Accounting Basics
Key terms
Balance Sheet
A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner’s equity at a given time.
Assets
Something valuable that an entity owns, benefits from, or has use of, in generating income.
Current Assets
Will be used within one year. Typically this could be cash, inventory or accounts receivable.
Fixed asset
Long-term and likely to provide benefits to a company for more than one year, such as a building, land or machinery.
Liabilities
A company's debts or financial obligations it incurred during business operations.
Current Liabilities
Debts that are payable within a year, such as a debt to suppliers.500
Long-term Liabilities
Typically payable over a period of time greater than one year. An example of a long-term liability would be a bank loan.
Owner's Equity
Amount of stock a person has ownership interest in the company. The owners of the stock are commonly referred to as the shareholders.
Income Statement (Profit and loss)
A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time; such a quarterly or annually.
Net Income
A company's total earnings, also called net profit or the “bottom line.” It is calculated by subtracting totally expenses from total revenues.
Expenses
The fixed, variable, accrued or day-to-day costs that a business may incur through its operations. Examples of expenses include payments to banks, suppliers, employees or equipment.
Cost of Goods Sold
The direct expense related to producing the goods sold by a company. This may include the cost of the raw materials (parts) and amount of employee labor used in production.
Cash Flow
The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time. Having a positive cash flow is essential in order for businesses to survive in the long run.
Debit and credit
Debit (DR.)
An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.
Credit (CR.)
An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: a credit and a debit.
Balance sheet
Current Asset Accounts
Long-term Asset Accounts
