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Assets
What you own.
Liabilities
What you owe.
Revenue
What you earned.
Expenses
What is spent to generate or earn revenue.
Net Worth
Assets minus Liabilities.
Accounting
A system to identify, measure, and communicate financial activities.
Personal Accounting
Tracks individual wealth and worth.
Transactions
Financial activities that involve a trade or exchange to receive value.
Surplus
When revenue exceeds expenses.
Deficit
When expenses exceed revenue.
Income Statement
A record showing revenue and expenses to determine the change in net worth.
Balance Sheet
A document recording assets, liabilities, and net worth on a specific date.
Capital
Amounts that increase net worth but are not earned.
Accrual-Based Accounting
Records revenue and expenses in the period they occur, regardless of cash payment timing.
Cash Flow
Relates to cash flowing into and out of the bank account.
T-Account
A tool to record transactions and keep the accounting equation balanced.
Net Worth Calculation
Net Worth = Assets - Liabilities.
Imbalance Example
Occurs when entries in T-Accounts are not balanced.
Opening Balance
The money carried over from the last period.
Closing Balance
Amount remaining in an account at the end of the period.
Cash-based Accounting
Revenue and expenses reported only when cash is received or paid.
Accruals
Accumulation of amounts owed or due but not yet paid or received.
Personal Balance Sheet
A record of assets, liabilities, and net worth at a specific time.
Deductions from Net Worth
Expenses decrease net worth.
Increasing Revenue Impact
When revenue exceeds expenses, net worth increases.
Decreasing Revenue Impact
When expenses exceed revenue, net worth decreases.
Financial Activities
Include all transactions that impact a person's or business's net worth.
Obligations
Also referred to as debt or liabilities.
Definition of Revenue
Income earned through providing goods or services.
Purpose of Income Statement
To determine the change in net worth over a specific period.
Main Components of Balance Sheet
Assets, Liabilities, and Net Worth.
Account Tracking
Allows for detailed information on individual item values.
Journal Entries
Documents initial transaction details before posting to accounts.
Benefits of Monthly Accounting Period
Tracks regular expenses and maintains realistic expectations.
Net Worth Significance
Indicates an individual's or business's financial health.
Liability Examples
Unpaid accounts like credit card bills.
Future Benefits of Assets
Assets benefit you now and in the future.
Personal Finance Accounting Method
Cash-based accounting is often preferred for simplicity.
Revenue Recognition
Recognizing earnings at the time they are realized.
Expense types
Operational costs, rent, insurance, food, etc.
Purchasing Assets Effect on Net Worth
Buying an asset does not impact net worth.
Definition of Surplus
Surplus is added to net worth.
Accrual Definition
Accruals relate to various amounts owed or due.
Monthly Expense Tracking
Helps in estimating future surplus or deficit.
Types of Accounting Periods
Monthly, quarterly, annually, etc.
Capital Increases
Includes gifts and lottery winnings.
Potential consequences of deficits
Reducing net worth.
Analytical Approach
Maintaining balance through double entry accounting.
Revenue T-Account Side
Increases on the right side and decreases on the left.
Expense T-Account Side
Increases on the left side and decreases on the right.
Net Worth Monitors
Essential for managing personal finances effectively.
Documentation of Transactions
Initial recording before posting to T-Accounts.
Definition of Personal Accounting Purpose
To manage expenses and save for retirement.
Comparing Net Worth Scenarios
Higher assets do not guarantee higher net worth.
Understanding Liabilities Importance
Crucial for assessing financial obligations.
Types of non-earned Capital
Gifts, lottery winnings, and other non-revenue increases.
Implications of Deficits
Indicates a reduction in overall net worth.
Purpose of Financial Records
To maintain accurate tracking of assets and liabilities.
Financial Behavior Monitoring
Evaluate changes in net worth effectively.
Expenses Impact on Financial Position
Directly affects net worth calculations.
Purpose of T-Accounts
To maintain accounting equation balance.
Dynamics of Revenue and Expenses
Interaction between these elements dictates net worth.
Double Entry Accounting Logic
Every transaction impacts at least two accounts.
Indicators of Personal Wealth
Tracking personal assets and liabilities over time.
Definition of Cash Flow vs. Accruals
Differentiation between immediate cash movement and overall net worth.
End of Period Balancing
Calculation of closing balance after transactions.
Financial Health Indicator
Net worth reflects personal financial wellbeing.
Reporting Revenue in Personal Finance
Cash received triggers income recognition.
Variation in Net Worth Calculations
Based on changing assets and liabilities.
Understanding Tax Implications
Liabilities may derive from tax obligations.
Impacts of Asset Purchase
Asset exchanges do not alter net worth.
Effects of Debt Payments
Repaying loans impacts cash flow, not net worth.
Account Management
Maintaining knowledge of individual accounts for financial clarity.
Role of Accounting in Business
Essential for tracking and reporting financial performance.
Financial Transactions Recording
Necessary for accurate financial statement preparation.
Measurement of Financial Performance
Use of income statements and balance sheets for assessment.
Understanding Financial Metrics
Critical for evaluating personal and business finances.
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