Accounting
Financial Accounting Basics Flashcards
34 financial accounting terms every intro course expects you to define on demand
34 cards~9 min
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All 34 Accounting Financial Accounting Basics flashcards
The full deck in writing, listed A to Z. Read it through if the topic is new, then use the cards above to test yourself without looking.
- Accounting Equation
- The rule that a business's assets always equal its liabilities plus owners' equity, because every resource it holds is financed either by debt or by owner investment and retained profit.For example: Buying a $5,000 laptop with a bank loan raises both assets and liabilities by $5,000, so both sides stay equal.
- Accounts Payable
- Amounts a business owes its suppliers for goods or services bought on credit but not yet paid for; it is a current liability.For example: An unpaid $600 supplier invoice is recorded in Accounts Payable.
- Accounts Receivable
- Money customers owe a business for goods or services already delivered but not yet paid for; it is a current asset expected to be collected soon.For example: A $2,000 invoice sent on 30-day terms sits in Accounts Receivable until paid.
- Accrual Basis Accounting
- A method that records revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, giving a truer picture of a period's performance.For example: Work performed in December but billed in January is counted as December revenue.
- Accumulated Depreciation
- A contra-asset account holding the total depreciation charged against an asset since its purchase; it is subtracted from the asset's cost to give its book value.For example: A $10,000 asset with $6,000 of accumulated depreciation has a $4,000 book value.
- Asset
- A resource a business owns or controls that is expected to provide future economic benefit, such as cash, inventory, equipment, or amounts customers owe it.For example: Cash, a delivery van, and accounts receivable are all assets.
- Balance Sheet
- A financial statement showing a company's assets, liabilities, and equity at a single point in time, always balancing under the equation Assets = Liabilities + Equity.For example: A December 31 balance sheet snapshots what the firm owns and owes on that day.
- Cash Basis Accounting
- A method that records revenue only when cash is received and expenses only when cash is paid; it is simpler than accrual but not allowed under GAAP for most companies.For example: A freelancer books income the day a client's payment clears the bank.
- Chart of Accounts
- An organized list of every account a business uses to record transactions, grouped by type (assets, liabilities, equity, revenue, expenses) and usually assigned a reference number.For example: Account 1010 might be Cash and 2010 might be Accounts Payable.
- Closing Entries
- End-of-period journal entries that transfer the balances of temporary accounts (revenue, expenses, dividends) into retained earnings, resetting them to zero for the next period.For example: After closing, revenue and expense accounts begin the new year at zero.
- Contra Account
- An account that offsets and is reported against a related account, carrying the opposite normal balance, such as Accumulated Depreciation offsetting a fixed asset.For example: Allowance for Doubtful Accounts is a contra account that reduces Accounts Receivable.
- Cost of Goods Sold (COGS)
- The direct cost of producing or purchasing the goods a company sold during a period; it is subtracted from sales revenue to arrive at gross profit.For example: For a retailer, COGS is what the sold inventory originally cost to buy.
- Credit
- An entry recorded on the right side of an account; credits increase liability, equity, and revenue accounts and decrease asset and expense accounts.For example: Earning $500 of cash revenue credits the Revenue account and debits Cash.
- Debit
- An entry recorded on the left side of an account; debits increase asset and expense accounts and decrease liability, equity, and revenue accounts.For example: Paying $200 cash for supplies debits the Supplies account and credits Cash.
- Depreciation
- The systematic allocation of a long-lived asset's cost across its useful life as an expense, reflecting the gradual wearing out and use of the asset over time.For example: A $10,000 machine used for five years might be expensed at $2,000 each year.
- Double-Entry Bookkeeping
- A system in which every transaction is recorded in at least two accounts, with total debits equal to total credits, so the accounting equation always stays in balance.For example: A $1,000 sale on credit debits Accounts Receivable and credits Revenue.
- Equity (Owners' Equity)
- The owners' residual claim on a business after subtracting liabilities from assets; it grows with owner investment and profits and shrinks with losses and withdrawals.For example: If assets are $100,000 and liabilities are $60,000, equity is $40,000.
- Expense
- The cost of resources used up to generate revenue during a period, such as rent, wages, and utilities, which reduces both net income and equity.For example: Employee salaries and the electricity bill are expenses of the period.
- GAAP
- Generally Accepted Accounting Principles: the common set of standards, rules, and conventions U.S. companies follow so their financial statements are consistent and comparable.For example: Publicly traded U.S. companies must report their results under GAAP.
- General Ledger
- The complete collection of a company's accounts, where journal entries are posted and a running balance is maintained for each account such as Cash or Revenue.For example: Every cash transaction accumulates in the Cash account within the ledger.
- Income Statement
- A financial statement reporting revenues, expenses, and the resulting net income or loss over a period of time, showing whether the business was profitable.For example: The annual income statement shows the full year's profit or loss.
- Journal Entry
- The first record of a business transaction, listing the accounts debited and credited, the amounts, and the date, before those amounts are posted to the ledger.For example: Recording rent paid: debit Rent Expense $800, credit Cash $800.
- Liability
- An obligation a business owes to outsiders that will require a future outflow of resources, usually cash, such as loans, unpaid supplier bills, or wages owed to employees.For example: A bank loan and an unpaid supplier invoice are both liabilities.
- Matching Principle
- The accrual rule that expenses should be recorded in the same period as the revenues they helped generate, so reported profit reflects the true cost of earning it.For example: Sales commission is expensed in the same month as the sale it earned.
- Net Income
- The profit that remains after subtracting all expenses from all revenues for a period; when expenses exceed revenues the result is instead called a net loss.For example: Revenue of $50,000 minus expenses of $42,000 gives $8,000 of net income.
- Normal Balance
- The side, debit or credit, on which an account increases and therefore usually carries its balance; assets and expenses are normally debit, while liabilities, equity, and revenue are normally credit.For example: Cash has a normal debit balance; Accounts Payable has a normal credit balance.
- Prepaid Expense
- A cost paid in advance for goods or services to be received later; it is first recorded as an asset and then expensed gradually as the benefit is used up.For example: Six months of rent paid upfront is a prepaid asset expensed month by month.
- Retained Earnings
- The cumulative net income a company has kept rather than paid out as dividends; it is part of equity and rises each period the business is profitable.For example: Profits not distributed to owners build up in the Retained Earnings account.
- Revenue
- The income a business earns from its main operations, such as selling goods or services, recorded when it is earned rather than when the cash is collected under accrual accounting.For example: A consulting firm records revenue when it delivers the work, not when the invoice is paid.
- Revenue Recognition Principle
- The rule that revenue is recorded when it is earned, meaning when goods or services are delivered to the customer, not necessarily when the payment arrives.For example: A magazine recognizes subscription revenue as each issue is shipped.
- Statement of Cash Flows
- A financial statement reporting the cash a business generated and used during a period, divided into operating, investing, and financing activities.For example: It explains why net income can differ sharply from the change in cash.
- T-Account
- A simple visual form of a ledger account shaped like the letter T, with debits recorded on the left side and credits recorded on the right side.For example: Students sketch a T-account to see whether Cash ends with a debit or credit balance.
- Trial Balance
- A list of every ledger account and its balance at a point in time, prepared to check that total debits equal total credits before financial statements are built.For example: If the two columns do not match, a posting error exists somewhere.
- Unearned Revenue (Deferred Revenue)
- Cash a business has received for goods or services it has not yet delivered; it is a liability until the work is done and the revenue can be recognized.For example: A gym's annual membership paid in January is unearned until each month passes.