Understand Basic Accounting Terms:

Chart of Accounts: A chart of accounts (COA) is an index of all

the financial accounts in the general ledger of a company. In short, it is
an organizational tool that provides a digestible breakdown of all the
financial transactions that a company conducted during a
specific accounting period, broken down into subcategories.

Accounts Receivable: Accounts receivable (AR) is the balance of

money due to a firm for goods or services delivered or used but not yet
paid for by customers. Account’s receivables are listed on the balance
sheet as a current asset. AR is any amount of money owed by
customers for purchases made on credit.

Accounts Payable: Accounts payable (AP) is an account within

the general ledger that represents a company's obligation to pay off a
short-term debt to its creditors or suppliers. Another common usage of
"AP" refers to the business department or division that is responsible for
making payments owed by the company to suppliers and other creditors.

Assets: An asset is a resource with economic value that an individual,

corporation or country owns or controls with the expectation that it will
provide a future benefit. Assets are reported on a company's balance
sheet and are bought or created to increase a firm's value or benefit the
firm's operations.

 Current assets: Current assets represent all the assets of a

company that are expected to be conveniently sold, consumed,
utilized or exhausted through the standard business operations,
which can lead to their conversion to a cash value over the next
one year period. Since current assets is a standard item appearing
in the balance sheet, the time horizon represents one year from the
date shown in the heading of the company's balance sheet.

 Fixed Assets: A fixed asset is a long-term tangible piece of

property or equipment that a firm owns and uses in its operations
to generate income. Fixed assets are not expected to be
consumed or converted into cash within a year. Fixed assets most
 commonly appear on the balance sheet as property, plant, and
equipment (PP&E). They are also referred to as capital assets.

Liability: A liability, in general, is an obligation to, or something that is

owed to somebody. Liabilities are defined as a company's legal financial
debts or obligations that arise during the course of business operations.

 Current liability: Current liabilities are a company's short-term

financial obligations that are due within one year or within a
normal operating cycle. An operating cycle, also referred to as
the cash conversion cycle, is the time it takes a company to
purchase inventory and convert it to cash from sales. An example
of a current liability is money owed to suppliers in the form
of accounts payable.
 Long term liability: Long-term liabilities are financial obligations
of a company that are due more than one year in the future. The
current portion of long-term debt is listed separately to provide a
more accurate view of a company's current liquidity and the
company’s ability to pay current liabilities as they become due.
Long-term liabilities are also called long-term debt or noncurrent
liabilities.

Equity: Equity is typically referred to as shareholder equity (also known

as shareholders' equity) which represents the amount of money that
would be returned to a company’s shareholders if all of the assets were
liquidated and all of the company's debt was paid off.

Revenue: Revenue is the income generated from normal business

operations and includes discounts and deductions for returned
merchandise. It is the top line or gross income figure from which costs
are subtracted to determine net income.

Expense: An expense is the cost of operations that a company incurs to

generate revenue. As the popular saying goes, “it costs money to make
money.”
Balance Sheet: A balance sheet is a financial statement that reports a
company's assets, liabilities and shareholders' equity at a specific point
in time, and provides a basis for computing rates of return and
evaluating its capital structure. It is a financial statement that provides a
snapshot of what a company owns and owes, as well as the amount
invested by shareholders.

Income Statement: An income statement is one of the three

important financial statements used for reporting a company's financial
performance over a specific accounting period, with the other two key
statements being the balance sheet and the statement of cash flows.
Also known as the profit and loss statement or the statement of revenue
and expense, the income statement primarily focuses on the company’s
revenues and expenses during a particular period.

Cash Flow Statement: A cash flow statement is

a financial statement that provides aggregate data regarding all cash
inflows a company receives from its ongoing operations and external
investment sources. It also includes all cash outflows that pay for
business activities and investments during a given period. 

Retained Earnings Statement: The statement of retained earnings

(retained earnings statement) is a financial statement that outlines the
changes in retained earnings for a company over a specified period. This
statement reconciles the beginning and ending retained earnings for the
period, using information such as net income from the other financial
statements, and is used by analysts to understand how corporate profits
are utilized.

Accounting Method: A process used by a business to report income

and expenses. Companies must choose between two methods
acceptable to the IRS, cash accounting or accrual accounting.

Cash Basis Accounting: An accepted form of accounting that records

all revenues and expenditures at the time when payments are actually
received or sent. This straightforward method of accounting is
appropriate for small or newer businesses that conduct business on a
cash basis or that don't carry inventories.

Accrual Basis Accounting: An accepted form of accounting

that reports income when earned and expenses when incurred. Under
the accrual method, companies do have some discretion as to when
income and expenses are recognized, but there are rules governing the
recognition. In addition, companies are required to make prudent
estimates against revenues that are recorded but may not be received,
called a bad debt expense.

Cash Flow: The revenue or expense expected to be generated through

business activities (sales, manufacturing, etc.) over a period of time.

Cost of Goods Sold: The direct expenses related to producing the

goods sold by a business. The formula for calculating this will depend on
what is being produced, but as an example this may include the cost of
the raw materials (parts) and the amount of employee labor used in
production.

Credit: An accounting entry that may either decrease assets or increase

liabilities and equity on the company's balance sheet, depending on the
transaction. When using the double-entry accounting method there will
be two recorded entries for every transaction: A credit and a debit.

Debit: An accounting entry where there is either an increase in assets or

a decrease in liabilities on a company's balance sheet.

Insolvency: A state where an individual or organization can no longer

meet financial obligations with lender(s) when their debts come due.

Generally Accepted Accounting Principles (GAAP): A set of rules

and guidelines developed by the accounting industry for companies to
follow when reporting financial data. Following these rules is especially
critical for all publicly traded companies.

Trial Balance: A business document in which all ledgers are compiled

into debit and credit columns in order to ensure a company’s
bookkeeping system is mathematically correct.
Limited Liability Company (LLC): An LLC is a corporate structure
where members cannot be held accountable for the company’s debts or
liabilities. This can shield business owners from losing their entire life
savings if, for example, someone were to sue the company.

Net Income: A company's total earnings, also called net profit. Net
income is calculated by subtracting total expenses from total revenues.

Return on Investment: A measure used to evaluate the financial

performance relative to the amount of money that was invested. The ROI
is calculated by dividing the net profit by the cost of the investment. The
result is often expressed as a percentage.

Bonds & Coupons: A bond is a form of debt investment and is

considered a fixed income security. An investor, whether an individual,
company, municipality or government, loans money to an entity with the
promise of receiving their money back plus interest. The “coupon” is the
annual interest rate paid on a bond.