Accounting Terms, Accounting Principles, Accounting Equation
Learn more about the operating activities section of the Statement of Cash Flows (with video)
The area of financial accounting deals with providing information to users outside the business to assist those users in decision making about a business. GAAP requires that useful information must be relevant, reliable and comparable.
What is the Accounting Equation?
Assets = Liabilities + Owners' Equity
- Assets are future economic benefits of a business
- Liabilities are the debtors claims on the assets of the business
- Owners' Equity represents the owners' claims on the assets of the business
Examples of Assets, Liabilities and Stockholders' EquityAssets Liabilities Stockholders' Equity
Cash Accounts Payable Retained Earnings
Accounts Receivable Notes Payable Common Stock
Inventory Salaries Payable
Land Taxes Payable
Accounting Terms & Accounting PrinciplesIt is important to note that financial accounting deals with creating financial information for use by outsides to make decisions about a company (i.e. investing or lending decisions); whereas, managerial accounting is the analyzing of financial data to assets management in making decisions for a company (this data is not regulated by GAAP).
What is Accounting?Accounting is the language of business that measures business activity and process data into reports and communicates the results to decision makers. These decisions makers can be different depending on the type of accounting being discussed: financial or managerial.
Four financial statements that report on a business in monetary terms:
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Statement of Cash Flows
Financial accounting provides information to users outside the company to assist in decision making: creditors, investors, government.
Managerial accounting provides information to users inside the company to assist in decision making: management.
Outsiders make decisions about a company and Insiders make decisions for a company
Earning RevenueEarnings revenues is the purpose of any business. Revenues are created from the day-to-day activities/operations of the business.
The revenue recognition principle states that revenues are recorded when they are earned; not necessarily when cash is received.
Incurring ExpensesExpenses create revenues. GAAP requires that businesses record expenses in the same period as the revenues those expenses created.
After reading this article and watching all the videos, you should have a general knowledge of:
- Using accounting vocabulary
- Applying accounting concepts and principles
- Using the accounting equation
- Analyzing business transactions
- Preparing the financial statements
- Evaluating business performance
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