Accounting is the recording of financial transactions pertaining to a business. Learn how to use accounting to summarize, analyze, and report the financial activity of a company.
Accounting Essentials You Need To Know
Are revenue and income the same thing?
Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Income or net income is a company's total earnings or profit. So, while they’re both related to profits that the company makes, they differ because revenue consists of profits made due to the sale of goods or services, while income includes all earnings and profits. Income tends to refer to the bottom line or net income since it represents the total amount of earnings remaining after accounting for all expenses and additional income.Learn More: The Difference Between Revenue and Income
What’s the difference between accrual accounting and cash basis accounting?
Accrual accounting means revenue and expenses are recognized and recorded when they occur, while cash basis accounting means these line items aren't documented until cash exchanges hands. While cash basis accounting is easier, accrual accounting portrays a more accurate portrait of a company's health because it includes accounts payable and accounts receivable. The accrual method is the most commonly used method, especially by publicly-traded companies because it smooths out earnings over time.Learn More: Accrual Accounting vs. Cash Basis Accounting
What are the four factors of production?
The factors of production are land, labor, capital, and entrepreneurship. They are the inputs needed for creating a good or service. Land serves a purpose via natural resources, like oil, gold, and crops. Labor refers to the effort expended by an individual to bring a product or service to the market, whether that’s the construction worker at a hotel site or the hotel cleaning staff. Capital refers to the purchase of goods made with money in production—for example, a tractor purchased for farming is capital. Entrepreneurship combines all the factors together by putting them all to work to reach production of a good or service.Learn More: The Four Factors of Production
What are current and noncurrent assets?
In financial accounting, assets are the resources that a company requires in order to run and grow its business. Current assets are a company's short-term assets; those that can be liquidated quickly and used for a company's immediate needs. This includes cash, marketable securities, inventory, and accounts receivable. Noncurrent assets, on the other hand, are long-term and have a useful life of more than a year. This includes long-term investments, land, property, plant, and equipment (PP&E), and trademarks.
How do variable cost and fixed cost differ?
Companies incur two types of production costs: variable and fixed costs. Variable costs change based on the amount of output produced. This includes things like labor, commissions, and raw materials. Fixed costs remain the same regardless of production output.
This includes lease and rental payments, insurance, and interest payments. While variable costs tend to remain flat, the impact of fixed costs on a company's bottom line can change based on the number of products it produces.
Economic Order Quantity (EQQ)
The economic order quantity (EOQ) is a company's optimal order quantity for minimizing its total costs related to ordering, receiving, and holding inventory. EOQ is best applied in situations where demand, ordering, and holding costs remain constant over time. One of the important limitations of the economic order quantity is that it assumes the demand for the company’s products is constant over time.
A financial audit is an objective examination and evaluation of the financial statements. The audit can be conducted internally by employees of the organization or externally by an outside Certified Public Accountant (CPA) firm. The point is to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent.
Retained earnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders. The decision to retain the earnings or distribute them among the shareholders is usually left to the company management. A growth-focused company may not pay dividends at all or pay very small amounts because it may prefer to use retained earnings to finance expansion activities.
Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal. ABC is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data.
Just in Time (JIT)
The just-in-time (JIT) inventory system is a management strategy that minimizes inventory and increases efficiency. This method requires producers to forecast demand accurately. The success of the JIT production process relies on steady production, high-quality workmanship, no machine breakdowns, and reliable suppliers. The system is used by large corporations: the car manufacturer Toyota adopted the system in the 1970s.
The general ledger is the foundation of a company’s double-entry accounting system. General ledger accounts encompass all the transaction data needed to produce the income statement, balance sheet, and other financial reports. General ledger transactions are a summary of transactions made as journal entries to sub-ledger accounts.