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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 that 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 that 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 - Current Liabilities
Working capital is an 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



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