Accounting Basics

Depreciation

• The process of allocating the cost of an asset over its useful life.

• A method of increasing the value of an asset over time.

• The total value of an asset at the end of its useful life.

• A financial strategy to maximize profit margins.

Accrual Accounting

• Recording revenue and expenses when they occur, not necessarily when cash is received or paid.

• Recording revenue only when cash is received and expenses only when cash is paid.

• Recording all transactions at the end of the accounting period regardless of when they occur.

• Recording expenses before they are incurred and revenue after it is earned.

Net Loss

• When expenses exceed revenue.

• When revenue exceeds expenses.

• When total income is zero.

• When expenses are equal to revenue.

Debits and Credits

• Debits increase assets and decrease liabilities, while credits increase liabilities and decrease assets.

• Debits decrease expenses and increase equity, while credits increase expenses and decrease equity.

• Debits increase liabilities and decrease assets, while credits do the opposite.

• Debits increase assets/expenses and decrease liabilities/equity, while credits do the opposite.

GAAP (Generally Accepted Accounting Principles)

• Standard rules for financial reporting.

• A type of financial statement.

• A method for tax calculation.

• A guideline for personal budgeting.

Statement of Owner’s Equity

• Shows changes in owner’s equity over a period.

• Displays the income generated by the business.

• Lists the assets and liabilities of the company.

• Summarizes the cash flow activities of the business.

Equity

• The owner's claim to the assets of the business (assets-liabilities=equity).

• The total value of a company's assets.

• The amount of money a company owes to its creditors.

• The profit made by a business after all expenses are paid.

Cash Basis Accounting

• Recording revenue when cash is received and expenses when paid.

• Recording revenue when earned and expenses when incurred.

• Recording all transactions at the end of the accounting period.

• Recording only cash transactions and ignoring credit transactions.

Ledger

• A collection of all accounts and their balances.

• A record of daily transactions only.

• A summary of financial statements.

• A list of all employees in a company.

Expense

• Costs incurred to generate revenue (rent, utilities, salaries).

• A type of investment that generates profit.

• A financial term for savings and investments.

• A method of budgeting for future expenses.