Accounting is an area with its vocabulary or terminology that is constantly changing. In class or at at business meeting, you are likely to hear an accounting term, definition that is unfamiliar to you. You have to understand the definition or basic accounting in order to follow the presentation. One of the major concerns of accounting is the preparation of summarized reports of recorded data.
The principal statements used to communicate summarized data are the income statement, statement of owner’s equity, and balance sheet. A brief description of basic accounting terms as follows:
Income statement – A summary of the revenue and expenses of a business entity for a specific period of time, such as month or a year. If total revenues for the period in question exceed total expenses, the result is net income (or net profit). If total expenses exceed total revenues, the result is a net loss.
Statement of owner’s equity – A summary of the changes in the owner’s equity of a business entity for a specific period of time, such as a month or a year. In a corporation, the emphasis is on reports of changes in retained earnings (net income retained in the business). Those changes are reported in the retained earnings statement.
Balance sheet – A list of the assets, liabilities and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a month or a year. Assets are usually listed first, followed by a list of liabilities and a section detailing owner’s equity. Asset accounts (known as the left-hand side of the balance sheet) carry debit balances. Assets are usually listed with cash first, followed by accounts receivable, inventory, and other assets considered to be “current assets” (those easily converted to cash or expected to be converted to cash within one year). These are subtotaled and followed by a list of a long-term assets such as land and equipment.
Liabilities – Liabilities are classified similarly. “Current liabilities” are listed first, usually in the order of accounts payable, notes payable and various other obligations such as salaries payable. These are subtotaled and followed by a listing of long term liabilities.
Statement of cash flows – The statement of cash flows is an important supplemental financial statement. This statement summarizes cash receipts and cash disbursements for a business during a given period of time, such as a month or a year. This statement supplements the income statement (which may be prepared on an accrual basis), providing users with information about an entity’s ability or inability to meet its current cash obligations.