Accounting Principles and Financial Statements: Chapter 1-2 Overview

Accounting

the process of planning, recording, analyzing, and interpreting financial information

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

Net worth statement

allows the person extending the loan to see the financial position of a borrower on a specific date and make a lending decision

Asset

anything of value that is owned

Liability

an amount owed

Personal net worth

the difference between personal assets and personal liabilities

Equity

difference between assets and liabilities

Ethics

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

Business ethics

use of ethics in making business decisions

Service businesses

business that performs an activity for a fee

Proprietorship

a business owned by one person

Business plan

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

GAAP

standards and rules that accountants follow while recording and reporting financial activities are commonly referred to as generally accepted accounting principles

Equities

financial rights to the assets of a business

Owner's equity

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

Accounting equation

equation showing the relationship among assets, liabilities, and owner's equity

Transaction

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

Account

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

Account title

name given to an account

Account balance

difference between the increases and decreases in an account

Capital account

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

Creditor

person or business that to whom a liability is owed

Revenue

increase in equity resulting from the sale of goods or services

Sale on account

sale for which payment will be received at a later date

Expense

the cost of goods or services used to operate a business

Withdrawals

assets taken from the business for the owner's personal use