Essential Accounting Terms and Principles: A Comprehensive Glossary

Essential Accounting Terms and Principles

Basic Accounting Concepts

Accounting: The information system that identifies, records, and communicates the economic events of an organization to interested users.

Assets: Resources a business owns.

Auditing: The examination of financial statements by a certified public accountant in order to express an opinion as to the fairness of presentation.

Balance Sheet: A financial statement that reports the assets, liabilities, and owner's equity at a specific date.

Bookkeeping: A part of the accounting process that involves only the recording of economic events.

International Accounting Standards

Convergence: The process of reducing the differences between U.S. GAAP and IFRS.

Business Structures

Corporation: A business organized as a specific legal entity under state corporation law, having ownership divided into transferable shares of stock.

Drawings: Withdrawal of cash or other assets from an unincorporated business for the personal use of the owners.

Accounting Assumptions

Economic Entity Assumption: An assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

Financial Reporting Elements

Expenses: The cost of assets consumed or services used in the process of earning revenue.

Accounting Principles

Fair Value Principle: Assets and liabilities should be reported at fair value.

Faithful Representation: Numbers and descriptions match what really existed or happened.

Fields of Accounting

Financial Accounting: The field of accounting that provides economic and financial information for investors, creditors, and other external users.

FASB: A private organization that establishes the generally accepted accounting principles in the USA.

Forensic Accounting: An area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.

GAAP: Common standards that indicate how to report economic events.

Historical Cost Principle: An accounting principle that states that companies should record assets at their cost.

Financial Statements

Income Statement: A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.

International Standards

IASB: An accounting standard-setting body that issues standards adopted by many countries outside of the USA.

IFRS: International accounting standards set by the IASB.

Owner's Equity

Investments by Owner: The assets an owner puts into the business.

Liabilities: Creditor claims against total assets.

Accounting Services

Management Consulting: An area of public accounting ranging from the development of accounting and computer systems to support services for marketing projects and merger and acquisition activities.

Managerial Accounting: The field of accounting that provides internal reports to help users make decisions about their companies.

Monetary Unit Assumption: An assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money.

Profit and Loss

Net Income: The amount by which revenues exceed expenses.

Net Loss: The amount by which expenses exceed revenues.

Owner's Equity: The ownership claim on total assets.

Owner's Equity Statement: A financial statement that summarizes the changes in owner's equity for a specific period of time.

Business Partnerships

Partnership: A business owned by two or more persons associated as partners.

Accounting Specializations

Private (Managerial) Accounting: An area of accounting within a company that involves such activities as cost accounting, budgeting, design and support of accounting information systems, and tax planning and preparation.

Proprietorship: A business owned by one person.

Public Accounting: An area of accounting in which the accountant offers expert service to the general public.