Principles of Financial Accounting Chapter 1
Information and measurement system that identifies, records, and communicates relevant information about a company’s business activities.
Equality involving a company’s assets, liabilities, and equity; Assets = Liabilities + Equity
Resources that a company owns or controls that are expected to provide current and future benefits to the business.
Analysis and report of an organization’s accounting system, its records, and its reports using various tests.
Individuals hired to review financial reports and information systems of organizations.
Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.
The 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.
A corporation’s basic ownership share.
A written framework to guide the development, preparation, and interpretation of financial accounting information.
Business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders.
The notion that only information with benefits of disclosure greater than the costs of disclosure need to be disclosed.
Accounting principle that prescribes financial statement information to be based on actual costs incurred in business transactions.
Owner’s claim on the assets of a business; equals the residual interest in an entity’s assets after deducting liabilities. Also called net assets.
Code of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.
Happenings that both affect an organization’s financial position and can be reliably measured.
Expanded Accounting Equation
Assets = Liabilities + Equity; Equity equals [Owner capital – owner withdrawal + revenue – expenses] for a non-corporation; Equity equals [Contributed capital – retained earnings + revenue – expenses] for a corporation where dividends are subtracted from retained earnings.
Expense Recognition Principle
Prescribes expenses to be reported in the same period as the revenues that were eared as a result of the expenses. Also called the Matching Principle.
Outflows or using up of assets as part of operations of business to generate sales.
Exchanges of economic value between one entity and another entity.
Persons using accounting information who are not directly involved in running the organization.
Area of accounting aimed mainly at serving external users.
Financial Accounting Standards Board
Independent group of full-time members responsible for setting accounting rules.
Full Disclosure Principle
Principle that prescribes financial statements (including notes) to report all relevant information about an entity’s operations and financial condition.
Generally Accepted Accounting Principles
Rules that specify acceptable accounting practices.
Principle that prescribes financial statements to reflect the assumption that the business will continue operating.
Financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses.
Activities within an organization that can affect the accounting equation.
Persons using accounting information who are directly involved in managing the organization.
International Accounting Standards Board
Group that identifies preferred accounting practices and encourages global acceptance; issues the International Financial Reporting Standards.
International Financial Reporting Standards
Accounting standards set by the IASB which aim to develop a single set of global standards, to promote those standards, and converge national and international standards globally.
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.
Area of accounting aimed mainly at serving the decision-making needs of internal users.
Prescribes expenses to be reported in the same period as the revenues that were eared as a result of the expenses. Also called the Expense Recognition Principle.
Prescribes that accounting for items that significantly impact a financial statement and any inferences from them adhere strictly to GAAP.
Accounting information is based on cost with potential subsequent adjustments to fair value.
Monetary Unit Assumption
Principle that assumes transactions and events can be expressed in money units.
Amount earned after subtracting all expenses necessary for and matched with sales for a period.
Excess of expenses over revenues for a period.
Account showing the owner’s claim on company assets; equals owner investments plus net income (or less net loss) minus owner withdrawals since the company’s inception. Also called Equity.
Assets put into the business by the owner.
Assets pulled out of the business by the owner.
Unincorporated association of two or more persons to pursue a business for profit as co-owners.
The part of accounting that involves recording transactions and events either manually or electronically. Also called Bookkeeping.
Monies (or sums of money) received from an investment; often in percent form.
Return on Assets
Ratio reflecting operating efficiency; defined as net income divided by average total assets for that period.
Revenue Recognition Principle
The principle prescribing that revenue is recognized when earned.
Gross increase in equity from a company’s business activities that earn income.
Uncertainty about expected return.
Sarbanes-Oxley Act (SOX)
Create the Public Company Accounting Oversight Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, impacts insider transactions and executive loans, establishes new types of criminal conduct, and expands penalties for violations of federal securities laws.
Securities and Exchange Commission
Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.
Owners of a corporation who usually receive dividends. Also called stockholders.
Equity of a corporation divided into ownership units that usually give dividends. Also called Stock.
Business owned by one person that is not organized as a corporation.
Statement of Cash Flows
A financial statement that lists cash inflows and cash outflows during a period; arranged by operating, investing, and financing.
Statement of Owner’s Equity
Report of changes in equity over a period; adjusted for increases and for decreases.
Equity of a corporation divided into ownership units that usually give dividends. Also called Shares.
Owners of a corporation who usually receive dividends. Also called shareholders.
Time Period Assumptions
Assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.