The practice of recording, summarizing, and reporting a company's financial transactions to external stakeholders. It focuses on providing accurate financial information for decision-making and compliance purposes.
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Generally Accepted Accounting Principles
A set of standard accounting rules and procedures used in the United States to prepare financial statements. GAAP ensures consistency, comparability, and reliability across different organizations.
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Balance Sheet
A financial statement that shows a company's assets, liabilities, and equity at a specific point in time. It follows the fundamental accounting equation: Assets = Liabilities + Equity.
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Income Statement
A financial statement that reports a company's revenues, expenses, and profits over a specific period. It shows whether the company was profitable during the period.
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Cash Flow Statement
A financial statement that tracks the movement of cash in and out of a company during a period. It shows operating, investing, and financing activities.
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Assets
Economic resources owned by a company that have monetary value and are expected to provide future benefits. Examples include cash, inventory, equipment, and property.
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Liabilities
Obligations or debts owed by a company to external parties such as creditors and lenders. They represent claims against company assets.
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Equity
The residual interest in company assets after liabilities are deducted; represents ownership stake. It includes contributed capital and retained earnings.
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Revenue
Income generated by a company from selling goods or providing services to customers. It is the top line on an income statement before any expenses.
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Expenses
Costs incurred by a company in the process of generating revenue. Common examples include salaries, rent, utilities, and cost of goods sold.
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Accrual Accounting
An accounting method that records revenues and expenses when they are earned or incurred, not when cash is received or paid. It provides a more accurate picture of financial performance.
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Cash Basis Accounting
An accounting method that records transactions only when cash is received or paid. It is simpler but less accurate than accrual accounting.
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Double-Entry Bookkeeping
A fundamental accounting system where every transaction is recorded in at least two accounts. This ensures the accounting equation always remains balanced.
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Journal Entry
A record of a business transaction that includes the date, accounts affected, amounts, and description. Journal entries are the first step in the accounting process.
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Ledger Account
A record that tracks all transactions for a specific account in a business. Ledger accounts are organized by account type and maintain running balances.
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Trial Balance
A list of all ledger account balances at a specific point in time, used to verify that debits equal credits. It helps identify recording errors before financial statements are prepared.
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Net Income
The bottom line profit or loss after all revenues and expenses have been accounted for. It represents the company's earnings and is reported on the income statement.
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Depreciation
The process of spreading the cost of a fixed asset (like equipment or buildings) over its expected useful life through regular expenses on financial statements. This accounting method matches the asset's cost with the revenue it generates and reflects its gradual loss of value due to wear, use, or obsolescence.
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Chart of Accounts
A complete list of all accounts used by a company to record transactions, organized by category. It serves as a reference guide for proper transaction recording.
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Fiscal Year
A 12-month period used by a company for accounting and financial reporting purposes. It may differ from the calendar year depending on the company's business cycle.