Accounting Exam 1

Sole Proprietorship

A business owned by one individual with unlimited liability and the simplest form of ownership.

Unlimited Liability

A situation where the owner is personally responsible for all business debts.

Partnership

A business owned by two or more individuals who share liability and management.

Corporation

A separate legal entity from its owners, providing limited liability to its shareholders.

Shareholders

Owners of a corporation who have limited liability.

Limited Liability Partnership (LLP)

A partnership providing limited liability to each partner, protecting them from personal liability for business debts.

Limited Liability Company (LLC)

A business structure combining partnership flexibility with corporation limited liability.

S Corporation (S Corp)

A corporation that elects to pass income and losses to shareholders for tax purposes.

Assets

Resources owned by a company, such as cash, inventory, and buildings.

Liabilities

Obligations owed to creditors, such as accounts payable and loans.

Owner’s Equity

The residual interest in the assets of the entity after deducting liabilities.

Revenue

Earnings from the sale of goods or services.

Expenses

Costs incurred to generate revenue, like wages and rent.

Gains/Losses

Increases or decreases in equity from peripheral activities.

Balance Sheet

A financial statement providing a snapshot of a company's financial position at a specific time.

Income Statement

A financial statement showing a company's performance over a period, detailing revenue and expenses.

Statement of Retained Earnings

Shows changes in retained earnings over time, including net income and dividends.

Statement of Cash Flows

Reports cash inflows and outflows from operating, investing, and financing activities.

Accounting Equation

Assets = Liabilities + Owner’s Equity.

Internal Users of Accounting Information

Managers and employees using financial information for decision-making.

External Users of Accounting Information

Investors, creditors, and regulators assessing a company's financial health.

CPAs (Certified Public Accountants)

Accountants licensed to provide auditing, tax, and advisory services.

SEC (Securities and Exchange Commission)

U.S. government agency overseeing the securities industry and enforcing accounting standards.

FASB (Financial Accounting Standards Board)

Sets accounting standards in the U.S.

AICPA (American Institute of Certified Public Accountants)

A professional organization for CPAs responsible for ethics and standards.

IASB (International Accounting Standards Board)

Develops and promotes global financial reporting standards (IFRS).

Audits

Independent examination of financial statements for accuracy and compliance.

GAAP (Generally Accepted Accounting Principles)

A set of accounting standards and procedures used in the U.S.

Conceptual Framework

Defining principles and concepts that guide the development of accounting standards.

Double Entry Accounting

A system where every transaction affects at least two accounts, keeping the accounting equation balanced.

T Accounts

Visual representation of individual accounts with debit and credit sides.

Debits (Dr)

Increases in assets, and decreases in liabilities and equity.

Credits (Cr)

Increases in liabilities and equity, and decreases in assets.

Normal Balances

Regular balance of accounts: Assets (debit), Liabilities (credit), Owner’s Equity (credit), Revenue (credit), Expenses (debit).

Journal Entries

Records of each transaction detailing accounts affected and amounts debited and credited.

Trial Balance

A listing of all account balances to ensure that debits equal credits.

4 basic financial Statements

income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash flows