Accounting Fundamentals

Accrual accounting

Based on the underlying profit, irrespective of how much cash changes hands, transactions are recorded when they take place

Revenue recognition

Record revenue when a sale occurs, not necessarily when cash changes hands

matching

All expenses will be recorded with the revenue they helped create

Historical cost

All assets, liabilities, and equities are recorded at their original purchase price

Conservatism

Record items as soon as possible and usually on the lower end of market value

Accounts payable

The money a business owes to its suppliers for goods or services purchased on credit.

Accounts receivable

A customer owes you a payment for a good or service you already delivered, which is an asset.

Operating debt vs non-operating

Operations (landlord, inventory) vs. non-operating or financial debt which is just borrowing money from the bank

Retained earnings

accumulated profit from a company less dividends

PP&E

physical asset that has a useful life beyond one year

Deferred Revenue

An individual pays you for your goods/services before receiving it, a liability.

Cost of goods sold (COGS)

Cost to make all goods and services sold, recorded by reducing inventory

Selling, General, and Administrative (SG&A)

overhead and sales cost of the business (insurance, rent, etc, along w sales and marketing)

Operating profit

aka EBIT, profit before interest or tax expenses

Prepaid expense

A payment made in advance for goods or services that will be used in the future.

Accrued Liability

Company received goods but haven't paid for it yet

3 sections of cashflow

Cash flow from operations (cash flow generated from business), then cash flow from investing (reinvesting by buying equipment but also actual investments like stocks) and finally cash flows from financing (money in and out from lenders and investors). The final output is net change in cash.

Indirect method of cash flow

Begin with net income, add back non cash charges (D&A) and then adjust for impact of accruals (account receivable and accrued liabilities)