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.

Frequently Asked Questions
  • 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.

  • 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.

  • 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.

  • 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.

Key Terms

Explore Accounting

Close up of Female Accountant or Banker Making Calculations
How Does US Accounting Differ From International Accounting?
Progress Billings
Progress Billings: Definition, Purpose, Benefits, and Example
Marketable Securities
Marketable Securities
Cycle Billing
Business Planning
How Do You Record Adjustments for Accrued Revenue?
8 Ways Companies Cook the Books
Young Man Working at Home with Accounting Software
The 7 Best Accounting Books in 2023
What Is Accounting Fraud? Definition and Examples
Book Income
Book Income
FIFO vs. LIFO Inventory Valuation
Financial Data Analyzing
The Difference Between Profitability and Profit
Accounting vs. Economics: What's the Difference?
What Are the Disadvantages of the FIFO Accounting Method?
Production Costs vs. Manufacturing Costs: What's the Difference?
Mature Businessman Sitting at His Desk Using a Phone While Holding a Tablett PC
Applying GAAP to Inventory Reserves
Accounting
The 8 Important Steps in the Accounting Cycle
Balancing The Accounts
How to Treat Overhead Expenses in Cost Accounting
How Can the First-in, First-out (FIFO) Method Minimize Taxes?
Wall Street Quiet Period
Are Dividends Considered a Company Expense?
Depreciation Expense vs. Accumulated Depreciation: What's the Difference?
Toy forklift hold letter blocks reading FIFO
How to Calculate Cost of Goods Sold Using the FIFO Method
Board Room Meeting
Net Income vs. Profit: What's the Difference?
How To Recognize Sunk Costs
Activity-Based Budgeting
What Is Activity-Based Budgeting (ABB)? How It Works and Example
Account Settlement
Account Settlement: Definition, Types, Example
Accountability
Accountability: Definition, Types, Benefits, and Example
Accountant's Letter
Accountant's Letter
Accounting Change
Accounting Change
Accounting Error
Understanding Accounting Errors, How to Detect and Prevent Them
Accounting Event
Accounting Event: Definition, Types, and Examples
Accounting Period
Accounting Period: What It Is, How It Works, Types, Requirements
Accrued Liability
Accrued Liabilities: Overview, Types, and Examples
Additional Paid-in Capital: What It Is, Formula and Examples
Accounting Rate of Return (ARR)
Accounting Rate of Return (ARR): Definition, How to Calculate, and Example
Book Closure
Book Closure
Business Banking
What Is Business Banking? Definition and Services Offered
Business Income
What Is Business Income? Definition, How It's Taxed, and Example
Cash Budget
Cash Budget Definition: Parts and How to Create One
Cost-Volume-Profit Analysis
Cost-Volume-Profit (CVP) Analysis: What It Is and the Formula for Calculating It
Cash Return On Gross Investment (CROGI)
Cash Return On Gross Investment (CROGI)
Debit
Debit Definition: Meaning and Its Relationship to Credit
Deferred Equity
Deferred Equity
Discretionary Account
Discretionary Account: Definition, Examples, Pros & Cons
Days Payable Outstanding (DPO) Defined and How It's Calculated
Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO): Meaning in Finance, Calculation, and Applications
Due From Account: Definition, How It Works and Vs. Due to Account
EBIDA
Earnings Before Interest, Depreciation, and Amortization (EBIDA)
Earnings Before Interest, Depreciation, Amortization and Exploration (EBIDAX)
Effective Net Worth
Effective Net Worth
Ending Inventory
Ending Inventory: Definition, Calculation, and Valuation Methods
Financial Accounting Standards Board
What Is the Financial Accouting Standards Board (FASB)?
Financial Asset
Financial Asset Definition and Liquid vs. Illiquid Types
General Ledger
How a General Ledger Works With Double-Entry Accounting Along With Examples
Hierarchy of GAAP
Hierarchy of GAAP
Modified Accrual Accounting
Modified Accrual Accounting: Definition and How It Works
Modified Book Value
Modified Book Value
Modified Cash Basis
Understanding Modified Cash-Basis in Accounting, Pros & Cons
Next In, First Out (NIFO)
Next In, First Out (NIFO)
Operating Costs Definition: Formula, Types, and Real-World Examples
Pay As You Earn (PAYE)
Pay As You Earn (PAYE): Definition and Examples