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

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