Chapter 1 Accounting 201

Shareholder Stockholder

A person who owns stock in a corporation.

Corporation

A business owned by stockholders, or shareholders. These are the people who own shares of stock in the business. A legal entity distinct from its owners. One or more owners called shareholders.

Stock

A certificate representing ownership interest in a corporation.

Financial Accounting Standards Board (FASB)

A privately funded organization that formulates accounting standards in the United States. Works with the SEC.

Account Payable

A short-term liability that will be paid in the future. Backed by the general reputation and credit standing of the debtor.

Income Statement Statement of Earnings Statement of Operations

A summary of a business entity's revenues and expenses for a period of time, such as a month, quarter, or year.

Fiduciary Responsibility

An ethical and legal obligation to perform their duties in a trustworthy manner. Their goal is to raise cash to fund their corporations.

Audit

An examination of a company's financial records.

Not-for-Profit

An organization that has been approved by the Internal revenue Service to operate for a religious, charitable, or educational purpose. A board makes the decisions for the organization. Has no owners.

Entity

An organization that stands apart as a separate economic unit. Refers to one business, separate from its owners. Applies to any economic unit that needs to be evaluated separately.

Transaction

Any event that affects the financial position of the business and can be measured reliably. Affect what the company owns, owes, or its net worth.

Going-Concern Concept

Assumes that the entity will remain in operation for the foreseeable future. Accountants assume that the business will remain in operation long enough to use existing resources for their intended purpose. Assumes the business won't close soon.

Certified Management Accountants (CMA)

Certified professionals who work for a single company.

Liabilities

Debts payable to outsiders who are known as creditors. Something the business owns. ex. Accounts payable, Notes payable, and Salary payable.

Drawings

Distributions of capital (usually of cash) by a company to owner(s). NOT expenses.

Charter

Document that gives the state's permission to form a corporation.

Limited Liability Partnership (LLP)

Each member/partner is liable (obligated) only for his or her own actions and those under his or her control.

Service Revenue

Earn by providing services.

Sales Revenue

Earn by selling products to customers.

Assets

Economic resources that are expected to benefit the business in the future. Something the business owns that has value. ex. Cash, merchandise inventory, furniture, and land.

Equity

Equals what is owned (assets) minus what is owed (liabilities). The company's net worth.

Managerial Accounting

Focuses on information for internal decision makers, such as the company's managers. Managerial accounting provides data for insiders.

Generally Accepted Accounting Principles (GAAP)

Guidelines for public information; the main U.S. accounting rule book. More specific in its regulations.

Proprietorships

Has a single owner, called the proprietor, who often manages the business. Small retail stores of professional businesses, i.e. attorneys and accountants. One owner called a proprietor.

Revenue

Increases in capital from delivering goods or services to customers.

Interest Revenue

Is earned on bank deposits and on money lent out to others.

Dividend Revenue

Is earned on investments in the stock of other corporations.

Partnerships

Joins two or more individuals as co-owners. Each owner is a partner and can commit the partnership in a binding contract (mutual agency). Two or more owners called partners.

Certified Public Accountant (CPA)

Licensed professional accountants who serve the general public.

Accounting Equation

Measures the resources of a business and the claims to those resources.

Mutual Agency

One partner makes all partners mutually liable.

Faithful Representation Principle

Principle that asserts accounting information is based on the fact that the data faithfully represents the measurement or description of that data; complete, neutral, and free from material error.

Net Income

Profit. When revenues exceed expenses.

Financial Accounting

Provides information for external decision makers, such as outside investors and lenders. Provides data for outsiders.

Financial Statements

Report on a business in monetary terms.

Statement of Cash Flow

Reporting cash receipts and cash payments and whether cash increased or decreased.

Balance Sheet Statement of Financial Position

Reporting the business's assets and liabilities. Mirrors the accounting equation.

Income Statement

Reporting the net income or net loss of the business.

Retained Earnings

Represent the net earning retained by the corporation.

Common Stock

Represents the basic ownership of every corporation.

Cost Principle

States that acquired assets and services should be recorded at their actual cost (historical cost). We list at the amount shown on the receipt-the actual amount paid.

Statement of Owner's Equity

Summary of the changes in an owner's capital account during a specific period.

Securities and Exchange Commission (SEC)

The U.S. governmental agency that oversees U.S. financial markets. Oversees those organizations that set standards (FASB).

Authorization

The acceptance by the state of the Corporate by-laws.

Paid-in Capital Contributed Capital

The amount invested in the corporation by its owners, the stockholders. The basic component is stock, which the corporation issues to the stockholders as evidence of their ownership.

Limited Liability Company (LLC)

The business-not the members-is liable for the company's debts. Has one or more owner called members.

Owner's Equity

The claim of a company's owners to the assets of the business.

Shareholder's Equity Stockholder's Equity

The claim of a corporation's owners to the assets of the business.

Stable Monetary Unit Concept

The concept that says that accountants assume that the dollar's purchasing power is stable. Stable currency buying power.

Expenses

The decreases in capital that result from operations. Incurred costs that you will have to pay for, either now or later. Opposite of revenue.

Accounting

The information system that measures business activity, processes the data into reports, and communicates the results to decision makers. "The language of business."

International Financial Reporting Standards (IFRS)

The international accounting rule book. Less specific and based more on general principles, leaving more room for professional judgement.

Capital

The net amount invested in the business by the owner. An owner can contribute cash or other net assets to the business to receive "it." Contains the amount earned by income-producing activities and kept (retained) for use in the business.

International Accounting Standards Board

The organization that determines how accounting is practiced internationally.

Account Receivable

The right to receive cash in the future from customers to whom the business has sold goods or for whom the business has performed services.

Bylaws

The rule book that guides the corporation.

Articles of Incorporation

The rules approved by the state that govern the management of the corporation.

Creditors

Those to whom a business owes money.

Public Companies Accounting Oversight Board (PCAOB)

Watchdog agency to monitor the work of independent accountants who audit public companies.

Net Loss

When expenses exceed revenues.