Financial Accounting- Chapter 1

accounting

an information and measurement system that identifies, records, and communicates an organization’s business activities

internal controls

policies and procedures that prevent fraud by protecting assets, ensuring reliable accounting records, and promoting efficiency

Securities and Exchange Commission (SEC)

government agency that has the legal power to set and enforce accounting practices for companies whose securities are offered for sale to the general public

Generally Accepted Accounting Principles (GAAP)

financial accounting concepts and rules to provide relevant, comparable, and reliable information

Measurement Principle (cost principle)

transaction value is the exchange value

revenue recognition principle

recognize revenue when goods or services are provided to customers and an amount is expected to be received from the customer

expense recognition principle (matching principle)

expense is reported when it happens/when item is used

full disclosure

report details behind financial statements that would impact a customers decisions (pertinent and relevant information)

going concern assumption

business is presumed to keep operating

monetary unit assumption

transactions and events are recorded in money

time period assumption

life of a company can be divided into time periods (ex. week, month, year)

business entity assumption

business is accounted for separately than the owner’s accounts

sole proprietorship

a business owned by one person that is a separate accounting entity but not a separate legal entity from its owner

partnership

a business owned by two or more people who are jointly liable for tax and other obligations and are not legally separate from its owners

corporation

a business legally separate from its owners or owners meaning it is responsible for its own taxes and debts. It has the rights of a person

cost benefit

Only information with benefits of disclosure greater than their cost need to be disclosed

assets

economic resources that are expected to benefit the companies future operations

liabilities

business’s present debt (ex. loans, owed wages, taxes owed)

equity

parts of the business clearly owned by the owner that contributes to their net assets

owner investments

assets from owner put into the business

owner withdrawals

assets that owner takes out of the business

revenue (sales)

increases owner’s equity from business

expenses

decreases in owner’s equity from the business

accounting equation

assets= liabilities + owner’s equity