CH1 Terminology

A complete set of vocabulary flashcards derived from the lecture notes, covering essential accounting principles, financial statements, and business resource definitions.

Accounting

Service-based profession that provides reliable and relevant financial information useful in making decisions.

Accounting equation

Expression of the relationship between the assets and the claims on those assets.

Accounting event

Economic occurrence that changes a company’s assets, liabilities, or equity.

Accounting period

Span of time covered by the financial statements, normally $1$ year, but it may be a quarter, a month, or some other time span.

Accounts

Record of classified and summarized transaction data; component of financial statement elements.

Annual report

Document in which an organization provides information to stockholders, usually on an annual basis.

Articulation

Characteristic of financial statements that means they are interrelated. For example, the amount of net income reported on the income statement is added to beginning retained earnings as a component in calculating the ending retained earnings balance reported on the statement of changes in stockholders’ equity.

Assets

Economic resources used to produce revenue that is expected to provide future benefit to the business.

Asset exchange transactions

Transaction that decreases one asset while increasing another asset so that total assets do not change; for example, the purchase of land with cash.

Asset source transactions

Transaction that increases an asset and a claim on assets; three types of asset source transactions are acquisitions from owners (equity), borrowings from creditors (liabilities), or earnings from operations (revenues).

Asset use transactions

A transaction that decreases both an asset and a claim on assets; the three types of asset use transactions are distributions (transfers to owners), liability payments (to creditors), or expenses (costs incurred to operate the business).

Balance sheet

Financial statement that reports a company’s assets and the corresponding claims (liabilities and equity) on those assets as of a specific date (usually as of the end of the accounting period).

Claims

Owners’ and creditors’ interests in a business’s assets.

Closing (the books)

Bookkeeping technique of transferring balances from the temporary accounts (Revenue, Expense, and Dividends) to the permanent account (Retained Earnings).

Common stock

Basic class of corporate stock that carries no preferences as to claims on assets or dividends; certificates that evidence ownership in a company.

Creditors

Individual or organization that has loaned goods or services to a business.

Dividend

Transfer of wealth from a business to its owners.

Double-entry accounting (bookkeeping)

Recordkeeping system that provides checks and balances by recording two sides for every transaction.

Earnings

The difference between revenues and expenses. Sometimes called profit.

Elements

The primary financial statement categories: assets, liabilities, equity, contributed capital, revenue, expenses, gains, losses, distributions, and net income.

Expenses

Economic sacrifices (decreases in assets or increases in liabilities) that are incurred in the process of generating revenue.

Financial accounting

Branch of accounting focused on the business information needs of external users (creditors, investors, governmental agencies, financial analysts, etc.); its objective is to classify and record business events and transactions to produce external financial reports (income statement, balance sheet, statement of cash flows, and statement of changes in equity).

Financial Accounting Standards Board (FASB)

Private, independent standard-setting body established by the accounting profession that has been delegated the authority by the SEC to establish most of the accounting rules and regulations for public financial reporting.

Financial resources

Money or credit supplied to a business by investors (owners) and creditors.

Financial statements

Primary means of communicating the financial information of an organization to the external users. The four general-purpose financial statements are the income statement, statement of changes in equity, balance sheet, and statement of cash flows.

Financial activities

Cash inflows and outflows from transactions with investors and creditors (except interest), including cash receipts from issuing stock, borrowing activities, and cash disbursements to pay dividends; one of the three categories of cash inflows and outflows reported on the statement of cash flows. This category shows the amount of cash supplied by these resource providers and the amount of cash that is returned to them.

General ledger

The set of all accounts used in each accounting system, typically organized in financial statement order.

Generally accepted accounting principles (GAAP)

Rules and practices that accountants agree to follow in financial reports prepared for public distribution.

Going concern

Accounting presumption that a company will continue to operate indefinitely, benefiting from its assets and paying its obligations in full; justifies reporting assets and liabilities in the financial statements.

Historical cost concept

Accounting presumption that a company will continue to operate indefinitely, benefiting from its assets and paying its obligations in full; justifies reporting assets and liabilities in the financial statements.

Horizontal statements model

Arrangement of a set of financial statements horizontally across a sheet of paper.

Income

Added value created in transforming resources into more desirable states.

Income statement

Financial report on profitability; measures the difference between revenues and expenses for the accounting period (whether or not cash has been exchanged).

Interest

Fee paid for the use of funds; represents expense to the borrower and revenue to the lender.

International Accounting Standards Board (IASB)

Private, independent body that establishes International Financial Reporting Standards (IFRS). The IASB’s authority is established by various governmental institutions that require or permit companies in their jurisdiction to use IFRS. To date, over $100$ countries require or permit companies to prepare their financial statements using IFRS. One notable exception is the United States of America.

International Financial Reporting Standards (IFRS)

Pronouncements established by the International Accounting Standards Board that provide guidance for the preparation of financial statements.

Investing activities

Cash inflows and outflows associated with buying or selling long-term assets and cash inflows and outflows associated with lending activities and investments in the debt and equity of other companies; one of the three categories of cash inflows and outflows reported on the statement of cash flows.

Investors

Company or individual who gives assets or services in exchange for security certificates representing ownership interests.

Labor resources

The intellectual and physical efforts of individuals are used in the process of providing goods and services to customers.

Liabilities

Obligations of a business to relinquish assets, provide services, or accept other obligations.

Liquidation

Process of dividing up an organization’s assets and returning them to the resource providers. In business liquidations, creditors normally have priority; after creditor claims have been satisfied, any remaining assets are distributed to the company’s owners (investors).

Liquidity

Ability to convert assets to cash quickly and meet short-term obligations.

Managerial accounting

Branch of accounting focused on the information needs of managers and others working within the business; its objective is to gather and report information that adds value to the business. Managerial accounting information is not regulated or reported to the public.

Manufacturing business

Companies that make the goods they sell to customers.

Market

Groups of people or entities organized to buy and sell resources.

Matching concept

Accounting principle of recognizing expenses in the same accounting period as the revenues they produce, using one of three methods: match expenses directly with revenues (e.g., cost of goods sold), match expenses to the period in which they are incurred (e.g., rent expense), and match expenses systematically with revenues (e.g., depreciation expense).

Merchandising business

Companies that buy and resell merchandise inventory.

Net income

Increase in equity resulting from operating the business.

Net loss

Decrease in equity resulting from operating the business.

Not-for-profit entities

Organizations (also called nonprofit or nonbusiness organizations) established primarily for motives other than making a profit, such as providing goods and services for the social good. Examples include state-supported universities and colleges, hospitals, public libraries, and public charities.

Operating activities

Cash inflows from and outflows for routine, everyday business operations, normally resulting from revenue and expense transactions including interest; one of the three categories of cash inflows and outflows reported on the statement of cash flows.

Permanent accounts

Balance sheet accounts; contain information carried forward from one accounting period to the next (ending account balance one period becomes beginning account balance next period).

Physical resources

Natural resources businesses transform to create more valuable resources.

Profit

Value added by transforming resources into products or services desired by customers.

Reporting entities

Businesses or other organizations for which financial statements are prepared.

Retained earnings

Portion of stockholders’ equity that includes all earnings retained in the business since inception (revenues minus expenses and distributions for all accounting periods).

Revenue

The economic benefit (increase in assets or decrease in liabilities) gained by providing goods or services to customers.

Service businesses

Organizations such as accounting and legal firms, dry cleaners, and insurance companies that provide services to consumers.

Stakeholders

Parties interested in the operations of a business, including owners, lenders, employees, suppliers, customers, and government agencies.

Statement of cash flow

The financial statement that reports a company’s cash inflows and outflows for an accounting period, classifying them as operating, investing, or financing activities.

Statement of stockholders’ equity

Statement that summarizes the transactions that affected the owners’ equity during the accounting period.

Stewardship

Refers to a business’s duty to protect and use the assets of the company for the benefit of the owners (the firm’s stockholders).

Stockholders

Owners of a corporation.

Stockholders’ equity

Stockholders’ equity represents the portion of the assets that is owned by the stockholders.

Temporary accounts

Accounts used to collect retained earnings data applicable to only the current accounting period (revenues, expenses, and distributions); sometimes called nominal accounts.

Transactions

Business event that involves transferring something of value between two entities.

Users

Individuals or organizations that use financial information for decision making.