Accounting

Accounting

Information and management system that identifies, records, and communicates relevant information about a company's business activities

Expense Recognition (Matching) Principle

Expenses should be recorded in the same period as the revenues they help generate

External Users

Individuals or groups outside of a company who use company’s financial information to make decisions

Ex) investors, lenders, suppliers, customers, financial analysts

Financial Accounting

Area of accounting aimed at serving external users

Financial Accounting Standards Board (FASB)

An independent group of full-time members responsible for establishing and improving accounting standards (known as Generally Accepted Accounting Principles, or GAAP) in the United States

Full Disclosure Principle

All information that could influence a user’s understanding of a company’s financial statements must be fully disclosed

Going-Concern Assumption

A business will continue to operate for the foreseeable future and won’t be forced to shut down or liquidate

Income Statement

Shows a company’s revenues, expenses, and profit or loss over a specific period of time

Revenue - Expenses = Net Income

Internal Users

People inside a business who use accounting information to make decisions, manage operations, and plan for the future

Ex) managers, owners, department heads, internal auditors

Liabilities

What a business owes; legal debts or obligations it must pay to others in the future

Ex) wages payable, accounts payable, short-term loans, mortgage, bonds

Limited Liability Company LLC

A legal business entity where the owners (called members) are not personally liable for the company’s debts or legal obligations

Managerial Accounting

Helps managers understand costs, budgets, and performance so they can run the company more effectively

Net Income

Also called bottom line; shows how much money the company actually earned (or lost) after paying for things like operating costs, taxes, interest, and depreciation

Net Income = Revenue - Expenses

Retained Earnings

The accumulated profits a company keeps (does not distribute as dividends) to reinvest in the business or pay off debt; it’s like a savings account for the company’s profits

Retained Earnings (End) = Retained Earnings (Beginning) + Net Income - Dividends Paid

Indicates the company’s ability to grow without needing outside funding

Return on Assets (ROA)

Financial ratio that shows how efficiently a company uses its assets to generate profit

ROA = Net Income/Average Total Assets

Measures how much profit a company earns for every dollar of assets it owns

Higher ROA = company is using assets more efficiently to generate earnings

Revenue Recognition Principle

Revenue should be recognized (recorded) when it is earned and realizable, regardless of when cash is received

International Accounting Standards Board

Independent, global organization that develops and issues International Financial Reporting Standards (IFRS) - the accounting rules used in over 140 countries around the world

Accounting Equation

Equality involving a company's assets, liabilities, and equity. Assets = Liabilities + Equity (also called balance sheet equation)

Assets

Resources a business owns or controls that are expected to provide current and future benefits to the business

Audit

Analysis and report of an organization's accounting system, its records, and its reports using various tests

Auditors

Individuals hired to review financial reports and information systems. There are internal auditors employed by the company and external auditors that are hired to assess and evaluate the "fairness" of financial statements (or to perform other contracted financial services)

Balance Sheet

Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date

Bookkeeping

Part of accounting that involves recording transactions and events, either manually or electronically; also called recordkeeping

Business Entity Assumption

Principle that requires a business to be accounted for separately from its owner(s) and from any other entity

Common Stock

Corporation’s basic ownership share; also generically called capital stock

Corporation

Business that is a separate legal entity under state or federal laws; its owners are referred to as shareholders or stockholders

Cost Constraint

The notion that the benefit of a disclosure exceeds the cost of that disclosure

Cost Principle

Accounting principle that prescribes financial statement information be based on actual costs incurred in business transactions; also called Measurement Principle

Equity

Ownership interest in the company after all debts or liabilities have been repaid. This includes contributed capital (value of the capital that shareholders have contributed/invested in the company) and retained earnings (the amount of net income that is retained by the business)