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Financial Accounting Basics
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Depreciation
Depreciation is the allocation of the cost of a tangible asset over its useful life. Calculation:
Accrual Accounting
Accrual accounting recognizes revenues and expenses when they are incurred, regardless of when cash is exchanged. It is the opposite of cash accounting.
Accounts Receivable
Accounts receivable represents money owed to the company by its customers for goods or services that have been delivered or used but not yet paid for.
Accounts Payable
Accounts payable represents obligations of the company to pay off a short-term debt to its creditors or suppliers.
Inventory
Inventory is the term for the goods available for sale and raw materials used to produce goods available for sale.
Balance Sheet
A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.
Income Statement
An income statement is a financial report that shows the company's revenues and expenses over a specific period, resulting in a net profit or loss.
Cash Flow Statement
A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows from operations, investments, and financing, as well as outflows.
Double-entry Bookkeeping
Double-entry bookkeeping is an accounting system where each transaction is entered twice, as a debit and a credit, to maintain the accounting equation Assets = Liabilities + Equity.
General Ledger
The general ledger is the master set of accounts that aggregates all transactions recorded for a company.
Trial Balance
A trial balance is a bookkeeping report that lists the balances in each of an organization's general ledger accounts at a specific time.
FIFO (First-In, First-Out)
FIFO is an inventory valuation method where goods are sold in the order they are acquired; the earliest purchased items are sold first.
LIFO (Last-In, First-Out)
LIFO is an inventory valuation method where the most recently produced or purchased items are sold first.
Amortization
Amortization is the process of spreading out a loan or an intangible asset cost over its useful life.
Net Income
Net income is the total profit of a company after all expenses and taxes have been subtracted from total revenues.
Cost of Goods Sold (COGS)
Cost of goods sold is the direct cost attributable to the production of the goods sold by a company.
Accounting Equation
The accounting equation is the fundamental equation of double-entry bookkeeping: Assets = Liabilities + Equity.
Liquidity
Liquidity refers to how quickly an asset can be converted into cash without affecting its market price.
Fixed Assets
Fixed assets are long-term tangible property that a firm owns and uses in its operations to generate income.
Equity
Equity represents the value that would be returned to shareholders if all the assets were liquidated and all the company's debt was paid off.
Revenues
Revenues are the income received from normal business operations and other activities, such as the sale of assets.
Expenses
Expenses are the economic costs that a business incurs through its operations to earn revenue.
Current Assets
Current assets are all assets that a company expects to convert to cash or use up within one year or within the operating cycle.
Current Liabilities
Current liabilities are a company's debts or obligations that are due to be paid to creditors within one year.
Working Capital
Working capital is the difference between a company's current assets and current liabilities.
Retained Earnings
Retained earnings are the cumulative amount of profits that a company has reinvested in itself rather than paid out as dividends.
Gross Profit
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products.
Statement of Shareholder's Equity
The statement of shareholder's equity is a financial document that a company uses to detail the changes in the value of a firm's equity between the start and end of an accounting period.
Goodwill
Goodwill is an intangible asset that arises when a buyer acquires an existing business but pays more than the fair value of the net identifiable assets.
Accrued Expenses
Accrued expenses are expenses that have been incurred but not yet paid for, and are recognized in the period they are incurred rather than when they are paid.
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