Accounting Terms, Accounting Principles and the Accounting Equation

Accounting Terms, Accounting Principles, Accounting Equation

Accounting is the language of business that reports financial data in the form of reports. These reports are also referred to as financial statements. There are four financial statements that are required by GAAP (generally accepted accounting principles): Income Statement, Statement of Retained Earnings, Balance Sheet and the Statement of Cash Flows.  

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

The accounting equation is also the balance sheet (one of the four financial statements). In these videos, I focus on the accounting terms and accounting principles: accounting, financial reports, decision makers, the four financial statements, types of accounting (financial versus managerial) and the users of the different types of accounting information, generally accepted accounting principles (GAAP), and give examples of some of the concepts/principles.

Examples of Assets, Liabilities and Stockholders' Equity

Assets                                      Liabilities                          Stockholders' Equity
Cash                                       Accounts Payable              Retained Earnings
Accounts Receivable              Notes Payable                   Common Stock
Inventory                                Salaries Payable
Land                                       Taxes Payable
Furniture
Prepaid Expenses

Accounting Terms & Accounting Principles

It 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

The two types of accounting mentioned above, financial and managerial, have different users of the data that is produced.

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 Revenue

Earnings 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 Expenses

Expenses create revenues. GAAP requires that businesses record expenses in the same period as the revenues those expenses created.

The matching principle states that expenses are recorded when they are incurred; not necessarily when cash is paid.

After reading this article and watching all the videos, you should have a general knowledge of:

1. Using accounting vocabulary
2. Applying accounting concepts and principles
3. Using the accounting equation
4. Analyzing business transactions
5. Preparing the financial statements
6. Evaluating business performance

Learn about the rules of debits and credits, recording business transactions and the accounting equation (video).

Don't forget to download the notes that accompany the accounting videos.

Click here for the Accounting Terms, Accounting Principles, Accounting Equation Game.

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