Accounting Bookkeeping Essential Definitions

This page contains essential accounting and bookkeeping terms and definitions, in general, such as: what is accounting? What is bookkeeping? What is public accounting? What is financial accounting? Etc.

• Accounting – The information system that identifies, records, and communicates the economic events of an organization to interested users.
• Accounting information system – A system that collects and processes transaction data, and communicates financial information to decision makers.
• Manual accounting system – A system in which someone performs each of the steps in the accounting cycle by hand.
• Bookkeeping – A part of accounting that involves only the recording of economic events.
• Public accounting – An area of accounting in which the accountant offers expert service to the general public.
• Financial accounting – The field of accounting that provides economic and financial information for investors, creditors, and other external users.
• Auditing – The examination of financial statements by a certified public accountant in order to express an opinion as to the fairness of presentation.
• Forensic accounting – An area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.
• Management/Managerial accounting – The field of accounting that provides internal reports to help users make decisions about their companies. (Also defined as: 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.)
• Management consulting – An area of public accounting ranging from development of accounting and computer systems to support services for marketing projects and merger and acquisition activities.
• Taxation – An area of public accounting involving tax advice, tax planning, preparing tax returns, and representing clients before governmental agencies.
• Financial Accounting Standards Board (FASB) – A private organization that establishes generally accepted accounting principles (GAAP).
• Generally accepted accounting principles (GAAP) – Common standards that indicate how to report economic events.
• Assets – Resources a business owns.
• Balance sheet – A financial statement that reports the assets, liabilities, and owner’s equity at a specific date.
• Basic accounting equation – Assets = Liabilities + Owner’s Equity.
• Corporation – A business organized as a separate legal entity under state corporation law, having ownership divided into transferable shares of stock.
• Cost principle – An accounting principle that states that companies should record assets at their cost.
• Drawings – Withdrawal of cash or other assets from an unincorporated business for the personal use of the owner(s).
• 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.
• Ethics – The standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair.
• Expanded accounting equation = Assets = Liabilities + Owner’s Capital – Owner’s Drawings + Revenues – Expenses.
• Expenses – The cost of assets consumed or services used in the process of earning revenue.
• 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 Accounting Standards Board (IASB) – An accounting standard-setting body that issues standards adopted by many countries outside of the United States.
• Investments by owner – The assets an owner puts into the business.
• Liabilities – Creditor claims on total assets.
• Monetary unit assumption – An assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money.
• 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.
• Partnership – A business owned by two or more persons associated as partners.
• Proprietorship – A business owned by one person.
• Revenues – The gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income.
• Sarbanes-Oxley Act of 2002 (SOX) – Law passed by Congress in 2002 intended to reduce unethical corporate behavior.