This lesson distinguishes the timing of business activity from the timing of cash receipts and payments. That distinction matters because an income statement measures financial performance over a period, while a cash balance shows cash available at a particular time.
An income statement reports an organization’s financial performance over a specified period. Its main elements include revenues, expenses, gains, and losses. Revenues and gains increase the organization’s value, while expenses and losses decrease it.
All flashcards
What is an income statement?
A financial statement that summarizes an organization’s revenues, expenses, gains, and losses over a specified period to show its financial performance.
What is cash-basis accounting?
An accounting method that generally records revenue when cash is received and expenses when cash is paid, so recognition follows cash timing.
How does accrual accounting differ from cash-basis accounting?
Accrual accounting records revenues and expenses in the periods to which the related business activity applies, even when cash is received or paid in a different period.
What is the accounting equation?
Assets = Liabilities + Owner’s Equity. It expresses that an organization’s resources are financed by creditor claims, owner claims, or both.
How do revenues and expenses affect equity?
Revenues increase equity, while expenses decrease it.
Quiz questions
What does an income statement report?Answer: An organization’s financial performance, including revenues, expenses, gains, and losses, over a specified period.
How does cash-basis accounting generally determine when to record revenue and expenses?Answer: It records revenue when cash is received and expenses when cash is paid.
In double-entry accounting, what must be true of the total debits and credits for each transaction?Answer: The total debits must equal the total credits.
On which side of a T-account is a debit recorded?Answer: The left side.
A business has assets of $900 and liabilities of $350. What is its owner’s equity under the accounting equation?Answer: $550, because equity equals assets minus liabilities.
Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.