Investing Glossary

Financial accounting refers to the type of accounting concerned with reporting financial information to the firm’s shareholders and creditors. This information is provided through the financial statements and supplementary information prepared in accordance with relevant accounting standards. For companies which are domiciled or have issued securities in the U.S., the accounting standards are U.S. Generally […]

The income statement, also known as the profit and loss statement, is a financial statement which conveys basic information regarding business operations over a given period.  A company’s business operations consist primarily of revenues and expenses.   A company’s revenues constitute sales of goods or services, while expenses are costs associated with the generation of revenues.

The cash flow statement is a financial statement which presents the company’s cash receipts and disbursements over a stated period. The net cash flow corresponds to the change in the cash balance on the balance sheet over the period.  The cash flow statement has three sections: cash flow from operating activities, cash flow from investing

The accounting cycle refers to a series of steps taken to aggregate accounting transactions into financial statements.   For a manual accounting system, the cycle begins when transactions are recorded in the journal. Transactions are then periodically posted into ledgers, which record the transactions in each account. Account balances may then be aggregated into a general

Generally Accepted Accounting Principles, otherwise knows as U.S. GAAP, or just GAAP, are rules governing the financial reporting  of firms which issue financial securities in the United States.   The rules and guidelines which constitute GAAP are promulgated by the Financial Accounting Standards Board (FASB), a rule-setting body operating under the authority of the Securities and

The balance sheet, also called the statement of financial position, is a financial statement which shows the company’s assets, liabilities, and owner’s equity at a point in time.  The balance sheet must balance. That is, the total of assets must equal the sum of liabilities and equity. One way to think of the balance sheet

An accounting journal is a form where financial transactions are initially recorded before moving through the accounting cycle. Entries are made chronologically and in accordance with the rules of double-entry bookkeeping.  The accounting journal contains five columns: transaction number, date, account affected, and debit and credit columns.   Consistent with the rules of double-entry bookkeeping, the

The accounting equation states that assets = liabilities + owner’s equity. Or to put it another way, a company’s economic resources must equal the value of the financial claims against those resources.  The accounting equation is a central feature of the double-entry system. We can think of the accounting equation like a scale whose two

With accrual basis accounting, a firm recognizes revenues when a sale occurs regardless of when the firm receives payment for the sale. Likewise, a firm recognizes expenses when it incurs the expense, regardless of when the firm sends payments to its vendors.  The accrual method has two advantages over the cash method. First, the accrual

Cash basis accounting refers to an accounting system where the firm recognizes sales when it receives cash from customers and recognizes expenses when it pays cash to vendors. Thus, with cash basis accounting, income more closely approximates the firm’s operating cash flow.  The Internal Revenue Service (IRS) allows firms under a certain size to report