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Chapter 2

Analyzing Transactions: The Accounting Equation

TermDefinition
Business Entity An individual, association, or organization that engages in economic activities and controls specific economic resources.
Assets An item that is owned by a business and will provide future benefits.
Accounts Receivable An amount owed to a business by its customers as a result of the sale of goods or services.
Account Payable An unwritten promise to pay a supplier for assets purchased or services received.
Liabilities Something owed to another business entity.
Notes Payable A formal written promise to pay supplier or lender a specified sum of money at a definite future time.
Owner's Equity The amount by which the business assets exceed the business liabilities.
Net Worth Another term for Owner's Equity, the amount by which the business exceeds the business liabilities.
Capital Another term for Owner's Equity, the amount by which the business assets exceed the business liabilities.
Business Entity Concept The concept that nonbusiness assets and liabilities are not included in the business entity's accounting records,
Business Transaction An economic event that has a direct impact on the business.
Accounting Equation The accountant equation consists of the three basic accounting elements: Assets=Liabilities+Owner's Equity.
Account A separate record used to summarize changes in each asset, liability, and owner's equity of a business.
Account Titles Provides a description of the particular type of asset, liability, owner's equity, revenue, or expense.
Revenues The amount a business charges customers for products sold or services performed.
Net Income The excess of total revenues over total expenses for the period.
Expenses The decrease in assets (or increase in liabilities) as a result of efforts to produce revenues.
Net Loss The excess of total expenses over total revenues for the period.
Accounting Period Concept The concept that income determination can be made on a periodic basis.
Fiscal Year Any accounting period of 12 months’ duration.
Withdrawals Reduce owner’s equity as a result of the owner taking cash or other assets out of the business for personal use.
Liquidity A measure of the ease with which an asset will be converted to cash.
Drawing Reduce owner’s equity as a result of the owner taking cash or other assets out of the business for personal use.
Income Statement Reports the profitability of business operations for a specific period of time.
Operating Statement Another name for the Income statement, which reports the profitability of business operations for a specific period of time.
Profit and Loss Statement Another name for the income statement, which reports the profitability of business operations of a specific period of time.
Statement of Owner's Equity Reports beginning capital plus net income less withdrawals to compute ending capital.
Balance Sheet Reports assets, liabilities, and owner's equity on a specific date. It is called a balance sheet because it confirms that the accounting equation is in balance.
Statement of Financial Condition Another name for the balance sheet, which reports assets, liabilities and owner's equity on a specific date.
Statement of Financial Position Another name for the balance sheet, which reports assets, liabilities, and owner's equity on a specific date.
Processing Recognizing the effect of transactions on the assets, liabilities, and owner's equity, revenues, and expenses of a business.
Input Business transactions provide the necessary input for the accounting information system.
Output The financial statements are the output of the accounting information system.
Created by: msilvan2006
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