Theory

Key Terms & Definitions

Financial Statements — Formal reports that summarize a business’s financial position, performance, and cash flows, used by stakeholders for decision-making.

Balance Sheet (Statement of Financial Position) — A snapshot of assets, liabilities, and equity at a specific moment. Shows liquidity and solvency.

Income Statement (Profit & Loss Statement) — A report summarizing revenues, expenses, and profit/loss over a period. Reflects operational performance.

Cash Flow Statement — A statement showing cash inflows and outflows from operating, investing, and financing activities.

Statement of Shareholders’ Equity — Shows changes in equity components (capital, retained earnings, reserves) over the reporting period.

General Ledger — The central accounting record containing all accounts and transactions posted from journals. Basis for trial balance and statements.

Journal Entry — The initial record of a transaction, later posted to the general ledger.

Trial Balance — A list of all ledger account balances used to verify that total debits equal total credits before preparing reports.

Financing Activities — Cash flows involving loans, equity, or dividends, such as borrowing funds or repaying debt.

Accruals — Adjustments ensuring revenue and expenses are recorded when earned or incurred, not when cash moves.

Gross Profit — Revenue minus cost of goods sold (COGS); shows core profitability.

Operating Income — Profit from main operations, excluding financing and investing activities.

Net Profit — Final result after all income and expenses; indicator of overall profitability.