Accounting Basics

Assets

Anything a company owns or controls created from a past transaction that gives future economic benefit

Accounts Receivable

Money owed to the business by customers who bought on credit but haven't paid yet. (Current asset)

Supplies

Physical items bought for internal use, not for sale. Counted as a current asset until consumed.

Liabilities

Anything the company owes

Salaries Payable

Wages earned by employees that the business hasn't paid yet. (Current liability)

Accounts Payable

Money the business owes to suppliers for goods or services already received but not yet paid. (Current liability)

Notes Payable

A formal written promise to repay a borrowed amount, usually with interest. Can be current or long-term depending on the due date.

Equity

The owners' claim on the business — what would be left over for the owners if all assets were used to pay off all liabilities.

Common Shares

The amount investors paid to the company in exchange for ownership.

Retained Earnings

Cumulative profits kept in the business after dividends are paid out. Grows with net income, shrinks with losses or dividends.

Financial Statements

Formal reports that summarize a business's financial activity and position over a specific period.

Revenues

Inflows earned from selling goods or services to customers. Increases equity.

Expenses

Costs incurred to generate revenue and run the business. Decreases equity.

Supplies Expense

The portion of supplies already consumed during the period. Recorded when used, not when purchased.

Dividends

Distributions of profit paid out to shareholders. Reduces retained earnings — not an expense.

Balance Sheet

A snapshot of assets, liabilities, and equity at a single point in time.

Income Statement

Revenues minus expenses over a period of time, showing net profit or loss.

Statement of Retained Earnings

How retained earnings changed during the period — starts with opening balance, adds net income, subtracts dividends.

Cash Flow Statement

Actual cash moving in and out of the business across operating, investing, and financing activities.

Accounting

The process of recording, summarizing, and reporting a business's financial transactions so that decision makers can use the information.

Bookkeeping

The day-to-day recording of transactions. A subset of accounting.

Accounting Equation

Assets = Liabilities + Equity. The foundation of double-entry accounting — must always stay balanced.

Double-entry Accounting

Every transaction affects at least two accounts, keeping the accounting equation balanced.

Chart of Accounts

The complete list of all accounts a business uses, organized by category.

Account

A named record that tracks increases and decreases in one specific item (e.g. Cash, Accounts Payable).

Transaction

Any economic event that affects the financial position of a business and can be measured in money.

GAAP (Generally Accepted Accounting Principles)

The standard rules and guidelines businesses follow when preparing financial statements.

IFRS (International Financial Reporting Standards)

The global equivalent of GAAP, used in most countries outside the US.

Going Concern Principle

Assumes the business will continue operating indefinitely, unless there is evidence otherwise.

Accrual Basis Accounting

Revenues and expenses are recorded when earned or incurred, not when cash is received or paid.

Cash Basis Accounting

Revenues and expenses are recorded only when cash is actually received or paid.

Matching Principle

Expenses should be recorded in the same period as the revenues they helped generate.

Revenue Recognition Principle

Revenue is recorded when it is earned, regardless of when cash is collected.

Cost Principle

Assets are recorded at their original purchase cost, not their current market value.

Materiality Principle

Only information significant enough to influence a decision needs to be formally reported.

Consistency Principle

A business should use the same accounting methods from period to period so results are comparable.

Conservatism Principle

When in doubt, choose the option that understates assets or overstates liabilities — avoid overstating financial health.

Monetary Unit Assumption

Only transactions that can be expressed in money are recorded. Non-financial information is excluded.

Time Period Assumption

Business activity can be divided into specific time periods (monthly, quarterly, annually) for reporting purposes.

Business Entity Principle

The business is treated as separate from its owners — personal transactions are never mixed with business transactions.

Accounting Cycle

The step-by-step process of recording and reporting a business's financial activity within a period.

Source Document

The original evidence of a transaction — receipts, invoices, contracts. The starting point for recording.

Journal

The book of original entry where transactions are first recorded in chronological order.

Journal Entry

A record of a transaction showing which accounts are affected and by how much.

Ledger

A collection of all accounts showing their running balances after journal entries are posted.

Posting

Transferring journal entry amounts from the journal into the corresponding ledger accounts.

Trial Balance

A list of all ledger accounts and their balances at a point in time, used to verify the equation is still balanced.

Closing Entries

Entries made at the end of a period to zero out revenue, expense, and dividend accounts and transfer their net effect into retained earnings

Adjusting Entries

Entries made at the end of a period to update accounts before financial statements are prepared (e.g. recording accrued expenses).

Fiscal year

The 12-month accounting period a business uses for reporting — doesn't have to follow the calendar year.

Current asset

An asset expected to be converted to cash or used up within 12 months.

Non-current asset

An asset held and used by the business beyond 12 months.

Current liability

An obligation due to be settled within 12 months.

Non-current liability

An obligation not due for more than 12 months.

Liquidity

How quickly an asset can be converted into cash. Assets on the balance sheet are listed from most to least liquid.

Net income

Revenue minus all expenses for a period. The "bottom line." Also called net profit.

Net loss

When total expenses exceed total revenues for a period.

Gross Profit

Revenue minus cost of goods sold — profit before operating expenses.

COGS (Cost of Goods Sold)

The direct cost of producing or acquiring the goods that were sold.

Depreciation

The systematic allocation of a long-term asset's cost over its useful life. Recorded as an expense each period.

Accrued Expense

An expense incurred but not yet paid or recorded — recognized through an adjusting entry.

Prepaid Expense

Cash paid in advance for a future benefit. Starts as a current asset, becomes an expense as it is used up.

Unearned Revenue

Cash received before the service is delivered. A current liability until the business earns it.

Debtor

A person or entity that owes money to the business.

Creditor

A person or entity the business owes money to.