Transaction: economic exchange between entities. (ie sales/purchases, receipt of cash by a borrower, payment of cash by a lender)
Accounts: A record in which transactions are summarized. (a summary of transactions.)
Financial statements: A summary of accounts.
Fiscal year: Any 12-month period used for generating fiscal reports. Frequently the calendar year.
Balance sheet / statement of financial position: Snapshot of assets, liabilities and owner's equity at a given point in time.
Basic requirements for a financial statement (name of financial statement):
1. Financial position at the end of the period (balance sheet)
2. Earnings for the period (income statement)
3. Cash flows for the period (statement of cash flows)
4. Investments by and distributions to owners during the period (Statement of changes in owners' equity)
Accounting / balance sheet equation: Assets = Liabilities + owner's equity
Owner's equity = Assets - liabilities
Owner's equity = net assets
Assets: resources owned by the business. ie cash, merchandise, equipment, or money you're owed (accounts receivable).
Liabilities: Any amount owed to other entities (accounts payable).
Owner's equity / net assets: Any assets remaining after subtracting liabilities.
Financial statements don't show current market value of assets, only the amount paid for assets.
Kinds of assets:
Cash: Cash on-hand or readily available in bank accounts
Accounts receivable: amount owed to business by customers when purchasing on credit.
Merchandise inventory: Unsold merchandise in your inventory.
Equipment: Cost of things like shelving, display racks, other store equipment.
Accumulated depreciation: the portion of the cost of equipment estimated to have been used up in the course of doing business. Depreciation is the practice of spreading the cost of an asset over its expected useful lifespan, not an attempt to account for loss of market value through age or use.
Accounts payable: Amount owed to suppliers for goods bought on credit.
Accrued liabilities: amount owed to creditors, including wages owed to employees.
Short-term debt: amount borrowed that will be repaid within 12 months of the balance sheet's date.
Long-term debt: amount borrowed that will not be repaid within 12 months of the balance sheet's date.
Current assets: Assets which are likely to be converted into cash and used for the business within 12 months.
Current liabilities: Obligations likely to be paid with cash within 12 months.
Income statement / profit and loss / earnings statement / statement of operations = (Revenue - expenses) + (gains - losses.)
Revenue: Cash or assets gained through 'normal' operations of the business.
Expenses: Spent cash or used up assets to complete 'normal' business operations.
Gains: Assets gained through incidental transaction that aren't part of 'normal' operations or invest by owners.
Losses: Decrease in assets due to incidental transactions that aren't part of 'normal' operations or distributions to owners.
Income statement report assets and liabilities for a period of time, not a snapshot of a specific date like a balance sheet.
Net sales - cost of goods sold = gross profit
Gross profit - administrative + operating expenses (wages, depreciation, advertising, etc.) = income from operations
Income from operations - interest paid for loans = before-tax income
Before-tax income - taxes = Net income
Net income divided by number of outstanding shares = earnings per share
Statement of changes in owners' equity / statement of changes in retained earnings / statement of changes in capital stock: has a period of time like an income statement.
Owner's equity = Paid-in capital + (retained earnings = net income - dividends)
Statement of cash flows: used to determine sources and uses of cash during the time period.
Three principal forms of business organization:
Proprietorship: single owner, easy to start, owner is liable for all debts incurred by the business (unlimited liability)
Partnership: A group of proprietors. Unlimited personal liability, unless set up as an LLP (limited liability partnership)
Corporation: Owners = stockholders who are issues stock as evidence of ownership. More complex tax structure compared to proprietorship/partnership. More expensive to form. Can form an LLC (limited liability company) to get some of the benefits of being a corporation without some of the formalities of a corporate structure.
Assets = A
Liabilities = L
Paid-in Capital = PIC
Retained earnings, beginning of period = RE1
Retained earnings, end of period = RE2
Net income for period = NET
Dividends = DIV
A = RE2 + L + PIC
RE2 = A - L - PIC
DIV = RE1 - RE2 + NET
RE2 = RE1 + NET - DIV
RE1 = RE2 - NET + DIV
A - L = OE
OE = PIC + RE
RE = NET - DIV
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