Principles of Accounting I: Chapter 1 Overview

Business

Organization providing goods or services to customers.

Profit

Difference between revenue and costs of inputs.

Accounting

Information system reporting economic activities.

Managerial Accounting

Timely information for internal decision-making.

Financial Accounting

Information for external users like investors.

General-purpose financial statements

Reports distributed to external users.

Ethics

Moral principles guiding individual conduct.

Accounting Equation

Assets = Liabilities + Stockholders' Equity.

Liabilities

Obligations or debts owed by a business.

Stockholders' Equity

Owner's claim after liabilities are settled.

Ethical Decision-Making

Process of evaluating decisions based on ethics.

Ethical Decision-Making

Consider obligations to affected parties before deciding.

Relevance in Financial Reporting

Information that can impact decision-making processes.

Faithful Representation

Information accurately reflecting economic activity or condition.

Comparability

Ability to identify similarities and differences in reports.

Verifiability

Agreement on the meaning of reported financial items.

Timeliness

Distribution of reports must influence user decisions promptly.

Understandability

Clarity and conciseness facilitating interpretation of reports.

Monetary unit

Assumes currency is stable for accounting.

Time period

Assumes financial activities are reported periodically.

Going concern

Assumes business will continue operating indefinitely.

Measurement principle

Determines amounts to be recorded objectively.

Historical cost principle

Records assets at their initial transaction price.

Revenue recognition principle

Records revenue when services are performed or goods delivered.

Expense recognition principle

Records expenses in the same period as related revenue.

Assets

Resources owned by a business.

Liabilities

Debts owed to creditors by a business.

Equity

Owner's rights in the business.

Stockholders' equity

Equity for corporate ownership interests.

Owner's equity

Equity for proprietorships and partnerships.

Accounting equation

Assets = Liabilities + Stockholders' Equity.

Business transaction

Economic event affecting financial condition.

Account payable

Liability from purchases made on credit.

Prepaid expenses

Assets for future business use.

Revenue

Income earned from selling goods or services.

Objective amounts

Based on independent, unbiased evidence.

Verifiable amounts

Confirmed by third-party evidence.

Revenue

Income generated from providing services or selling goods.

Fees Earned

Revenue recorded from services provided.

Account Receivable

Claim against customers, representing an asset.

Expenses

Costs incurred in the process of earning revenue.

Wages Expense

Cost of employee compensation paid.

Rent Expense

Cost incurred for leasing property.

Utilities Expense

Costs for services like electricity and water.

Dividends

Distributions of earnings to stockholders.

Common Stock

Shares representing ownership in a corporation.

Retained Earnings

Accumulated profits retained for business operations.

Stockholders' Equity

Residual interest in assets after liabilities.

Assets

Resources owned by a business with economic value.

Liabilities

Obligations owed to creditors.

Transaction

An economic event affecting financial statements.

Cash

Liquid asset used for transactions.

Accounts Payable

Liabilities owed to suppliers or creditors.

Supplies Expense

Cost of supplies used during a period.

Income Statement

Reports revenues and expenses over a time period.

Net Income

Excess of revenue over expenses.

Net Loss

Excess of expenses over revenue.

Statement of Stockholders' Equity

Reports changes in retained earnings and stock.

Balance Sheet

Reports assets, liabilities, and equity at a date.

Statement of Cash Flows

Reports cash inflows and outflows from activities.

Revenue Recognition Principle

Revenues recognized when earned, not received.

Expense Recognition Principle

Expenses matched with related revenues.

Retained Earnings

Cumulative profits retained in the business.

Common Stock

Equity ownership in a corporation.

Cash Receipts

Money received from customers or clients.

Dividends

Payments made to shareholders from profits.

GAAP (Generally Accepted Accounting Principles)

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

Sole Proprietorship

A business owned by one person

Partnership

A business in which two or more persons combine their assets and skills

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts