Hello again. In the previous lesson, you separated equity, equities, and owner’s equity by looking for precise clues: remaining value, shares of stock, or an owner’s claim. This lesson adds six terms that describe how a business should behave, what kind of business it is, how it plans, and how it reports financial information.
The goal is not to write long explanations on a test. It is to recognize the one clue that makes each word-bank choice correct: morality, business conduct, service, one owner, written plan, or accounting rules.
Six terms, organized before memorizing
These terms become much easier to retain when you see that they belong to different categories.
| Category | Terms | Main idea |
|---|---|---|
| Moral conduct | ethics, business ethics | What is right or wrong |
| Type of business | service business, proprietorship | What the business does; who owns it |
| Planning | business plan | What the business intends to do |
| Reporting standards | GAAP | Rules for accounting information |
Consider a person starting a small computer-repair company.
- They decide not to hide repair fees from customers: this involves ethics and business ethics.
- The company earns money by repairing computers rather than selling a physical product: it is a service business.
- If one person owns it, it is a proprietorship.
- The written document explaining its customers, goals, costs, and plans is its business plan.
- When it prepares financial statements for outside users, it follows GAAP.
The terms all relate to business, but they answer very different questions. That is the central fact to use in a matching exercise.
Ethics and business ethics: general conduct versus conduct in business
Ethics are moral principles or standards that help people decide what is right and wrong. Ethics apply broadly: to personal choices, school, government, medicine, and business.
A test-ready definition is:
Ethics: moral principles that guide a person’s or group’s behavior.
If someone finds a lost wallet and returns it rather than keeping it, that decision concerns ethics. The situation does not need to involve a company.
Business ethics apply those moral principles to business activity. They guide how a business and the people in it deal with customers, employees, owners, suppliers, competitors, and the public.
Business ethics: moral principles, values, and policies that govern behavior in business activity.
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A business may face ethical choices such as whether to:
- describe a product honestly in advertising;
- protect customer information;
- charge fees clearly rather than hiding them;
- treat workers fairly;
- report financial information truthfully.
Do not confuse “ethical” with merely “legal”
A law tells people what is required or prohibited by government rules. Ethics asks what is right, fair, honest, and responsible. Often the two overlap, but they are not identical. A choice can be legal yet still raise an ethical concern.
For the word bank, the distinction is simpler:
| Definition clue | Best match |
|---|---|
| “Standards of right and wrong” with no specific business setting | Ethics |
| “Moral principles governing business conduct” | Business ethics |
Use this memory line:
Ethics applies everywhere; business ethics applies at work and in commerce.
A service business and a proprietorship answer different questions
The next pair is easy to confuse because one business can be both. But the terms describe two separate features.
A service business earns revenue by performing services for customers. It provides work, expertise, assistance, or an experience instead of primarily selling a tangible product.
Service business: a business that performs services for customers.
Examples include:
- a barber shop;
- a cleaning company;
- a tutoring business;
- an accounting firm;
- a repair shop;
- a consulting practice.
A computer-repair company is a service business because the central activity is repair work. It may also sell a cable or replacement part, but its main purpose is still performing a service.
Look for definition clues such as performs work, provides a service, assists customers, repairs, or charges for labor or expertise.
A proprietorship describes ownership, not the product or service provided. In introductory accounting, proprietorship usually means a sole proprietorship: an unincorporated business owned by one person.
Proprietorship: a business owned by one person.
The owner is called a proprietor. This connects to the last lesson: a proprietorship commonly uses the term owner’s equity because one owner has the residual claim on the business’s assets after liabilities are subtracted.
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The key comparison is:
| Term | It tells you... | It does not tell you... |
|---|---|---|
| Service business | What the business does to earn revenue | How many people own it |
| Proprietorship | Who owns the business: one person | Whether it sells products or provides services |
Therefore, a one-person photography business can be both a service business and a proprietorship. A store owned by one person may be a proprietorship, but it is not necessarily a service business if it mainly sells merchandise.
Sole Proprietorship: Definition, Advantages, and Legal Considerations — Auditing Accounting
Read the opening definition from Auditing Accounting to reinforce the ownership clue that identifies a proprietorship.
In the section “1. What Is a Sole Proprietorship?”, read from the core definition. Focus on the phrase “owned and managed by one person.” For this word-bank lesson, that is the decisive clue; the later legal details are useful context but not required for matching.
A business plan: the business’s written blueprint
Before a business starts or expands, its owner may prepare a business plan. This is a written description of the business and its goals, together with plans for reaching those goals.
Business plan: a written description of a business, including its goals and plans for achieving them.
A business plan often discusses:
- what product or service the business will provide;
- who its customers will be;
- what resources, employees, or equipment it needs;
- expected costs and revenue;
- marketing and operating plans.
For example, the owner of the computer-repair business might write that the company will serve local students and small offices, charge set hourly rates, advertise online, and purchase repair tools. Those future-oriented decisions belong in a business plan.
The strongest word-bank clues are written description, goals, future operations, strategy, start a business, and plans for success.
Do not choose business plan for a definition about rules for preparing financial statements. A plan is the business’s own guide for where it intends to go; accounting standards are shared rules for reporting what the business has done financially.
GAAP: common rules for financial reporting
GAAP stands for Generally Accepted Accounting Principles. It refers to common accounting rules and standards used when businesses prepare financial statements. In the United States, GAAP is particularly important for financial statements distributed to people outside the company.
GAAP: generally accepted accounting rules and standards used in preparing financial statements.
Why do common rules matter? Imagine two businesses reporting profit in completely different ways. An investor, lender, or owner would have difficulty comparing them. GAAP promotes consistency and makes financial reports more understandable and comparable.
Bookkeepers: G.A.A.P. explained simply (generally accepted accounting principles)
Watch “Bookkeepers: G.A.A.P. explained simply” by FinePoints for a concise explanation of GAAP as a shared reporting framework.
Watch the full introduction. Focus on two ideas: GAAP provides a standard framework, and using the same framework makes different businesses easier to compare. You do not need to memorize the organization mentioned in the video for this word-bank outcome; memorize what GAAP does.
The most useful test clues for GAAP are:
- “generally accepted accounting principles”;
- “accounting standards, rules, or procedures”;
- “preparing financial statements”;
- “consistent reporting”;
- “comparing companies’ financial information.”
GAAP is not:
- a moral code for business decisions, which is business ethics;
- a written strategy for a particular company, which is a business plan;
- a type of ownership, which is a proprietorship.
Build a definition fingerprint for each term
For a fast word-bank test, do not try to recall a whole paragraph immediately. First find the definition’s distinctive signal.
| Term | Short definition to memorize | Definition fingerprint |
|---|---|---|
| Ethics | Moral principles that guide behavior. | Right and wrong; moral conduct |
| Business ethics | Moral principles that guide conduct in business. | Moral conduct in a business setting |
| Service business | A business that performs services for customers. | Performs work; provides expertise or assistance |
| Proprietorship | A business owned by one person. | One owner; proprietor; sole owner |
| Business plan | A written description of a business and its goals. | Written plan; goals; future operations |
| GAAP | Common accounting rules used to prepare financial statements. | Accounting standards; financial reporting; comparability |
Notice the precise contrasts:
- Ethics is broad; business ethics is ethics within business.
- Service business describes the activity; proprietorship describes the ownership.
- Business plan gives one business’s intended direction; GAAP gives common reporting rules for many businesses.
A useful recall routine is to cover the middle column of the table, read the term, and say its definition aloud. Then reverse the process: cover the first column, read the fingerprint, and name the term. This reverse direction is especially valuable because word-bank tests give you the definition first.
Key takeaways
- Ethics means moral principles guiding behavior in general.
- Business ethics means moral principles and values guiding behavior in business activity.
- A service business earns revenue by performing services for customers.
- A proprietorship is a business owned by one person; it can also be a service business, but the terms describe different things.
- A business plan is a written description of the business, its goals, and how it intends to achieve them.
- GAAP means Generally Accepted Accounting Principles: common accounting rules used to prepare financial statements.
In the next lesson, you will return to the core relationship behind much of accounting vocabulary: assets, liabilities, and owner’s equity in the accounting equation.
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