Definition

Chapter 1: Accounting in Action Definitions

Accounting: An information system that identifies, records, and communicates the economic events of an organization to interested users.
Bookkeeping: A part of the accounting process that involves only the mechanical recording of economic events.
Internal Users: Managers who plan, organize, and run a business from within the organization (e.g., marketing managers, production supervisors, finance directors).
External Users: Individuals and organizations outside a company who want financial information about the business (e.g., Investors, Creditors).
Investors (Owners): External users who use accounting information to decide whether to buy, hold, or sell business stock.
Creditors (Suppliers/Bankers): External users who evaluate the risks of granting credit or lending money to a business.
Ethics: The standards of conduct by which one's actions are judged as right or wrong, honest or dishonest, fair or not fair.
Generally Accepted Accounting Principles (GAAP): A common set of rules and practices, having substantial authoritative support, recognized by the accounting profession as a general guide for financial reporting purposes.
Historical Cost Principle (or Cost Principle): An accounting rule dictating that companies must record assets at their original purchase cost.
Fair Value Principle: An accounting principle stating that assets and liabilities should be reported at fair value (the market price received to sell an asset or settle a liability).
Monetary Unit Assumption: An assumption requiring that companies include in the accounting records only transaction data that can be expressed in terms of money.
Economic Entity Assumption: An assumption requiring that the activities of a business entity be kept separate and distinct from the activities of its owner and all other economic entities.
Proprietorship: A business owned by one person, where the owner receives all profits, suffers all losses, and is personally liable for all business debts.
Partnership: A business owned by two or more persons, typically characterized by retail or service-type operations and unlimited personal liability.
Corporation: A business organized as a separate legal entity under state corporation law, with ownership divided into transferable shares of stock, giving owners limited liability.
Assets: Resources owned by a business that provide future services or economic benefits (e.g., Cash, Supplies, Equipment).
Liabilities: Existing claims against assets representing a company's debts and obligations to creditors.
Owner’s Equity: The ownership claim on total assets, often referred to as residual equity ( $Assets - Liabilities$ ).
Investments by Owner: The assets (such as cash) that an owner puts into the business.
Revenues: Gross increases in owner's equity resulting from business activities entered into for the purpose of earning income (e.g., sales, fees, services).
Drawings: Decreases in owner's equity caused when an owner withdraws cash or other assets for personal use.
Expenses: The cost of assets consumed or services used in the process of earning revenue (e.g., salaries expense, rent expense).
Transactions: A business's economic events recorded by accountants that alter the financial position (assets, liabilities, or owner's equity) of a company.
Income Statement: A financial report that presents the revenues and expenses of a company to show its net income or net loss for a specific period of time.
Net Income: Earned during a time period when total revenues exceed total expenses ( $Revenues > Expenses$ ).
Net Loss: Incurred during a time period when total expenses exceed total revenues ( $Expenses > Revenues$ ).
Owner’s Equity Statement: A financial statement that summarizes the changes in owner’s equity for a specific period of time.
Balance Sheet: A financial statement acting as a "snapshot" that reports the assets, liabilities, and owner’s equity of a company at a specific date.
Statement of Cash Flows: A financial statement providing information about a specific period's cash receipts (inflows) and cash payments (outflows).
Forensic Accounting: An accounting field that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.

Chapter 2: The Recording Process Definitions

Account: An individual accounting record of increases and decreases in a specific asset, liability, owner's equity, revenue, or expense item.
T-Account: The simplest visual form of an account, structured like a "T", consisting of a title, a left side (Debit), and a right side (Credit).
Debit (Dr.): The left side of an accounting T-account.
Credit (Cr.): The right side of an accounting T-account.
Double-Entry System: A foundational system where each business transaction affects two or more accounts to ensure total debits equal total credits and keep the equation balanced.
Normal Balance: The side of an account (Debit or Credit) where an increase is recorded under standard accounting rules.
Journal: A chronological record of transactions, referred to as the book of original entry, showing complete debit and credit effects in one place.
Journalizing: The mechanical process of entering transaction data chronologically into the journal.
Compound Journal Entry: A journal entry that involves three or more individual accounts (e.g., debiting one account and crediting two).
General Ledger: A collection or book containing the entire group of individual asset, liability, owner's equity, revenue, and expense accounts maintained by a company.
Posting: The process of transferring chronological journal entry information into individual account categories within the ledger.
Chart of Accounts: A systematic list of all the account titles used by a business, usually ordered by assets, liabilities, equity, revenues, and expenses.
Trial Balance: A compiled list of accounts and their ledger balances at a specific point in time, used primarily to prove the mathematical equality of total debits and credits.

Quick Formula & Rule Reference for the Test

Assets = Liabilities + Owner’s Capital - Owner’s Drawings + Revenues - Expenses

Normal Balance Rule (The "DEAD" Mnemonic):

Debit increases Expenses, Assets, and Drawings. (Normal Balance = Debit).
Credit increases Liabilities, Capital, and Revenues. (Normal Balance = Credit).