Essential Accounting Terms for Professionals and Students
Understanding key accounting terms is crucial for finance professionals and students. This presentation covers essential concepts used in financial reporting and analysis. Let’s explore these terms to enhance your accounting knowledge.
Assets and Liabilities
Assets
Resources owned by a company that has economic value. Examples include cash, inventory, and equipment.
Liabilities
Financial obligations or debts owed by a company. These may include loans, accounts payable, and bonds.
Revenue and Expenses
Revenue
Income generated from normal business operations. It’s the top line of the income statement.
Expenses
Costs incurred in the process of generating revenue. These reduce a company’s profitability.
Net Income
The difference between revenue and expenses. They are also known as profit or earnings.
Debits and Credits
Debit Credit
Increases assets Decreases assets
Decreases liabilities Increases liabilities
Decreases equity Increases equity
Equity and Capital
Owner’s Equity
The owner’s stake in the business. It’s calculated as assets minus liabilities.
Paid-in Capital
Money invested by shareholders in exchange for stock. It’s a key source of funding.
Retained Earnings
Accumulated profits that haven’t been distributed to shareholders as dividends.
Financial Statements
Balance Sheet
Shows a company’s assets, liabilities, and equity at a specific point in time.
Income Statement
Reports revenues, expenses, and profit or loss over a period of time.
Cash Flow Statement
Tracks the inflow and outflow of cash from operating, investing, and financing activities.
Accounting Methods
Cash Basis
Records revenue when cash is received and expenses when cash is paid.
Accrual Basis
Records revenue when earned and expenses when incurred, regardless of cash flow.
Hybrid Method
Combines elements of both cash and accrual methods for specific situations.
Depreciation and Amortization
Straight-line
Allocates an equal amount of depreciation each year over an asset’s useful life.
Declining Balance
Applies a higher depreciation rate in the early years of an asset’s life.
Units of Production
Based on the asset’s usage or output rather than time.
Accounting Principles and Standards
GAAP
Generally Accepted Accounting Principles used in the United States.
IFRS
International Financial Reporting Standards are used globally.
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