Financial Account Concepts Flashcards
Double entry
system
In double entry bookkeeping, each accounting
transaction has two sides that are equal or “in
balance.”
Asset
What you have or are owed.
Liability
What you owe.
Net assets or
equity
What you get to keep.
Accounting
Equation
The formula for the accounting equation is
Assets equal Liabilities plus Net Assets (for a not-forprofit entity) OR: Assets equal Liabilities plus Equity
(for a for-profit entity). Sometimes also referred to as
the accounting identity.
The Matching
Principle
According to the matching principle in accounting,
revenues earned in a given period (a month, a
quarter, or a year) must be matched with the
corresponding expenses incurred in earning that
revenue.
Accrual
An accrual is an accounting entry that records an
asset (a receivable) for a service (revenue) rendered
but for which payment has not been collected and a
liability (a payable) for a matching cost (expense)
incurred but not yet paid. Accrual basis accounting
(an accounting system that uses accruals) is required
by Generally Accepted Accounting Principles (GAAP) of
all but the smallest business entities
Cash basis
accounting
Cash basis accounting is the alternative to accrual
basis accounting. It does not follow the matching
principle. Under cash basis accounting, Revenue equal
Cash receipts, and Expenses equal Cash
disbursements.
The Income
Statement or
“Statement of
Activities”
The income statement summarizes revenues,
expenses, and income for an organization over a
specified period of time (a month, quarter, or year).
The income statement ties to the balance sheet
through net assets: Net assets at beginning of the
period (the previous balance sheet date) plus Net
income during the period equal Net assets at the end
of the period (the current balance sheet date).
The Balance Sheet or “Statement of Financial Position”
The balance sheet describes the organization’s assets,
liabilities, and net assets at a specified point in time –
usually the end of the accounting period (month, quarter,
or year).
The Statement
of Cash Flows
The statement of cash flows shows the sources and uses of cash using the accrual basis of accounting. This
statement reconciles the change in the cash balance
during the period to net income during the period. The
statement breaks down cash flows into operating,
investing and financing activities.
Liquidity
Liquidity ratios measure the ability of an entity to pay its
current obligations as they come due (current =
obligations due in less than one year). Examples: current ratio and days-cash-on-hand ratio.
Capital
structure
Capital structure ratios measure the relationship of an
entity’s debt to its net assets or equity and an entity’s
ability to meet its long-term obligations from its income.
Examples: debt-to-equity ratio and debt service coverage ratio
Profitability
Profitability ratios measure an entity’s earning power.
Example: operating margin and total margin.
