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.

The Balance Sheet and the Accounting Equation

The accounting equation is the foundation of accounting. The accounting equation is written such that assets equal liabilities plus owners' equity. This is a very simple form of the balance sheet. The balance sheet is one of the four financial statements. The balance sheet gives a snapshot of a business' financial health and well-being on any given day. Unlike the other three financial statements, the balance sheet shows assets, liabilities and owners' equity as of only one day in time and not for a period of time. Caution should be taken when reviewing the balance sheet and any other financial statement. A savvy investor should carefully read the accompanying notes to the financial statements for additional information regarding specific account details that may not be obvious in the financial statement data (i.e. age of accounts receivable).