Accounting Basics Flashcards
cash method of accounting (or) cash basis of accounting
This method reports revenues when
cash is received (as opposed to when
the revenues are earned) and reports
expenses when they are paid (as
opposed to when they occur).
accrual method of accounting (or) accrual basis of accounting
This method reports revenues when
they are earned (as opposed to when
the cash is received) and reports
expenses when they occur (as opposed
to when they are paid).
depreciation
This is the allocation of a plant asset’s
cost to expense over the asset’s useful
life. The purpose is to match the
asset’s cost to the years that benefit
from its use.
land
This asset is part of property, plant and
equipment but it is not depreciated.
balance sheet (or statement of financial position
This financial statement reports a
company’s financial position as of
a moment of time. It reports the
assets, liabilities and stockholders’ (or
owner’s) equity.
income statement (or) statement of earnings (or) statement of operations
This financial statement reports
a corporation’s profitability for a
specified period of time. It reports
revenues, expenses, gains, losses, and
the resulting net income. Also referred
to as the P&L.
cost principle (or) historical cost principle
This basic underlying principle requires
a transaction to be recorded at its cash
value at the time of the transaction. It
also prevents reporting the increases
in the market value of property.
revenues
Under the accrual method, these are
reported on the income statement
when they are earned. Sales and fees
earned are examples.
expenses
Under the accrual method, these costs
are reported on the income statement
when they have been used up in the
process of earning revenues.
assets
These are a company’s resources that
have future economic value which
can be measured in the company’s
currency. Prepaid expenses are one of
these.
liabilities
These are the obligations of a
company and are one of the main
elements of the balance sheet and
accounting equation. Deferred
revenues are one of these.
stockholders’ equity (or) shareholders’ equity
The total amount for this section of
a corporation’s balance sheet is the
amount of assets minus liabilities.
It reports the corporation’s paid-in
capital, retained earnings, and any
deduction for treasury stock. It is also
the total amount of the corporation’s
book value.
accounting equation (or) bookkeeping equation
This algebraic expression is assets =
liabilities + owner’s (or stockholders’)
equity. It should remain in balance
under the double-entry system
debit
This term indicates the left side of a
general ledger account. It is also the
normal balance for asset, expense,
and loss accounts
credit
This term indicates the right side
of a general ledger account. It is
also the normal balance for liability,
stockholders’ equity, revenue, and gain
accounts.
