identified

Ethnics

A code or moral system that provides criteria for evaluating right and wrong behavior.

Expenses

Costs of providing products and services and other business activities during the current period

Faithful representation

Accounting information that is complete, neutral, and free from error.

Financial accounting

Measurement of business activities of a company and communication of those measurements to decision makers outside of the company (external reporting).

Financial Accounting Standards Board (FASB)

An independent, private body that has been given responsibility by the SEC for establishing accounting and reporting standards (GAAP) for public and private companies in the United States.

Financial statements

Periodic reports published by the company for the purpose of communicating a company’s business activities to those outside of the company.

Financing cash flows

Cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends.

Generally accepted accounting principles (GAAP)

The formal standards that have been established for the purpose of financial reporting.

Going concern assumption

In the absence of information to the contrary, a business entity will continue to operate indefinitely

Income statement

A financial statement that reports the company’s revenues and expenses over an interval of time. Also, statement of operations, statement of income, profit and loss statement, or P&L.

International Accounting Standards Board (IASB)

An international accounting standard-setting body established to issue global standards to help make accounting practices more comparable worldwide.

International Financial Reporting Standards (IFRS)

The standards being developed and promoted by the International Accounting Standards Board.

Investing cash flows

Cash transactions involving the purchase and sale of investments and long-term assets, such as equipment.

Liabilities

Amount owed to creditors

Monetary unit assumption

A unit or scale of measurement can be used to measure financial statement elements.

Net income

Difference between revenues and expenses. Also, earnings or profits.

Operating cash flow

Cash transactions involving revenue and expense activities, such as providing products or services to customers and the associated costs of doing so, like rent, salaries, utilities, taxes, and advertising.

Partnership

Business owned by two or more persons

Periodicity assumption

The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting.

Relevance

Accounting information that possesses confirmatory value and/or predictive value, and that is material.

Retained earnings

All net income minus all dividends and net losses over the life of the company; internal source of equity. Also, reinvested earnings or profits reinvested in the business, or when negative, accumulated deficit.

Revenues

Amounts recognized when the company sells products or services to customers.

Sarbanes-Oxley Act (SOX)

Formally titled the Public Company Accounting Reform and Investor Protection Act of 2002, this act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators.

Securities and Exchange Commission (SEC)

Government agency in the United States responsible for overseeing and enforcing accounting and disclosure requirements for companies issuing and selling securities (stocks and bonds) to the public.

Sole proprietorship

A business owned by one person

Statement of cash flows

A financial statement that measures activities involving cash receipts and cash payments over an interval of time

Statement of stockholders’ equity

A financial statement that summarizes the changes in stockholders’ equity over an interval of time.

Stockholders’ equity

Owners’ claims to resources, which arise primarily from contributions by the owners and company operations. Also, shareholders’ equity, owners’ equity, or just equity.

Timeliness

Information being available to users early enough to allow them to use it in the decision process.

Understandability

Users must understand the information within the context of the decision they are making

Verifiability

A consensus among different measures