The Accounting Equation and Financial Statements: every key term you need (+ practice quiz)
25 flashcard terms for Financial Accounting Topic 1, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
Assets equal liabilities plus stockholders' equity. Every transaction keeps the two sides equal, which is why the balance sheet always balances and why double-entry bookkeeping works at all.
Asset
A present economic resource the entity controls as a result of a past event, expected to produce future inflows or cost savings. Cash, receivables, inventory and equipment are typical examples.
Liability
A present obligation to transfer an economic resource as a result of a past event. Accounts payable, wages payable, unearned revenue and bonds payable all sit on this side of the equation.
Stockholders' equity
The residual claim of owners: assets minus liabilities. In a corporation it splits into contributed capital raised from shareholders and retained earnings accumulated from profitable operations.
Balance sheet
A statement of financial position at a single instant listing assets, liabilities and equity. It is a snapshot, not a period flow, so it is dated as of one day rather than for a span of time.
Income statement
A period statement reporting revenues earned and expenses incurred, ending in net income. It measures performance over a span of time and feeds directly into retained earnings.
Statement of retained earnings
Reconciles beginning retained earnings plus net income minus dividends to the ending balance. It is the bridge that carries income statement results onto the balance sheet.
Statement of cash flows
Explains the change in cash over a period, split into operating, investing and financing activities. It reconciles accrual-based income back to the cash the business actually collected and spent.
Revenue
The inflow of assets or settlement of liabilities from delivering goods or services that make up central operations. Recognized when the performance obligation is satisfied, not when cash arrives.
Expense
The outflow or using up of assets, or incurring of liabilities, from delivering goods or services. Recognized in the period the related benefit is consumed rather than when the bill is paid.
Net income
Revenues plus gains less expenses and losses for a period. It is an accrual measure of performance and normally differs from the period's change in cash held by the business.
Dividends
Distributions of accumulated earnings to shareholders. They reduce retained earnings and cash but are never an expense, because they are a return to owners rather than a cost of operating.
Contributed capital
Amounts investors paid the corporation for its shares, recorded as common stock at par plus additional paid-in capital. It is owner financing and never flows through the income statement.
Retained earnings
Cumulative net income of the corporation since inception less all dividends ever declared. It is an equity balance, not a pile of cash, and can be large while the bank account is small.
Separate entity assumption
The business is accounted for apart from its owners and from other businesses. An owner's personal car stays off the company books even though the same person controls both.
Going concern assumption
Statements are prepared assuming the entity will continue operating long enough to use its assets and settle its obligations. It is what justifies carrying assets at unrecovered cost.
Monetary unit assumption
Only items measurable in a stable currency are recorded, and the currency is treated as a constant yardstick. Unrecorded strengths such as employee talent stay off the balance sheet.
Periodicity assumption
The continuous life of a business is chopped into artificial periods such as quarters and years so users get timely reports. It is what forces the need for adjusting entries.
Historical cost principle
Assets are initially recorded at the cash-equivalent amount given up to acquire them. It favors verifiability over relevance, which is why land bought decades ago may sit far below market value.
Fair value measurement
The price that would be received to sell an asset in an orderly transaction between market participants. Used for many financial instruments even though most operating assets remain at cost.
Generally accepted accounting principles
The body of standards, interpretations and accepted practice that governs external reporting in a jurisdiction. It exists so that statements of different firms are comparable to outside users.
Financial Accounting Standards Board
The private-sector body that sets United States reporting standards under authority delegated by the securities regulator. Its output is codified into the standards accountants apply.
Articulation
The linkage of the four statements: income flows into retained earnings, retained earnings and other equity feed the balance sheet, and the ending cash balance ties to the cash flow statement.
Current versus noncurrent classification
Items expected to be realized or settled within one year or the operating cycle, whichever is longer, are current. The split lets readers judge short-run liquidity at a glance.
Notes to the financial statements
Narrative and tabular disclosures on accounting choices, commitments, segments and risks. They are an integral part of the statements, not optional commentary added by management.