The process of identifying, recording, and communicating the economic events of a business to interested users.

Who are internal users of accounting information?

Managers who plan, organize, and run the business — e.g., marketing managers, production supervisors, company officers.

Who are external users of accounting information?

Users outside the company — investors (buy/hold/sell decisions) and creditors (lending risk), plus taxing authorities, regulators, and customers.

What is the accounting equation?

Assets = Liabilities + Owner's Equity. It must always balance — every transaction keeps it in balance.

Resources a business owns that provide future economic benefit — cash, accounts receivable, supplies, equipment.

What are liabilities?

Claims of creditors — debts and obligations the business owes, such as accounts payable and notes payable.

What is owner's equity, and what changes it?

The owner's claim on total assets. Increased by investments and revenues; decreased by drawings and expenses.

Name the three financial statements (in preparation order) and what each shows.

1) Income statement — revenues minus expenses for a period. 2) Owner's equity statement — changes in capital for the period. 3) Balance sheet — assets, liabilities, and equity at a point in time.

What is GAAP and who sets it?

Generally Accepted Accounting Principles — the common set of reporting standards, developed primarily by the FASB with SEC oversight.

What does the historical cost principle require?

Record assets at their acquisition cost and keep them at cost — not at fair value. Land bought for $100,000 stays at $100,000 even if it appreciates.

What do the monetary unit and economic entity assumptions require?

Monetary unit: record only what can be expressed in money. Economic entity: keep the owner's personal activities separate from the business's records.

Are owner's drawings an expense?

No. Drawings are a distribution of equity to the owner — reported on the owner's equity statement, never on the income statement.

What is the EXPANDED accounting equation?

Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenues − Expenses. It breaks owner's equity into its moving parts.

The gross increases in owner's equity from business activities carried out to earn income — e.g., service revenue, sales, fees earned. Recorded when earned.

The cost of assets consumed or services used up in the process of earning revenue — e.g., salaries, rent, utilities. They decrease owner's equity.

Net income vs. net loss — what's the difference?

Net income: revenues exceed expenses. Net loss: expenses exceed revenues. Either flows into the owner's equity statement — never directly onto the balance sheet.

Name the three forms of business organization and one key trait of each.

Proprietorship — one owner, personally liable. Partnership — two or more owners share profits and liability. Corporation — separate legal entity; owners (stockholders) have limited liability.

What is the going concern assumption?

The assumption that the business will continue operating into the foreseeable future — it justifies recording assets at cost and spreading their cost over future periods.

When is the fair value principle used instead of historical cost?

Only when assets are actively traded with readily available market prices, such as investment securities. Most assets stay at historical cost.

What is a business transaction?

An economic event that changes assets, liabilities, or owner's equity and can be measured in money — only transactions are recorded, not every business activity.

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Accounting 1 · Chapter 1 · Free

Chapter 1 — Foundations of Accounting

The foundations of accounting for investors, traders, students, and business owners — what accounting is, why it matters, and the framework everything else builds on.

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Explain what accounting is and who uses financial information
Identify the three main financial statements and what each shows
Apply the accounting equation: Assets = Liabilities + Equity
Describe the role of GAAP and key accounting assumptions

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Chapter 1 — Foundations of Accounting

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