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Accounting

The process of recording, summarizing, analyzing, and interpreting financial (money-related) activities to permit individuals and organizations to make informed judgments and decisions.

accounting equation

The equation that expresses the relationship between the accounting elements in a simple mathematical form: Assets = Liabilities + Owner's Equity.

accounting period

A period that is typically one year; however, it can be any length of time for which accounting records are maintained, often for a month.

accounts receivable

The asset arising from selling goods or services on credit to customers.

assets

Items with money value that are owned by a business.

balance sheet

A listing of a firm's assets, liabilities, and owner's equity at a specific point in time. Other terms used to describe the balance sheet are statement of financial position and position statement.

business

An organization that operates with the objective of earning a profit.

cash

In its most basic meaning, cash is currency (paper money) and coin. The definition in a business context also includes checks, money orders, traveler's checks, cashier's checks, bank drafts, and receipts from credit card sales.

corporation

A form of business that legally exists separate from the investors who own it.

cost principle

The principle that states that, when purchased, all assets are recorded at their actual cost regardless of market value.

creditor

A business or person to whom a debt is owed.

dual effect

The principle that states that all business transactions are recorded as having at least two effects on the basic accounting elements.

equipment

The physical assets needed by a business in order to operate.

expenses

The costs of operating a business. Unlike the cost of an asset, the cost of an expense does not provide a future benefit to the business. Therefore, its effect is a reduction in owner's equity.

financial statements

Summaries of financial activities.

income statement

A summary of a business's revenue and expenses for a specific period of time, such as a month or a year. Other terms used to describe the income statement are earnings statement, operating statement, statement of operations, and profit and loss statement.

liabilities

Debts owed by the business

manufacturing business

A business that produces a product to sell to its customers

merchandising business

A business that earns its revenue by buying goods and then reselling those goods. Also called a trading business

net income

Occurs when revenue earned during an accounting period exceeds the expenses of the same period.

net loss

Occurs when expenses exceed revenue during an accounting period.

note payable

A formal written promise to pay a specified amount at a definite future date.

owner's equity

The excess of assets over liabilities (also called capital, proprietorship, and net worth).

partnership

An association of two or more persons who co-own a business for profit.

realization principle

The principle that states that revenue should be recorded when it is earned, even though cash may not be collected until later.

revenue

Income earned from carrying out the activities of a firm

service business

A business that performs services for customers to earn a profit.

shift in assets

Occurs when one asset is exchanged for another asset, such as when supplies are purchased for cash.

sole proprietorship

A business owned by one person

statement of owner's equity

A summary of the changes that have occurred in owner's equity during a specific period of time, such as a month or a year. Another term used to describe the statement of owner's equity is capital statement.

supplies

Short-term physical assets needed to operate a business.

tangible

All physical assets used by a business are tangible (capable of being touched).

transaction

Any activity that changes the value of a firm's assets, liabilities, or owner's equity.

withdrawal

The removal of business assets for the owner's personal use.

accounts payable

The liability that results from purchasing goods or services on credit.

business entity concept

The principle that states that, for accounting purposes, a business is a distinct economic entity or unit that is separate from its owner and from any other business.

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