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Accounting Primer
Basic Definitions:
Revenues - The dollar value of all goods and services sold during a given time period.
Inventory - The cost to acquire and/or produce goods which are currently held by the business.
Cost of Goods Sold - The cost of the goods or services which are associated with the revenue of the period.
For example, Cost of Goods Sold for a retail firm is computed as:
Beginning Inventory + Purchases = Cost of Goods Available For Sale;
Cost of Goods Available For Sale - Ending Inventory = Cost of Goods Sold
Selling and Administrative Expenses - Expenses incurred during the period which are not associated with any particular good/service, but the business as a whole.
Income Statement - Also known as the Profit and Loss Statement - Shows the revenue, cost of goods sold, and expenses of the period.
Basic Format:
Revenue - Cost of Goods Sold = Gross Profit;
Gross Profit - Selling and Administrative Expenses = Net Income
Assets - Tangible or intangible items which the business holds or has rights to (less accumulated depreciation).
Current Assets - Assets that are cash or can be converted into cash in less than one year.
Plant, Property, and Equipment - Long-term assets used to produce revenue for the firm.
Other Assets - Patents, copyrights, goodwill, etc.
Depreciation - The systematic way in which the cost of a long-term asset is expensed over time. For example: Straight Line Depreciation simply divides the cost of the asset (less any expected salvage value) by the expected useful life of the asset. Note: Land is not depreciable.
Liabilities - Promises by the business to repay another party.
Current Liabilities are due within one year.
Long-Term Liabilities are due more than one year from now.
Equity - The difference between assets and liabilities. Also equals all contributed capital plus retained earnings.
Fundamental Accounting Equation (Balance Sheet)
Assets = Liabilities + Equity
Working Capital = Current Assets minus Current Liabilities - Indicator of the firm's ability to operate in the short term.
The following worksheets are provided to help you prepare statements for your business.
Next section: Balance Sheet