Ch. 1 The Language of Business

Exposure Draft

A proposed solution to a problem being considered by the Financial Accounting Standards Board.

Statements of Financial Accounting Standards

Accounting principles established by the Financial Accounting Standards Board.

What is accounting?

Accounting provides financial information about a business or a nonprofit organization. Owners, managers, investors, and other interested parties need financial information in order to make decisions. Because accounting is used to communicate financial information, it is often called the "language of business."

Generally Accepted Accounting Principles (GAAP)

Accounting standards developed and applied by professional accountants. Generally accepted accounting principles must be followed by publicly owned companies unless they can show that doing so would produce information that is misleading.

limited liability partnership (LLP)

An LLP is a general partnership that provides some limited liability for all partners. LLP partners are responsible and have liability for their own actions and the actions of those under their control or supervision. They are not liable for the actions or malfeasance of another partner. Except for the limited liability aspect, LLPs generally have the same characteristics, advantages, and disadvantages as any other partnership.

Discussion Memorandum

An explanation of a topic under consideration by the Financial Accounting Standards Board.

Auditor's Report

An independent accountant's review of a firm's financial statements. The auditor's report also confirms that the financial information is prepared in conformity with generally accepted accounting principles. The financial statements and the auditor's report are made available to the public, including existing and potential stockholders.

Management Advisory Services

Services designed to help clients improve their information systems or their business performance. establishing accounting policies, managing the accounting system, preparing financial statements, interpreting financial information, providing financial advice to management, preparing tax forms, performing tax planning services, preparing internal reports for management.

International accounting

The study of accounting principles used by different countries.

Social entities

are nonprofit organizations, such as cities, public schools, and public hospitals.

seperate entity assumption

describes the concept of keeping the firm's financial records separate from the owner's personal financial records. For accounting purposes, all forms of business are considered separate entities from their owners. However, the corporation is the only form of business that is a separate legal entity.

Sole Proprietorship

is a business entity owned by one person. The life of the business ends when the owner is no longer willing or able to keep the business going. Many small businesses are operated as sole proprietorships.

Partnership

is a business entity owned by two or more people. The partnership structure is common in businesses that offer professional services, such as law firms, accounting firms, architectural firms, medical practices, and dental practices. At the beginning of the partnership, two or more individuals enter into a contract that details the rights, obligations, and limitations of each partner, including: the amount each partner will contribute to the business, each partner's percentage of ownership, each partner's share of the profits, the duties each partner will perform, the responsibility each partner has for the amounts owed by the business to creditors and tax authorities.

Corporation

is a business entity that is separate from its owners. A corporation has a legal right to own property and do business in its own name. Corporations are very different from sole proprietorships and partnerships.

entity

is recognized as having its own separate identity. An entity may be an individual, a town, a university, or a business.

Stock

issued in the form of stock certificates, represents the ownership of the corporation. Corporations may be privately or publicly owned. Privately owned corporations are also called closely held corporations. The ownership of privately owned corporations is limited to specific individuals, usually family members. Stock of closely held corporations is not traded on an exchange. In contrast, stock of publicly owned corporations is bought and sold on stock exchanges and in over-the-counter markets. Most large corporations have issued (sold) thousands of shares of stock.

stockholders/shareholders

owners of a corporation; are not personally responsible for the debts or taxes of the corporation. If the corporation is unable to pay its bills, the most stockholders can lose is their investment in the corporation. In other words, the stockholders will not lose more than the cost of the shares of stock.