Chapter 1-7: Accounting Fundamentals — Key Terms

Vocabulary flashcards covering fundamental accounting concepts and financial statements discussed in the lecture.

Basic accounting equation

Assets = Liabilities + Owner's (Stockholders') Equity; the foundation of double-entry accounting.

Asset

Economic resource or resource owned by a business expected to provide future benefits.

Liability

An obligation to pay a debt or other form of settlement in the future.

Owner's equity (Stockholders' equity)

The owners' claim on the assets after liabilities are paid; composed of common stock and retained earnings.

Revenue

Income earned from providing goods or services; increases retained earnings.

Expenses

Costs incurred to earn revenue; decrease retained earnings.

Dividends

Distributions of earnings to owners; decrease retained earnings.

Retained earnings

Accumulated net income minus dividends; component of stockholders' equity.

Common stock

A component of stockholders' equity representing ownership shares issued.

Notes payable

A written promise to pay a specific amount; a liability.

Accounts payable

Amounts owed to suppliers or creditors; a current liability.

Income statement

Financial statement that reports revenues and expenses for a period, yielding net income or net loss.

Balance sheet

Financial statement showing assets, liabilities, and stockholders' equity at a specific date; must balance (A = L + SE).

Statement of changes in stockholders' equity

Financial statement that shows changes in common stock and retained earnings over a period.

Statement of cash flows

Financial statement detailing cash inflows and outflows by operating, investing, and financing activities.

Net income

Revenue minus expenses for a period; increases retained earnings.

Year ended (FYE) dating

Date format used on income statement and related statements to denote the period covered.

As of date

Date used on the balance sheet to show position at a single point in time.

Matching principle

Revenue is matched with the expenses incurred to earn it in the same period.

Horizontal financial statement model

Visual tool to record day-to-day transactions and ensure the basic accounting equation stays in balance.

Beginning balance

The starting balance of an account at the start of a period.

Ending balance

The balance of an account at the end of a period.

Double underline (balance sheet)

Formatting that indicates assets equal liabilities plus stockholders' equity.

Cash flow statement (three activities)

Statement showing cash flows from operating, investing, and financing activities.

Operating activities

Cash flows related to day-to-day business operations (revenues and expenses).

Investing activities

Cash flows related to long-term assets and investments (purchase/sale of assets).

Financing activities

Cash flows related to obtaining funds from creditors or owners and paying dividends.

Starting cash balance

Cash balance at the beginning of the period used to compute net change in cash.

Ending cash balance

Cash balance at the end of the period; equals beginning cash plus net change in cash.

Red to read

Mnemonic noting that revenue, expenses, and dividends relate to retained earnings (R, E, D).