Chapter 1 Accounting Definitions

Front 1

What is accounting

Back 1

an information and measurement system that identifies, records and communicates relevant information about an organizations business activities

Front 2

what is recordkeeping/bookkeeping?

Back 2

recording of transactions and events

Front 3

whats the difference between external and internal users?

Back 3

external users are not directly involved in running the organization. Ex: investors, lenders, customers lawyers
internal users are directly involved in managing an organization

Front 4

what is financial accounting?

Back 4

aimed at serving external users by providing them with general-purpose financial statements

Front 5

what is managerial accounting?

Back 5

served the decision-making needs of internal users

Front 6

what are internal controls?

Back 6

procedures set up to protect company property and equipment, ensure reliable accounting reports, promote efficiency and encourage adherence to company policies
Ex:independent reviews, good records

Front 7

what are the four areas of opportunities in accounting?

Back 7

financial, managerial, taxation and accounting-related

Front 8

what are ethics?

Back 8

ethics are beliefs that distinguish right from wrong

Front 9

what are generally accepted accounting principles (GAAP)?

Back 9

the concepts and rules which financial accounting practice is governed by

Front 10

what are the two groups which establish GAAP in the US?

Back 10

the financial accounting standards board (FASB) is the private group that sets broad and specific principles while the securities and exchange comission (SEC) is the government group that establishes reporting requirements for companies that issue stock

Front 11

whats the difference between general and specific principles?

Back 11

general principles come from long used accounting practices and are the basic assumptions, concepts and guidelines for preparing financial statements. Specific principles arise from authoritative groups and are detailed rules used in reporting business transactions

Front 12

what are the four basic principles of general accounting principles?

Back 12

cost principle, revenue recognition principle, matching principle and the full disclosure principle

Front 13

Describe the four basic principles

Back 13

the cost principle means that accounting is based on actual cost
he revenue recognition principle provides guidance on when a company must recognize revenue and has three concepts. (1) revenue is recognized when earned, (2) proceeds from selling products need not be in cash and (3)revenue is measured by the cash received plus the cash value of other items received
the matching principle says that a company must record expenses incurred to generate revenue reported
the full disclosure principle requires a company to report details behind financial statements that would impact user's decisions

Front 14

what are the four assumptions of general accounting principles?

Back 14

going-concern assumption, monetary unit assumption, time period assumption and the business entity assumption

Front 15

Describe the four basic assumptions

Back 15

the going-concern assumption reflects a presumption that a business will continue operating
the monetary unit assumption means that transactions can be expressed in money
the time period assumption presumes that the life of a company can be divided into time periods
the business entity assumption means that a business is accounted for separately from other business entities

Front 16

what are the three legal forms of business entities?

Back 16

sole proprietorship, partnership and corporation

Front 17

describe a sole proprietorship

Back 17

a business owned by one person. It is a separate entity for accounting purposes but is not a separate legal entity from its owner. This unlimited liability makes it a disadvantage. An advantage is that it is reported and taxed on the owner's personal income tax return instead of a business income tax return

Front 18

describe a partnership

Back 18

owned by two or more people and is not legally separate from its owners

Front 19

what are the three types of partnerships that limit liability?

Back 19

limited partnership (LP), limited liability partnership (LLP) and a limited liability company (LLC)

Front 21

describe a corporation

Back 21

a business legally separate form its owners Shareholders are not not liable for corporate acts and debts which is the main advantage. The main disadvantage is that the corporation income is taxed and any distribution of income to its owners through dividends is taxed as part of the owner's personal income which is known as double taxation

Front 22

what is the sarbanes-oxley act (SOX)?

Back 22

congress passed this to help curb financial abuses at companies that issue stock to the public

Front 23

what is a governance system?

Back 23

it is set up by companies to reduce the risk of accounting fraud

Front 24

what are assets?

Back 24

resources with future benefits that are owned or controlled by a company

Front 25

what are liabilities?

Back 25

what a company owes its nonowners in future payments or services

Front 26

what is equity?

Back 26

refers to the claims of its owners on assets
equity=owner capital-owner withdrawal+revenues-expenses

Front 27

what is the accounting equation?

Back 27

assets=liabilities+equities

Front 28

what are the four types of financial statements?

Back 28

income statement, statement of owner's equity, balance sheet and statement of cash flows

Front 29

describe each financial statement

Back 29

an income statement describes revenues and expenses along with net income/loss
a statement of owner's equity explains changes in equity from net income/loss and from owner investments/withdrawals
a balance sheet describes a company's financial position at a point in time
a statement of cash flows identifies cash inflows and outflows

Front 30

what is a return on assets (ROA)?

Back 30

ROA=Net income/average total assets