Core Accounting Concepts PDF

1. Core Accounting Concepts 1. Assets: Resources controlled by a company with the expectation of future economic benefits. These benefits can include generating cash flow, reducing expenses, or improving sales. Assets can be tangible (physical, like machinery) or intangible (non-physical, like copy...

1. Core Accounting Concepts 1. Assets: Resources controlled by a company with the expectation of future economic benefits. These benefits can include generating cash flow, reducing expenses, or improving sales. Assets can be tangible (physical, like machinery) or intangible (non-physical, like copyrights)[__LINK_ICON]. 2. Liabilities: Obligations of a company to pay money or provide goods or services to others in the future. Liabilities arise from past transactions and represent a future cash outflow. Examples include loans, accounts payable, and mortgages[__LINK_ICON]. 3. Equity: The residual interest in the assets of a company after deducting its liabilities. It represents the owners' stake in the company and is calculated as Assets - Liabilities[__LINK_ICON]. 4. Revenue: The income generated from the normal business operations of a company. It is calculated as the average sales price times the number of units sold. Revenue is also known as sales on the income statement[__LINK_ICON]. 5. Expenses: Costs incurred by a company in the process of generating revenue. They are deducted from revenue to determine net income. Examples include salaries, rent, and utilities[__LINK_ICON]. 6. Net Income: The profit or loss of a company after deducting all expenses from revenue. It is a key indicator of a company's profitability[__LINK_ICON]. 7. Cash Flow: The movement of money into and out of a company over a specific period. It represents the cash received (inflows) and the cash spent (outflows). Positive cash flow indicates more money coming in than going out, while negative cash flow indicates the opposite[__LINK_ICON]. 8. Accrual Accounting: An accounting method that recognizes revenue when earned and expenses when incurred, regardless of when cash is received or paid. This method provides a more accurate picture of a company's financial performance than cash-basis accounting[__LINK_ICON]. 2. Financial Statements 9. Balance Sheet: A financial statement that provides a snapshot of a company's financial position at a specific point in time. It shows the company's assets, liabilities, and equity. The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Equity[__LINK_ICON]. 10. Income Statement: A financial statement that summarizes a company's revenues and expenses over a specific period. It shows the company's profit or loss for that period. The income statement is also known as the profit and loss (P&L) statement or the statement of revenue and expense[__LINK_ICON]. 11. Statement of Cash Flows: A financial statement that shows how a company's cash balance changed over a specific period. It classifies cash flows into three categories: operating activities (cash flows from the company's main business operations), investing activities (cash flows from buying or selling long- term assets), and financing activities (cash flows from raising or repaying debt or equity)[__LINK_ICON]. 3. Subtopics and Additional Concepts 12. Current Assets: Assets that are expected to be converted into cash or used up within one year. Examples include cash, accounts receivable, and inventory. 13. Current Liabilities: Liabilities that are due within one year. Examples include accounts payable, salaries payable, and short-term loans. 14. Working Capital: The difference between current assets and current liabilities. It represents the company's ability to meet its short-term financial obligations. 15. Depreciation: The systematic allocation of the cost of a tangible asset over its useful life. It reflects the gradual decline in the value of the asset due to wear and tear. 16. Amortization: The systematic allocation of the cost of an intangible asset over its useful life. It reflects the gradual decline in the value of the intangible asset. 17. Gross Profit: The profit a company makes from selling its goods or services, calculated as revenue minus the cost of goods sold. 18. Operating Income: The profit a company makes from its core business operations, calculated as gross profit minus operating expenses. 19. Retained Earnings: The portion of a company's net income that is not distributed to shareholders as dividends. It represents the accumulated profits that have been retained by the company. 20. Financial Ratios: Metrics that compare different items on a company's financial statements to assess its financial health and performance. Examples include liquidity ratios, profitability ratios, and leverage ratios. 4. Cash Flow Concepts 1. Cash Equivalents: Short-term, highly liquid investments that can be easily converted into cash. Examples include treasury bills and commercial paper. 2. Petty Cash: A small amount of cash kept on hand for minor expenses. 3. Operating Cash Flow: Cash flows generated from the company's normal business operations. It includes cash received from customers and cash paid to suppliers and employees. 4. Investing Cash Flow: Cash flows related to the purchase or sale of long-term assets, such as property, plant, and equipment. 5. Financing Cash Flow: Cash flows related to raising or repaying debt or equity. It includes cash received from issuing bonds or stock and cash paid to repay loans or dividends. 6. Cash Reserves: A pool of cash that a company keeps on hand to meet unexpected expenses or take advantage of opportunities. 7. Cash on Hand: The amount of cash that a company has available at a specific point in time. 8. Cash Balances: The total amount of cash that a company holds, including cash on hand and cash equivalents. 9. Restricted Cash: Cash that is not readily available for use because it is subject to certain restrictions, such as legal or contractual agreements. 10. Free Cash Flow: The cash flow available to a company after paying for its operating expenses and capital expenditures. It represents the cash flow that can be used to pay dividends, repurchase shares, or invest in new projects. 11. Cash Management: The process of managing a company's cash flow to ensure that it has sufficient cash on hand to meet its financial obligations and take advantage of opportunities. 12. Cash Flow Statement: A financial statement that shows how a company's cash balance changed over a specific period. It classifies cash flows into the three categories mentioned above: operating, investing, and financing activities. 13. Cash Budget: A forecast of a company's cash inflows and outflows over a specific period. It is used to plan for cash shortages or surpluses. 14. Liquidity: A company's ability to meet its short-term financial obligations. It is often measured by liquidity ratios, such as the current ratio and the quick ratio. 15. Cash Turnover: A measure of how efficiently a company is using its cash to generate revenue. It is calculated as revenue divided by average cash balance. 16. Net Cash Flow: The difference between a company's cash inflows and outflows over a specific period. 17. Cash Surplus: A situation where a company has more cash on hand than it needs to meet its current obligations. 18. Cash Deficit: A situation where a company does not have enough cash on hand to meet its current obligations. 19. Cash Reconciliation: The process of comparing a company's bank statement to its internal cash records to identify any discrepancies. 20. Cash Conversion Cycle: The time it takes a company to convert its inventory into cash. It is calculated as the number of days of inventory on hand plus the number of days of accounts receivable outstanding minus the number of days of accounts payable outstanding. 5. Accounts Receivable Concepts 1. Accounts Receivable (AR): Money owed to a company by its customers for goods or services that have been delivered but not yet paid for. 2. Net Accounts Receivable: The amount of accounts receivable that a company expects to collect. It is calculated as gross accounts receivable minus the allowance for doubtful accounts. 3. Allowance for Doubtful Accounts: An account that represents the estimated amount of accounts receivable that a company does not expect to collect. 4. Bad Debt Expense: An expense that represents the amount of accounts receivable that a company has written off as uncollectible. 5. Aging of Accounts Receivable: A schedule that shows the amount of accounts receivable outstanding for different periods. It helps to assess the collectability of accounts receivable. 6. Accounts Receivable Turnover Ratio: A measure of how efficiently a company is collecting its accounts receivable. It is calculated as revenue divided by average accounts receivable. 7. Average Collection Period: The average number of days it takes a company to collect its accounts receivable. It is calculated as 365 days divided by the accounts receivable turnover ratio. 8. Days Sales Outstanding (DSO): Another measure of how efficiently a company is collecting its accounts receivable. It is calculated as average accounts receivable divided by average daily sales. 9. Trade Receivables: Accounts receivable that arise from the sale of goods or services in the ordinary course of business. 10. Uncollectible Accounts: Accounts receivable that a company has determined it will not be able to collect. 11. Gross Accounts Receivable: The total amount of accounts receivable that a company has outstanding. 12. Credit Sales: Sales made to customers on credit, where payment is not required immediately. 13. Receivables Management: The process of managing a company's accounts receivable to ensure that it is collecting its receivables efficiently and effectively. 14. Invoice Processing: The process of creating and sending invoices to customers. 15. Collection Process: The process of collecting payments from customers. 16. Write-offs: The process of removing uncollectible accounts receivable from a company's books. 17. Receivables Financing: The process of obtaining financing using accounts receivable as collateral. 18. Factoring of Receivables: The process of selling accounts receivable to a third-party factoring company at a discount. 19. Pledged Accounts Receivable: Accounts receivable that have been used as collateral for a loan. 20. AR Aging Report: A report that shows the amount of accounts receivable outstanding for different periods. It helps to identify any overdue accounts and assess the collectability of accounts receivable.