Key Terms

accounting equation: assets = liabilities + owner’s equity

accounts payable: value of goods or services purchased that will be paid for at a later date

accounts receivable: outstanding customer debt on a credit sale, typically receivable within a short time period

accrual basis accounting: accounting system in which revenue is recorded or recognized when earned yet not necessarily received, and in which expenses are recorded when legally incurred and not necessarily when paid

asset: tangible or intangible resource owned or controlled by a company, individual, or other entity with the intent that it will provide economic value

balance sheet: financial statement that lists what the organization owns (assets), owes (liabilities), and is worth (equity) on a specific date

cash basis accounting: method of accounting in which transactions are not recorded in the financial statements until there is an exchange of cash

common stock: corporation’s primary class of stock issued, with each share representing a partial claim to ownership or a share of the company’s business

comprehensive income: change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources

corporation: legal business structure involving one or more individuals (owners) who are legally distinct (separate) from the business

current asset: asset that will be used or consumed in one year or less

current liability: debt or obligation due within one year or, in rare cases, a company’s standard operating cycle, whichever is greater

current ratio: current assets divided by current liabilities; used to determine a company’s liquidity (ability to meet short-term obligations)

distribution to owner: periodic “reward” distributed to owner of cash or other assets

dividend: portion of the net worth (equity) that is returned to owners of a corporation as a reward for their investment

elements of the financial statements: categories or groupings used to record transactions and prepare financial statements

equity: residual interest in the assets of an entity that remains after deducting its liabilities

expense: cost associated with providing goods or services

gain: increase in organizational value from activities that are “incidental or peripheral” to the primary purpose of the business

income statement: financial statement that measures the organization’s financial performance for a given period of time

initial public offering (IPO): when a company issues shares of its stock to the public for the first time

intangible asset: asset with financial value but no physical presence; examples include copyrights, patents, goodwill, and trademarks

inventory: value of products to be sold or items to be converted into sellable products

investment by owner: exchange of cash or other assets in exchange for an ownership interest in the organization

liability: probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

liquidity: ability to convert assets into cash in order to meet primarily short-term cash needs or emergencies

long-term asset: asset used ongoing in the normal course of business for more than one year that is not intended to be resold

long-term liability: debt settled outside one year or one operating cycle, whichever is longer

loss: decrease in organizational value from activities that are “incidental or peripheral” to the primary purpose of the business

net income: when revenues and gains are greater than expenses and losses

net loss: when expenses and losses are greater than revenues and gains

noncurrent asset: asset that will be used or consumed over more than one year

noncurrent liability: liability that is expected to be settled in more than one year

notes payable: value of amounts borrowed that will be paid in the future with interest

notes receivable: value of amounts loaned that will be received in the future with interest

partnership: legal business structure consisting of an association of two or more people who contribute money, property, or services to operate as co-owners of a business

publicly traded company: company whose stock is traded (bought and sold) on an organized stock exchange

retained earnings: cumulative, undistributed net income or net loss for the business since its inception

revenue: inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations

Securities and Exchange Commission (SEC): federal regulatory agency that regulates corporations with shares listed and traded on security exchanges through required periodic filings

short-term asset: asset typically used up, sold, or converted to cash in one year or less

short-term liability: liability typically expected to be paid within one year or less

sole proprietorship: legal business structure consisting of a single individual

stakeholder: someone affected by decisions made by a company; may include an investor, creditor, employee, manager, regulator, customer, supplier, and layperson

statement of cash flows: financial statement listing the cash inflows and cash outflows for the business for a period of time

statement of owner’s equity: financial statement showing how the equity of the organization changed for a period of time

tangible asset: asset that has physical substance

working capital: current assets less current liabilities; sometimes used as a measure of liquidity

 

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