Managerial Accounting
Accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business.
Tax Accounting
An accounting approach based on specific accounting requirements by governmental taxing agencies.
Financial Accounting
A formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators.
Business Entity Concept
The concept that a business has an existence separate from that of its owners.
Going Concern Concept
The accounting concept that a business is expected to continue in existence for the foreseeable future.
Accounting Equation
The statement that assets equal liabilities plus owners' equity (assets = liabilities + owner's equity)
Liabilities
Legal obligations to give up things of value in the future.
Owners' Equity
The difference between assets and liabilities of a business.
Cost
The value given up to obtain something that you want.
Expense
A decrease in owners' equity caused by consuming your product or service.
MACRS rate
An Internal Revenue Service acronym for the Modified Accelerated Cost Recovery System. The MACRS approach lets taxpayers depreciate more of the cost earlier in the life of a capital expense.
Depreciation
Regular and systematic reduction in income that transfers asset value to expense over time.
Financial Statements
Formal summaries of the content of an accounting system's records of transactions.
Retained Earnings
The sum of all profits and losses, less all dividends paid since the beginning of the business.
Articulate
The concept that information flows from the income statement through the statements of retained earnings and owners' equity to the balance sheet.
Income Statement
A statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time.
Balance Sheet
A statement of what a business owns, what it owes to others, and how much value the owners have invested in it.
Liquidity
A measure of how quickly a company can raise money through internal sources by converting assets to cash.
Current Ratio
The value of current assets divided by current liabilities.
Financial Flexibility
A business's ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs.
Financial Strengths
The ability of a business to survive adverse financial events.
Cash Flow Statement
A statement of the sources and uses of cash in a business for a specific period of time.
GAAP
Generally Accepted Accounting Principles are the standardized rules for accounting procedures set out by the Financial Account Standards Board and used in all audits and submissions of accounting reports to the government.
Operating Activities
Activities involved in producing and selling goods and services.
Investing Activities
The purchase and sale of land, buildings, equipment, and securities.
Financial Activities
Activities through which cash is obtained from and paid to lenders, owners, and investors.
External (cost) factors
Aspects of the world outside the business which could cause the business's costs to change.
Internal (cost) factors
Aspects of or choices within the business which could cause the business's costs to change.
Cost-Volume-Profit Analysis
A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits.
Variable Costs
Those costs that change with each unit produced, for example, raw materials.
Fixed Costs
Those costs that remain constant regardless of quantity of output, for example, rent.
Economy of Scales
The idea that it is cheaper to make many of an item than few.
Breakeven Point
The point at which total cost equal gross revenue.
Pro Forma
Latin for "in the form of" when used to describe financial statements, indicates estimated or hypothetical information.
Budget
A financial plan for the future, based on a single level of operations; a quantitative expression of the use of resources necessary to achieve a business's strategic goals.
Master Budget
(Aka Comprehensive Budget) Consists of sets of budgets that detail all projected receipts and spending for the budgeted period.
Cost of Goods Sold
A schedule that shows the predicted cost of product actually sold during the accounting period.
Activity-Based Cost Estimates
An accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service.
Variance
The difference between an actual and budgeted revenue or cost.
Variance Analysis
The process of determining the effect of price and quantity changes on revenues and expenses.
Favorable/Unfavorable Variance
A label applied to variances to indicate their effect upon the income statement; favorable variances would result in profits being greater than budgeted, all other things being equal; unfavorable variances would result in profits being less than budgeted,
Why Accounting Matters
Proves what your business did financially
Shows how much your business is worth
Banks, creditors, development agencies, and investors require it
Provides easy-to-understand plans for business operations
You can't know how your business is doing without it
Asset
something the business owns that will have value in the future
Information from accounting
To produce information that is useful to you for managing your business
To meet legal or contractual requirements