Accounting is the system of recording a business’s financial transactions (like purchases made or payments received) and summarizing, analyzing, verifying, and reporting them.
An accounting method is an established set of rules that explain how a business’s revenues and expenses are recorded. There are two primary methods that a business can choose from are cash basis accounting and accrual accounting.
Accounts payable is a term referring to any money that a business owes to other entities. Accounts Payable are noted as a current liability on a business’s balance sheet.
Accounts receivable is a term referring to any money owed to a business from a customer who has not yet paid the full balance owed for products and services received. Accounts Receivable are usually treated as a current asset on a business’s balance sheet.
Accrual Accounting is one of the two primary accounting methods. When using this method, a business records revenues and expenses when they are incurred, regardless of when money is actually exchanged. This method can allow for better financial forecasting but requires careful monitoring of cash flow.
An asset is an item of economic value owned or controlled by an individual or business. Assets fit into different categories, including current assets (expected to convert to cash within a year), fixed assets (long-term resources subject to adjustment for depreciation), financial assets (investments like stocks and bonds), and intangible assets (such as intellectual property and brand affinity). They are expected to generate cash flow, reduce expenses, or improve a business’s sales performance in the future.
A balance sheet is a statement summarizing the financial health of a business at a given point in time. It includes information like assets, liabilities, and net worth. It is one of the three core financial statements that capture a company’s overall financial performance.
Cash Basis Accounting
Cash Basis Accounting is one of the two primary accounting methods. When using this method, a business records revenues and expenses at the time when the money is exchanged, not before. Certain types of business entities are prohibited from using Cash Basis Accounting, including C Corporations and certain types of trusts.
Cash Flow Statement
A statement that details the actual or anticipated amount of cash (and cash equivalents) entering and leaving a business during a specific accounting timeframe. It summaries where the money came from and went. It is one of the three core financial statements that capture a company’s overall financial performance.
An expense is any financial cost that is incurred as a result of doing business.
An income statement (also known as a profit and loss statement) summaries a business’s revenues, expenses, and net profit during a specific accounting timeframe. It is one of the three core financial statements that capture a company’s overall financial performance.
A liability is a business’s financial debt or other legal obligation. Liabilities are recorded on a balance sheet and include things like loans, mortgages, and accounts payable.
Revenue is the total amount of money that a business receives in return for goods and services or as a result of securities interest or exchange of assets.