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Fundamental Accounting Principles ninth edition chapter 01 terms


is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.


is the recording of transactions and events, either manually or electronically. Also called bookkeeping.


is the recording of transactions and events, either manually or electronically. Also called recordkeeping.

External users

Person using accounting information who are not directly involved in running the organization.

Financial accounting

area of accounting aimed at serving external users by providing them with general-purpose financial statements.

Internal Users

Persons using accounting information who are directly involved in managing the organization.

Managerial Accounting

area of accounting that serves the decision-making needs of internal users; also called management accounting.


Codes of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.

Financial Accounting Standards Boards (FASB)

Independent group of full time members responsible for setting accounting rules.

Securities and Exchange Commissions (SEC)

Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.

InternationalL Accounting Standards Board (IASB)

Group that identifies preferred accounting practices and encourages global acceptance; issues International Financial Reporting Standards (IFRS).

Cost Principle

Accounting principle that prescribes financial statements information to be based on actual costs incurred in business transactions.

Revenue Recognition Principle

The principle prescribing that revenue is recognized when earned.


Resources a business owns or controls that are expected to provide current and future benefits to the business.


Individuals hired to review financial reports and information systems.

Internal auditors of a company are employed to assess and evaluate its system of internal controls, including the resulting reports.

External auditors are in dependent of a company and are hired to assess and evaluate the "fairness" of financial statements (or to perform other contracted financial services).

Business Entity Assumption

Principle that requires a business to be accounted for separately from its owner(s) and from any other entity.

Common Stock

Corporation's basic ownership share; also generically called capital stock.


Business that is separate legal entity under state or federal laws with owners called shareholders or stockholders.

Full Disclosure Principle

Principle that prescribes financial statements (including notes) to report all relevant information about an entity's operations and financial condition.

Matching Principle

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Sarbanes-Oxley Act (SOX)

Created the Public Company Accounting Overt Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, impacts insider transactions and executive loans, establishes new types of criminal conduct,and expands penalties for violations of federal securities laws.


Owners of a corporation; also called stockholders.


Owners of a corporation; also called Shareholders.


Equity of a corporation divided into ownership units; also called stocks.


Equity of a corporation divided into ownership units; also called shares.

Sole Proprietorship

Business owned by one person that is not organized as a corporation; also called proprietorship.


Unincorporated association of two or more persons to pursue a business for profit as co-owners.

Balance Sheet

Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.


Owner's claim on the assets of a business; equals the residual interest in an entity's assets after deducting liabilities; also called net assets.


Happenings that both affect an organization's financial position and can be reliably measured.

Expanded Accounting Equation

Assets = Liabilities + Equity; Equity equals [Owner capital - Owner withdrawals + Revenues - Expenses] for a noncorporation; Equity equals [Contributed Capital + Retained earnings + Revenues - Expenses] for a corporation where dividends are Subtracted from retained earnings.

ExpensesOutflows or using u[

Outflows or using up of assets as part of operations of a business to generate sales.

External Transactions

Exchanges of economic value between one entity and another entity.

General Accepted Accounting Principle (GAAP)

Rules that specify acceptable accounting practices.

Going-Concern Assumption

Principle that prescribes financial statements to reflect the assumption that the business will continue operating.

Income Statement

Financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses.

Internal Transactions

Activities within an organization that can affect the accounting equation.


Creditors' claims on an organization's assets; involve a probable future payment of assets. products. or services that a company is obligated to make due to past transactions or events.

Monetary Unit Assumption

Principle that assumes transactions and events can be expressed in money units.

Net Income

Amount earned after subtracting all expenses necessary for and matched with sales for a period; also called income, profit, or earnings.

Net Loss

Excess of expenses over revenues for a period.

Owner, Capital

Account showing the owner's claim on company assets; equals owner investments plus net income (or less net losses) minus owner withdrawals since the company's inception; also referred to as equity.

Owner Investment

Assets put into the business by the owner.

Owner Withdrawals

Account used to record asset distribution to the owner. (see also withdrawals.)


(see Sole proprietorship)


Monies received from an investment; often in percent form.

Return on Assets

(See Return On Total Assets.)


Gross increase in equity from a company's business activities that earn income; also called sales.


Uncertainty about an expected return.

Statement of Cash Flows

A financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period; arranged by operating, and financing.

Statement of Owner's Equity

Report of changes in equity over a period; adjusted for increases (owner investment and net income) and for decreases (withdrawals and net loss).

Time Period Assumption

Assumption that an organization's activities can be divided into specific time periods such as months. quarters, or years.


Payments of cash or other assets from a proprietorship or partnership to its owner or owners.

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