Accounting Basics

Income Statement

A financial document that shows how much money (revenues) came in and how much money (expenses) was paid out. An income statement, does not report the cash coming in—rather, its purpose is to (1) report the revenues earned by the company's efforts during the period, and (2) report the expenses incurred by the company during the same period. The purpose of the income statement is to show a company's profitability during a specific period of time. The difference (or "net") between the revenues and expenses for the company is often referred to as the bottom line and it is labeled as either Net Income of Net Loss. Also known as the Profit & Loss Statement.

Multiple step income statement

A form of income statement that contains several sections, subsections, and subtotals

Debit

An accounting entry acknowledging sums that are owing. Recorded on the left side of the account.

Double Entry

An accounting system that keeps track of assets and liabilities simultaneously. Just as assets are on the left side (or debit side) of the accounting equation, the asset accounts in the general ledger have their balances on the left side. To increase an asset account's balance, you put more on the left side of the asset account. In accounting jargon, you debit the asset account. To decrease an asset account balance you credit the account, that is, you enter the amount on the right side. When a company receives cash, the Cash account is debited. When the company pays cash, the Cash account is credited. (? Don't get this. Seems backward.)

Notes Payable

Short-term or long-term liabilities that a business promises to repay by a certain date.

Conservatism

The accounting concept by which the least favorable figures are presented in the financial statements - not overstating the value of an asset, or understating the value of a liability or debt. So an accountant wouldn't increase the value of an asset because of market value, but they may decrease it.

Retained Earnings

The accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends. Will increase when the corporation earns a profit. There will be a decrease when the corporation has a net loss. Earnings are moved here at the end of the fiscal year so the revenue and expense accounts will start the new year with a zero balance.

Accounts receivable

The total amount of money owed to a business (before cash is actually received).

Expenses

An expense is an outflow of money to another person or group to pay for an item or service, or for a category of costs. Expenses are costs that have expired (have been used up).

Basic Accounting Equation

Assets = Liabilities + Stockholders Equity. The same concept as the balance sheet, just presented in an equation.

Accounts Payable

Current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid for. One of the most frequently used liability accounts.

Statement of Cash Flows

Financial statement for a specific period of time that reports cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.

Operating income

Gross Profit minus operating expenses. Indicates the profit earned from the company's primary activities of buying and selling merchandise.

Cash method basis of accounting

Revenues are recorded in the period in which cash is received and expenses are recorded in the period in which cash is paid. Less preferred than Accrual basis of accounting.

Net Loss

The difference between total revenue and total expenses when total expenses are greater

Net Profit

The difference between total revenue and total expenses when total revenue is greater.

Gross profit

The net sales minus the cost of goods and services sold

Useful Life

The period of time an asset can be productively used.

Wages Payable

Wages that have been earned by the employees but are not yet paid to them. A liability.

Liabilities

What a company owes. Notes (loans) Payable, Wages Payable, Interest Payable, Accounts Payable, Unearned Revenue

Assets

What a company owns; anything of value owned by a business. Includes costs that are not yet expired (used up). Vehicles, Cash, Equipment, Supplies, Accounts Receivable, Prepaid Expenses (Insurance), Land, Office Equipment

Matching principle

A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's (stockholder's) equity on a specific date.

Chart of Accounts

A list of accounts used by a business.

Common Stock

A share of ownership in a corporation, usually with voting rights. Will be increased when the corporation issues shares of stock in exchange for cash (or some other asset).

Sales

A temporary owner's equity account used to record the earning of revenue

Revenue

All income that a business receives over a period of time

Credit

An accounting entry acknowledging income or capital items. Recorded on the right side of the account.

Carrying Amount

The original cost of an asset less the accumulated depreciation

Cost Principle

The principle that states that, when purchased, all assets are recorded at their actual cost regardless of market value.

Depreciation Expense

The portion of a plant asset's cost that is transferred to an expense account in each fiscal period during a plant asset's useful life

Revenue Recognition Principle

The principle prescribing that revenue is recognized when earned.

Gross margin

The ratio gross profits divided by net sales

Accrual basis of accounting

Method of accounting in which income is recorded when earned and expenses are recorded when incurred. Preferred method of accounting.

Single step income statement

A form of income statement in which the total of all expenses is deducted from the total of all revenues.

Unearned Revenue

A liability created when a business collects cash from customers in advance of earning the revenue. The obligation is to provide a product or a service in the future.

Fixed expenses

Costs you are obligated to pay at specific times, regardless of other events. These expenses will not change as sales change. (ie rent, etc).

Service Revenue

Ordinary revenue for a service business. Revenues accounts are credited when the company earns a fee (or sells merchandise) regardless of whether cash is received at the time.

Interest Payable

This current liability account reports the amount of interest the company owes as of the date of the balance sheet. (Future interest is not recorded as a liability.)

Stockholder's (Owner's) Equity

Stockholders', or owners', claims to resources, which equal the difference between total assets and total liabilities. If the company is a sole proprietorship, it is referred to as Owner's Equity. Revenues will automatically cause an increase in Stockholders' Equity and expenses will automatically cause a decrease in Stockholders' Equity. The net income on an income statement will be the same as the increase (or decrease) in the Shareholders' Equity.