Chapter 1-8 Introduction to Financial Accounting Vocabulary

Vocabulary flashcards covering fundamental accounting principles, business structures, the accounting equation, financial elements, and standard accounts based on the lecture transcript.

GAAP

Generally Accepted Accounting Principles; the required rules for generating accounting and financial information that must be faithfully represented (complete, neutral, and free from error) and relevant.

Economic Entity Assumption

A foundational rule of GAAP stating that a business is treated as a separate entity or person from its owners.

Cost Principle

A GAAP principle requiring transactions and assets to be recorded at their historic cost (the dollar amount paid for them), regardless of future market value changes.

Monetary Unit Assumption

A GAAP rule requiring accounting records to be kept in monetary units (dollars) so that different companies can be compared directly.

Sole Proprietorship

A business owned by a single person that is easy to start and taxed once, but provides no legal protection because the owner is personally liable for business debts.

Corporation

A business structure offering limited liability, unlimited potential owners, and an indefinite life, but subject to double taxation and government scrutiny.

Limited Liability

A corporate feature restricting an owner's financial loss to the exact amount they invested in the business.

Double Taxation

A characteristic of corporations where company earnings are taxed at the corporate level, and dividends paid to owners are taxed again on individual income tax returns.

Accounting Equation

The basic equation of accounting: $\text{Assets} = \text{Liabilities} + \text{Equity}$, which must always stay in balance.

Assets

Economic resources owned or controlled by a business that provide future economic benefit, such as cash, inventory, supplies, land, and accounts receivable.

Liabilities

Debts or obligations owed by a business to outside parties, commonly denoted by the word payable in the account name.

Equity

The owner's residual share of the assets of the business, comprised of contributed capital (common stock) and retained earnings.

Contributed Capital

Money or assets invested directly into a business by its owners in exchange for ownership interest (such as common stock in a corporation).

Retained Earnings

The portion of equity accumulated from profit that is kept in the business rather than paid out to owners.

Revenue

Sales generated by a business from selling products or delivering services to customers, which increases equity.

Expenses

The costs incurred in the process of running a business to earn revenue, which decreases equity.

Net Income

The positive financial output achieved when total business revenues exceed total expenses.

Net Loss

The negative financial outcome when total business expenses exceed total revenues, typically formatted in accounting inside parentheses.

Dividend

A payout of corporate earnings made directly to shareholders/owners, reducing business equity.

Withdrawal

A payment of money or assets taken out of a sole proprietorship or partnership by the owner for personal use, reducing equity.

On Account

A phrase signifying that a transaction occurred on credit, where no cash has changed hands yet and payment will occur in the future.

Accounts Receivable

An asset account tracking short-term money owed to the business by clients for goods or services delivered on account.

Accounts Payable

A liability account tracking short-term debt owed by the business to vendors or suppliers for purchases made on account.

Big Four

The four largest public accounting firms capable of auditing the world's largest publicly traded companies.

PCAOB

Public Company Accounting Oversight Board; the oversight organization that audits and regulates external public accounting auditors.