Accounting Glossary

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Accounting

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

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Accounting equation

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

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Assets

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

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Audit

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

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Balance sheet

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

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Business entity principle

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

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Common stock

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Corporation's basic ownership share; also generically called capital stock.

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Corporation

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Business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders.

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Cost principle

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

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Equity

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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.

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Ethics

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

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Events

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

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Expanded accounting equation

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Assets = Liabilities + Equity; Equity equals [Owner capital – Owner withdrawals + Revenues – Expenses] for a noncorporation; Equity equals [Contributed capital + Retained earnings + Revenues – Expenses] for a corporation where dividends are subtracted from retained earnings.

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Expenses

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Outflows or using up of assets as part of operations of a business to generate sales.

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External transactions

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Exchanges of economic value between one entity and another entity.

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External users

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

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Financial accounting

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Area of accounting mainly aimed at serving external users.

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Financial Accounting Standards Board (FASB)

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Independent group of fulltime members responsible for setting accounting rules.

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Generally accepted accounting principles (GAAP)

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Rules that specify acceptable accounting practices.

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Going-concern principle

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

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Income statement

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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.

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Internal transactions

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Activities within an organization that can affect the accounting equation.

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Internal users

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

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International Accounting Standards Board (IASB)

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

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Liabilities

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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.

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Managerial accounting

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

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Monetary unit principle

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

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Net income

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Amount earned after subtracting all expenses necessary for and matched with sales for a period; also called income, profit, or earnings.

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Net loss

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Excess of expenses over revenues for a period.

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Objectivity principle

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Principle that prescribes independent, unbiased evidence to support financial statement information.

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Partnership

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Unincorporated association of two or more persons to pursue a business for profit as co-owners.

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Recordkeeping

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

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Return

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Monies received from an investment; often in percent form.

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Revenue recognition principle

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The principle prescribing that revenue is recognized when earned.

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Risk

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Uncertainty about an expected return.

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Sarbanes-Oxley Act

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Created 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

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Securities and Exchange Commission (SEC)

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

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Shareholders

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Owners of a corporation; also called stockholders.

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Shares

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Equity of a corporation divided into ownership units; also called stock.

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Sole proprietorship

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Business owned by one person that is not organized as a corporation; also called proprietorship.

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Statement of cash flows

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A financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period; arranged by operating, investing, and financing.

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Statement of owner's equity

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Report of changes in equity over a period; adjusted for increases (owner investment and net income) and for decreases (withdrawals and net loss).

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Withdrawals

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Payment of cash or other assets from a proprietorship or partnership to its owner or owners.