Accounting equation: Assets = Liabilities + Owner's equity Asset: A resource owned that has future value Liability: An obligation owed to others Equity: Owners' claim on the assets after liabilities Revenue: Income earned from selling goods or services Expense: Cost of operating a business Net income: Revenues minus expenses Net loss: Expenses exceed revenues Double-entry bookkeeping: Every transaction affects at least two accounts with equal debits and credits Debit: An entry on the left side of an account Credit: An entry on the right side of an account Normal balance of assets: Debit Normal balance of liabilities: Credit Normal balance of revenue: Credit Normal balance of expenses: Debit Journal: Chronological record of transactions General ledger: The collection of all accounts Chart of accounts: List of all accounts a business uses Trial balance: List of account balances proving debits equal credits T-account: A simple diagram of an account with debit and credit sides Adjusting entry: Update made at period end to match revenues and expenses to the right period Closing entries: Zero out temporary accounts at the end of the period Accrual accounting: Records revenue when earned and expenses when incurred Cash basis accounting: Records transactions only when cash changes hands Matching principle: Expenses are matched with the revenues they helped earn Revenue recognition principle: Record revenue when it is earned Going concern: Assumption that the business will continue operating GAAP: Generally Accepted Accounting Principles in the US IFRS: International Financial Reporting Standards Conservatism principle: Choose the option that is less likely to overstate assets and income Materiality: Only significant information needs separate disclosure Balance sheet: Shows assets, liabilities and equity at one date Income statement: Shows revenues and expenses over a period Statement of cash flows: Shows cash in and out from operating, investing and financing Statement of retained earnings: Shows changes in retained earnings over a period Retained earnings: Profits kept in the business rather than paid out Current assets: Assets expected to be turned into cash within a year Current liabilities: Obligations due within a year Long-term assets: Assets held for more than a year Accounts receivable: Money customers owe the business Accounts payable: Money the business owes suppliers Notes payable: Written promises to pay Prepaid expense: An expense paid in advance, recorded as an asset until used Unearned revenue: Cash received before service is provided; a liability Accrued expense: An expense incurred but not yet paid Inventory: Goods held for sale FIFO: First-in, first-out cost flow method for inventory LIFO: Last-in, first-out cost flow method for inventory Weighted average: Inventory costing using the average cost of goods Cost of goods sold: Direct cost of the products sold Gross profit: Sales minus cost of goods sold Operating income: Gross profit minus operating expenses Depreciation: Spreading the cost of a long-term asset over its useful life Straight-line depreciation: Equal depreciation each year Accumulated depreciation: Total depreciation recorded to date on an asset Book value: Asset cost minus accumulated depreciation Salvage value: Estimated value of an asset at the end of its life Amortization: Spreading the cost of an intangible asset over time Goodwill: Value of a business beyond its identifiable net assets Allowance for doubtful accounts: Estimate of receivables that will not be collected Bad debt expense: Cost of uncollectible receivables Common stock: Basic ownership shares of a corporation Treasury stock: Shares a company has bought back Paid-in capital: Amounts investors paid for stock Current ratio: Current assets divided by current liabilities Quick ratio: Liquid assets divided by current liabilities Debt-to-equity ratio: Total liabilities divided by equity Gross margin ratio: Gross profit divided by sales Return on assets: Net income divided by average total assets Return on equity: Net income divided by average equity Inventory turnover: Cost of goods sold divided by average inventory Working capital: Current assets minus current liabilities Liquidity: Ability to meet short-term obligations Solvency: Ability to meet long-term obligations Bank reconciliation: Matching the cash records to the bank statement Petty cash: A small fund for minor expenses Internal controls: Procedures that protect assets and ensure accurate records Audit: Independent examination of financial statements CPA: Certified public accountant Managerial accounting: Reporting for internal decisions Financial accounting: Reporting to outside users Cost accounting: Measuring the cost of making products Budget variance: Difference between budgeted and actual amounts Contribution margin: Sales minus variable costs Break-even in units: Fixed costs divided by contribution margin per unit Opportunity cost: Value of the next best alternative given up Sunk cost: A past cost that cannot be recovered Payroll: Employee compensation records and payments Gross pay: Pay before deductions Net pay: Pay after deductions Fiscal year: A 12-month accounting period Subsidiary ledger: Detailed records supporting a control account Source document: Evidence of a transaction, such as a receipt Invoice: A bill for goods or services Purchase order: A buyer's request to a seller to supply goods Free flashcards from Peabody at peabody.kids/flashcards/tp-accounting-terms