Free Accounting 101 Flashcards

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Accounting Equation

Assets = Liabilities + Owner's Equity; must ALWAYS balance; foundation of double-entry bookkeeping

Assets

Resources owned by the business; examples: cash, accounts receivable, inventory, equipment, buildings

Liabilities

Debts owed by the business; examples: accounts payable, loans payable, wages payable, taxes payable

Owner's Equity

Owner's claim on assets after liabilities; also called stockholders' equity; includes retained earnings

Revenue

Income earned from business operations; increases equity; recognized when earned (accrual basis), not when cash received

Expenses

Costs incurred to generate revenue; decrease equity; matched to the revenue they help generate

Debit

Left side of a T-account; increases assets and expenses; decreases liabilities, equity, and revenue

Credit

Right side of a T-account; increases liabilities, equity, and revenue; decreases assets and expenses

Double-Entry Bookkeeping

Every transaction affects at least two accounts; total debits must equal total credits; keeps equation balanced

Income Statement

Reports revenue and expenses over a period; shows net income (profit) or net loss; Revenue - Expenses = Net Income

Balance Sheet

Reports assets, liabilities, and equity at a point in time; a snapshot of financial position; must balance

Cash Flow Statement

Reports cash inflows and outflows; three sections: Operating, Investing, Financing activities

Accounts Receivable

Money owed TO the business by customers; asset account; arises from credit sales

Accounts Payable

Money the business OWES to suppliers; liability account; arises from credit purchases

Depreciation

Allocating cost of a long-term asset over its useful life; not a cash expense; methods: straight-line, declining balance

Accrual Accounting

Revenue recognized when earned, expenses when incurred; regardless of when cash changes hands; GAAP required

Cash Basis Accounting

Revenue recognized when cash received, expenses when cash paid; simpler but less accurate; used by small businesses

GAAP

Generally Accepted Accounting Principles; standard framework for financial accounting in the US; set by FASB

Trial Balance

List of all accounts and their balances; debits must equal credits; used to check for errors before financial statements

Journal Entry

The initial recording of a transaction; includes date, accounts, amounts, and description; chronological order

Ledger

Collection of all accounts; each account shows all transactions affecting it; organized by account number

Net Income

Revenue minus expenses; the 'bottom line'; positive = profit, negative = loss; flows to retained earnings

Retained Earnings

Accumulated profits not distributed as dividends; part of equity; increases with net income, decreases with dividends

Working Capital

Current Assets minus Current Liabilities; measures short-term financial health; positive = can pay near-term debts

Current Ratio

Current Assets / Current Liabilities; measures liquidity; > 1 means company can cover short-term obligations

Inventory

Goods available for sale; asset account; methods: FIFO (first in first out), LIFO (last in first out), weighted average

Cost of Goods Sold (COGS)

Direct costs of producing goods sold; Beginning Inventory + Purchases - Ending Inventory; subtracted from revenue for gross profit

Gross Profit

Revenue minus Cost of Goods Sold; measures profitability before operating expenses

Break-Even Point

Sales volume where total revenue equals total costs; no profit or loss; Fixed Costs / (Price - Variable Cost per Unit)

Audit

Independent examination of financial statements; ensures accuracy and compliance with GAAP; external vs internal

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