Introduction to Accounting and Business

Vocabulary

accounting equation

accounting tool used to measure the assets, liabilities, and equity of a business entity: assets = liabilities + equity (or owner's equity)

accounts payable

liabilities that result from purchases of goods or services on account

accounts receivable

right to collect cash from a customer in the future, resulting from services provided or products bought on credit

accrual basis accounting

method of recognizing revenue when earned and recording expenses when incurred regardless of the cash received or paid, required by Generally Accepted Accounting Principles (GAAP)

asset

economic resource that a business owns that is expected to provide future benefits

balance sheet

financial statement that is a snapshot of the assets, liabilities, and equity of a business at a point in time

business transaction

economic event that affects the financial condition of an entity

cash basis accounting

method of recognizing and recording revenue or expenses in the period when cash is received or paid

discontinued operation

business segment that is removed from continuing operations

equity

owner's right to the resources of a business

expense

consumption of a business's resources used to generate revenue or used in the course of business

extraordinary item

transaction that is so infrequent that it will rarely, if ever, happen again, and must be outside the company's normal operations

Financial Accounting Standards Board (FASB)

organization that develops, establishes, and communicates standards of financial accounting and reporting, such as GAAP, in the United States

Generally Accepted Accounting Principles (GAAP)

combination of accounting principles, standards, and procedures that govern the preparation of financial statements

gross profit

income from sales, or revenue, minus the cost of goods sold

income statement

financial statement that is a summary of a business's revenues and expenses over a period of time

liability

obligation or amount owed to another individual or entity as a result of a past transaction

manufacturing business

business that converts basic inputs, such as raw materials or parts, to make a final product that is sold to consumers

matching principle

concept that expenses incurred during a period match revenues earned during the same period

merchandising business

business that buys products from other businesses and sells them to consumers

multiple-step income statement

income statement with multiple sections, subsections, and subtotals, including gross profit

net income

amount of income left after all expenses have been deducted

operating income

income earned from normal business operations

other comprehensive income

section of an income statement that discloses transactions that are not allowed to be presented in net income

revenue

value received or to be received from customers resulting from providing services or delivering goods

Sarbanes-Oxley Act (SOX)

legislation passed in 2002 to restore the public's trust in the financial information provided by publicly traded entities by establishing auditing and financial regulations

service business

business that generates revenue by providing services

single-step income statement

income statement that shows only revenues less expenses, and does not include gross profit

statement of cash flows

financial statement that is a summary of inflows and outflows of cash over a period of time

statement of owner's equity

financial statement that is a summary of changes in a business's equity account over a period of time