Definition of Current Ratio The current ratio is a financial ratio that shows the proportion of a company’s current assets to its current liabilities. The current ratio is often classified as a liquidity ratio and a larger current ratio is better than a…

Definition of Revenue Revenue is the amount earned from a company’s main operating activities, such as a retailer selling merchandise or a law firm providing legal services. Definition of Gain In accounting, a gain is the result of a peripheral activity,…

Definition of Materiality In accounting, materiality refers to the relative size of an amount. Relatively large amounts are material, while relatively small amounts are not material (or immaterial). Determining materiality requires professional judgement. For instance, a $20,000 amount will likely…

Connection between Balance Sheet and Income Statement The connection between the balance sheet and the income statement results from: Basically, the income statement components have the following effects on owner’s equity: Example of How the Balance Sheet and Income Statement Are…

Definition of Balance Sheet The balance sheet is prepared in order to report an organization’s financial position at the end of an accounting period, such as midnight on December 31. A corporation’s balance sheet reports its: You can view the…

Definition of Net Assets Net assets is defined as total assets minus total liabilities. Examples of Net Assets In a sole proprietorship the amount of net assets is reported as owner’s equity. In a corporation the amount of net assets is reported as stockholders’ equity. In a not-for-profit…

Definition of Statement of Financial Position The statement of financial position is another name for the balance sheet. It is one of the main financial statements. The statement of financial position reports an entity’s assets, liabilities, and the difference in their totals…

Definition of Cash Flow Statement The cash flow statement or statement of cash flows or SCF identifies a company’s major cash inflows and outflows that occurred the same period of time as the company’s income statement and between the period’s beginning and ending balance sheets. The cash flow statement…

Definition of Trial Balance A trial balance is an internal report that remains in the accounting department. The trial balance lists all of the accounts in the general ledger and their balances (or all of the accounts that have balances). However, the…