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Accounting
Accounting is the language of business. Accounting is the process of capturing and communicating financial data. The goal of the accounting system is to issue financial statements. Accounting includes five types of accounts: assets, liabilities, equity, revenues, and expenses.
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Accounting equation
The accounting equation is assets = liabilities + equity. This is shown on the company’s balance sheet. The balance sheet must balance always because of the accounting equation.
Accrual basis of accounting
Accrual basis of accounting records revenue when products and services are delivered to customers. Expenses are recorded when they are incurred. The expenses are matched with the revenues that they produce. This is called the matching principle.
Accrual accounting better shows the performance of the company than the cash basis. Accrual basis net income is less dependent on the timing of cash flows.
Amortization
- the process where a loan is gradually decreased by principal payments, e.g. a loan amortization
- the process of expensing an asset over its useful life
- amortization can also be the annual amortization expense amount from a company’s income statement
Amortize
- to pay off a loan with regular payments of both principal and interest on a specific schedule, e.g. amortize a loan
- to gradually expense the cost of an asset usually over several years, e.g. amortize equipment
Annuity
An annuity is a series of equal payments. These payments could be either positive or negative. A cash receipt is a positive cash inflow. A cash payment is a negative cash outflow. An example of an annuity is a monthly payment for a car or a house. Another example is an annual dividend received by an investor.
An annuity typically pays either monthly, quarterly, semiannually, or annually.
There are two types of annuities.
- ordinary annuity – payments occur at the end of the period
- annuity due – payments occur at the beginning of the period
Appreciation
Appreciation is an increase in the value of an asset. For example, assume a stock purchase of 100 shares at $20. A year later the stock has a market price of $32. The appreciation is $12 per share or $1,200 total.
Asset
Assets are economic resources owned by a business. They are one of the five types of accounts. Assets are shown on the balance sheet.
There are four categories of assets on the balance sheet: current assets, fixed assets, investments, and intangible assets.
Assets are shown on the accounting equation. The accounting equation is assets = liabilities + equity.
Asset allocation
Asset allocation divides investments into different asset classes such as stocks, bonds, and cash. For long-term investing, an investor may set an allocation goal of Stocks 70% and Bonds 30%.
Asset class
In investing, different investment types are called asset classes. Each asset class has different characteristics including risk and return. The typical asset classes for individual investors are:
- Stocks: A stock is a share of ownership of a corporation. The corporation could be either public or private. Public companies sell stock to investors on stock exchanges. Stock investors may receive dividends and stock price increases based on company earnings. Stock investors can lose all or a portion of their initial investment.
- Bonds: Bonds are a way for companies and governments to borrow money. A bond investor is lending money with the future promise of receiving the investment plus interest. The company is the borrower and the investor is the lender.
- Cash: Cash represents short-term cash equivalent or money market investments. These can be savings accounts, certificates of deposit (CD’s), and money market funds. The cash asset class pays less interest than the bond asset class.
