Key Terms
Cash-basis accounting
Record transactions only when cash changes hands.
Accrual-basis accounting
Revenue and expenses recorded when earned/incurred, not when cash moves. Cash-basis accounting: transactions recorded on
Think of it as
Everything you own (assets) was either borrowed (liabilities) or built by owners (equity). Both sides must always balanc
BALANCE SHEET NOTE
Assets are split into current (consumed within a year) and noncurrent (used longer than a year). Same split for liabilit
General ledger
The master record of all accounts and their balances.
ETHICS NOTE
Manipulating salvage value or useful life estimates directly inflates or deflates net income. Waste Management did this
Book value
Original cost minus accumulated depreciation. Useful life: estimated period the asset will generate revenue.
Accumulated depreciation
Running total of all depreciation taken to date (contra account; reduces asset value on balance sheet). Salvage (residua
Example
5-year asset = 20% straight-line rate x 2 = 40% rate. Year 1: $58,000 x 40% = $23,200.
If revenues and gains exceed expenses and losses
Net income. If expenses and losses exceed revenues and gains: net loss.
T-account
Visual representation of a ledger account split into debit (left) and credit (right) sides.
Double-entry accounting
Every transaction affects at least two accounts; debits must equal credits. Net income: revenues and gains exceed expens