Accounting in Business

accounting

Information and measurement system that identifies, records, and communicates relevant information about a company’s business activities.

bookkeeping

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

financial accounting

Area of accounting aimed mainly at serving external users.

managerial accounting

Area of accounting aimed mainly at serving the decision-making needs of internal users; also called management accounting.

external users

Persons using accounting information who are not directly involved in running the organization.

internal users

Persons using accounting information who are directly involved in managing the organization.

data analytics

A process of analyzing data to identify meaningful relations and trends; in accounting, data analytics helps individuals make informed business decisions.

data visualization

A graphical presentation of data to help people understand its significance and draw reliable inferences.

dashboard

Data visualization that includes charts, graphs, and other imaging organized for users to see important trends and relations.

ethics

Codes of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.

internal controls

All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.

auditors

Individuals hired to review financial reports and information systems

generally accepted accounting principles (GAAP)

Rules that specify acceptable accounting practices.

financial accounting standards board (FASB)

Independent group of full-time members responsible for setting accounting rules.

securities and exchange commission (SEC)

Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.

international accounting standards board (IASB)

Group that identifies preferred accounting practices and encourages global acceptance; issues International Financial Reporting Standards (IFRS).

international financial reporting standards (IFRS)

Set of international accounting standards explaining how types of transactions and events are reported in financial statements

conceptual framework

basic concepts that underlie the preparation and presentation of financial statements for external users; can serve as a guide in developing future standards and resolving accounting issues that are not addressed directly in current standards using the definitions, recognition criteria, and measurement concepts for assets, liabilities, revenues, and expenses.

cost principle

Accounting principle that prescribes financial statement information be based on actual costs incurred in business transactions.

revenue recognition principle

The principle prescribing that revenue is recognized when goods or services are delivered to customers.

matching principle

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

full disclosure principle

Principle that prescribes financial statements (including notes) to report all relevant information about an entity’s operations and financial condition.

going-concern assumption

Principle that prescribes financial statements to reflect the assumption that the business will continue operating.

monetary unit assumption

Principle that assumes transactions and events can be expressed in money units.

time period assumption

Assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.

business entity assumption

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

proprietorship

Business owned by one person that is not organized as a corporation

stock

Equity of a corporation divided into ownership units

stockholders

Owners of a corporation

members

Owners of a limited liability company (LLC); rights and responsibilities are specified in the operating agreement and by state LLC regulations

common stock

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

cost-benefit constraint

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

assets

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

liabilities

Creditors’ claims on an organization’s assets; involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events.

equity

Owner’s claim on the assets of a business; equals the residual interest in an entity’s assets after deducting liabilities

accounting equation

Equality involving a company’s assets, liabilities, and equity; Assets = Liabilities + Equity; also called balance sheet equation

expanded accounting equation

Expanded version of: Assets = Liabilities + Equity. For a noncorporation: Equity = Owner’s capital − Owner’s withdrawals + Revenues − Expenses. [For a corporation: Equity = Contributed capital + Retained earnings + Revenues − Expenses − Dividends.]

owner investments

Assets put into the business by the owner.

external transactions

Exchanges of economic value between one entity and another entity.

internal transactions

Activities within an organization that can affect the accounting equation.

events

Happenings that both affect an organization’s financial position and can be reliably measured.

net income

Amount earned after subtracting all expenses necessary for and matched with sales for a period

net loss

Excess of expenses over revenues for a period

retained earnings

Cumulative income less cumulative losses and dividends.

environmental, social, and governance (ESG)

Framework that depicts how organizations act as responsible stewards of the environment, principled members of society, and accountable leaders.

return on assets (ROA)

Ratio reflecting operating efficiency; defined as net income divided by average total assets for the period