Topic 1-4 Definitions Flashcards
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What is an income statement?
It calculates the profit or loss for the business.
What is sales revenue?
Money received from customers in return for the sale of inventory or services.
What are expenses?
The costs of running the business. Common examples: wages, used up supplies, depreciation, rent, electricity, phone bill, tax.
How is profit calculated?
Total income minus all expenses.
What happens to profit after it is calculated?
It is added to the balance sheet in the retained earnings account in the equity section (after any dividends are paid).
What is a balance sheet?
It reports the financial position of the business by reporting the assets, liabilities, and owner’s equity.
What are assets?
Resources owned or controlled by the business.
What are current assets?
Most liquid assets that can be used, consumed, and converted to cash in 12 months. Common examples: cash, supplies, accounts receivable, inventory.
What are non-current assets?
Assets that will be used and consumed for more than 12 months. Common examples: property, plant and equipment, vehicles, buildings, land.
What are liabilities?
Debts owed to creditors (i.e., supplies, banks, service providers).
What are current liabilities?
Debts owed within 12 months. E.g., bank overdraft, accounts payable.
What are non-current liabilities?
Debts that are repaid over a period greater than 12 months.
What is equity?
Residual value of assets after liabilities have been subtracted, representing what the owners have left over. Also referred to as book value of the business.
What is capital?
The equity account that represents the owner’s investment in the business.
What are retained earnings?
The equity account on the balance sheet where the profit or loss (after dividends have been paid) is transferred to from the statement of profit or loss.
What are drawings?
The account that represents the owner’s asset withdrawals from the business. Example: cash withdrawal or taking a PC for personal use only.
What is accrual accounting?
Income and expenses are reported when they occur, not when the cash is paid or received.
What are prepaid expenses?
An expense paid in advance with cash before a product/service is received. E.g., prepaid rent, prepaid insurance, prepaid advertising.
What is accrued revenue?
Income that has been earned but not received in cash.
What are accrued expenses?
Expense incurred but not yet paid
Example: wages owing to employees for completed work.
Define unearned revenue.
Income received in advance for products or services not yet provided
This is classified as a current liability.
What does COGS stand for?
Cost of goods sold
It refers to the cost of the physical goods sold to customers.
How is gross profit calculated?
Sales revenue – costs of goods sold = gross profit
Gross profit reflects the profitability of core business operations.
