Core Terms
The process of planning, recording, analyzing, and interpreting financial information.
Answer: What is Accounting?
A business owned by one person.
Answer: What is a Proprietorship?
The equation showing the relationship among assets, liabilities, and owner’s equity.
Answer: What is the Accounting Equation?
An increase in equity resulting from the sale of goods or services.
Answer: What is Revenue?
Keeping personal and business records separate is an application of the business entity concept.
Answer: What is True?
Financial reports that summarize the financial condition and operations of a business.
Answer: What are Financial Statements?
A business that performs an activity for a fee.
Answer: What is a Service Business?
A record that summarizes all the transactions pertaining to a single item in the accounting equation.
Answer: What is an Account?
The cost of goods or services used to operate a business.
Answer: What is an Expense?
When cash is paid on account, a liability is increased.
Answer: What is False? (Paying cash on account decreases a liability)
Anything of value that is owned.
Answer: What is an Asset?
The principles of right and wrong that guide an individual in making decisions.
Answer: What are Ethics?
The difference between the increases and decreases in an account.
Answer: What is an Account Balance?
Assets taken from the business for the owner’s personal use.
Answer: What are Withdrawals?
The accounting concept Realization of Revenue is applied when revenue is recorded at the time goods or services are sold.
Answer: What is True?
An amount owed.
Answer: What is a Liability?
Generally Accepted Accounting Principles; the standards and rules that accountants follow while recording and reporting financial activities.
Answer: What is GAAP?
Financial rights to the assets of a business.
Answer: What are Equities?
A sale for which payment will be received at a later date.
Answer: What is a Sale on Account?
When a company pays insurance premiums in advance, it records the payment as a liability.
Answer: What is False? (Prepaid insurance is recorded as an asset).
A formal report that shows what an individual owns, what an individual owes, and the difference between the two.
Answer: What is a Net Worth Statement?
A formal written document that describes the nature of a business and how it will operate.
Answer: What is a Business Plan?
An account used to summarize the owner’s equity in a business.
Answer: What is a Capital Account?
A person or business to whom a liability is owed.
Answer: What is a Creditor?
When a company receives cash from a customer for a prior sale, the transaction increases cash and increases accounts receivable.
Answer: What is False? (Cash increases, but accounts receivable decreases).