Important Accounting Terms
Understanding accounting parlance can be critical in evaluating a corporation's financial statements because accountants and financial analysts prepare these statements in accordance with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). The most important accounting concepts concern financial statements and accounts. Financial statements include balance sheets, income statements, cash flow statements and equity statements. Important financial account terms include asset, liability, equity, revenue and expense.
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Balance Sheet
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A balance sheet is also called a statement of financial position. It lists a corporation's assets, liabilities and equity accounts. The basic accounting equation requires a company's assets to be equal to its liabilities plus equity.
Income Statement
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An income statement is also referred to as a statement of profit and loss or statement of income. It details a firm's revenues and expenses during a period. A statement of profit and loss also provides insight into a company's profitability in the short-term and the long-term.
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Cash Flow Statement
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A cash flow statement provides data about a corporation's cash flows from operating activities, investing activities and financing activities. It indicates sources of funds that a firm uses to finance short-term and long-term operating activities.
Equity Statement
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An equity statement provides details about shareholders' transactions with a firm. It lists a beginning balance of shareholders' equity, the retained earnings (internal funds) during the period, net income, dividend payments to common and preferred stockholders and the ending equity balance.
Asset
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An asset is an economic resource that a corporation owns. It can be a short-term asset (such as cash, accounts-receivable and inventories) or a long-term asset (such as land, equipment and machinery). An accountant lists assets in a balance sheet.
Liability
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A liability is a debt that a corporation must reimburse. A short-term debt, such as salaries payable, is a liability that a firm must pay off within 12 months. A long-term liability, such as bonds payable, is a loan that it must reimburse in a year or more. An accountant lists liabilities in a balance sheet.
Revenue
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Revenue is income that a corporation earns by selling goods or providing services. Examples of revenue items include sales, investment income from short-term financial transactions, interest income and gains from the sale of long-term investments. An accountant lists revenues in the income statement.
Expense
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An expense is a cost incurred in providing goods or services to clients. Expense items include salaries, the cost of goods sold and interest. An accountant lists expenses in the income statement.
Equity
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Equity represents owners' investments in a company. Equity accounts include common stocks, preferred shares, treasury stocks and dividend payments. A buyer of equity, or shareholder, receives periodic dividend payments. An accountant lists equity accounts in the balance sheet.
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References
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