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Principles of Finance

Key Terms

Principles of FinanceKey Terms

Key Terms

accounting equation
Assets=Liabilities+Owner’sEquityAssets=Liabilities+Owner’sEquity
accrual-basis accounting
an accounting system in which revenue is recorded or recognized when earned yet not necessarily received, and in which expenses are recorded when legally incurred and not necessarily when paid
capitalize
the process in which a long-term asset is recorded on the balance sheet and its allocated costs are expensed on the income statement over the asset’s economic life
cash-basis accounting
a method of accounting in which transactions are not recorded in the financial statements until there is an exchange of cash
credit
a record of financial information on the right side of an account
debit
a record of financial information on the left side of each account
depreciation
the process of allocating the costs of a tangible asset over the asset’s economic life
double-entry accounting
an accounting method that requires the sum of the debits to equal the sum of the credits for each transaction
expense
a cost associated with providing goods or services
expense recognition
(also, matching principle) matches expenses with associated revenues in the period in which the revenues were generated
gains
increases in organizational value from activities that are “incidental or peripheral” to the primary purpose of the business
income statement
a financial statement that measures the organization’s financial performance for a given period of time
long-term asset
asset used in the normal, ongoing course of business for more than one year that is not intended to be resold
losses
decreases in organizational value from activities that are “incidental or peripheral” to the primary purpose of the business
net income
income earned when revenues and gains are greater than expenses and losses
revenue
inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
revenue recognition
principle stating that a company must recognize revenue in the period in which it is earned; it is not considered earned until a product or service has been provided
T-account
a graphic representation of a general ledger account in which each account is visually split into left and right sides
tangible asset
an asset that has physical substance
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