A guide to underlying accounting principles and terms.


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Shareholders (definition)―and their importance in a corporation

An owner in a corporation; a person holding shares in a corporation.


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Shareholders’ equity, or net worth (definition)

The net worth of a company equals the total assets minus the total liabilities.

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Accounting principle: Stable dollar assumption

The stable dollar assumption is the accounting principle that the definition of the dollar remains constant over time.


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Working capital (definition): Its relationship to current liabilities and current assets

Working capital is what remains on the balance sheet after current liabilities are subtracted from current assets.

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Gross margin (definition)

The gross margin is what remains after you divide your gross profit by your net sales.


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Assets

An asset is an item on the balance sheet, acquired with the expectation that it will yield financial benefit.

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Business entity concept

Your company may or may not be a separate legal entity but its accounts must be kept separate and distinct.


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Cash versus accrual accounting

Two principal accounting methods exist to record business transactions: cash accounting and accrual accounting.

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Revenue (definition)

The measure of assets generated by a company’s business operations during a set period.


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Share (definition)

A measure of ownership of a corporation; also known as a stock.

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Closing entries

At the end of the fiscal period, accountants close certain accounts in order to prepare the financial statements.


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Dividend (definition)

A dividend is the share of profit payable to shareholders on their shares.

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Expenses (definition)

An expense is an outflow of company assets to pay for a service or product needed to generate business revenue.


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Fiscal period assumption

The fiscal period assumption entails that accounting take place over periodic and set time frames of equal duration.

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Fiscal period

The fiscal period represents a periodic set amount of time for which a business reports on its financial performance.


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Going concern concept

The going concern concept assumes that a company will stay in business during and beyond the next fiscal period.

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Gross profit (definition)

Gross profit is what remains after you subtract the cost it took to make your sold product from your sales revenues.


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Journal entries: credits and debits

Journal entries have two sides: they record both an equal debit and credit for every business transaction.

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Solvency (definition)

The ability of a business to pay its debts as they come due.