Accounting equation
Assets = liabilities + equity: recognized resources equal creditor and owner claims.
A loan increases cash and liabilities by the same amount.
Learn it in contextTHE FIELD GUIDE
A word is only
the beginning.
Get a precise definition, spot the distinction, then see it in action.
Connected to lessons
Accrual accounting
Recognition follows economic performance and obligations under the rules rather than only payment dates.
A completed service can create revenue and a receivable before cash collection.
Learn it in contextAccrued expense
An expense recognized before the related cash payment.
March wages paid in April create a March payable.
Learn it in contextAccumulated depreciation
The cumulative allocation of a tangible asset’s depreciable cost, shown as a reduction of gross asset cost.
Cost 50 less accumulated depreciation 18 gives carrying amount 32.
Learn it in contextAcquisition
A transaction to obtain assets, a business or an ownership interest; the exact type affects accounting and tax.
Buying a business is not always accounted for like buying one machine.
Learn it in contextAdjusted EBITDA
An issuer- or analyst-defined EBITDA measure with additional adjustments.
Read every exclusion; a recurring expense does not disappear because it is added back.
Learn it in contextAgent
A party that arranges for another party to provide a specified good or service.
A marketplace acting as agent may recognize only its fee as revenue.
Learn it in contextAmortization
Systematic allocation of a finite-lived intangible asset’s amount, or allocation of a debt premium or discount in another context.
Acquired technology of 60 over six years gives 10 annual straight-line amortization.
Learn it in contextAnti-dilutive
An instrument whose assumed inclusion would increase earnings per share or reduce loss per share under the applicable test.
Extra shares can make a loss look smaller and are then excluded from diluted EPS.
Learn it in contextAsset
A recognized economic resource controlled by the entity under the applicable framework.
Cash, receivables and equipment are different kinds of assets.
Learn it in contextAudit opinion
The auditor’s conclusion about statements within a specified scope and assurance framework.
An unmodified opinion is not a guarantee of future returns.
Learn it in contextAverage invested capital
Capital committed to operations averaged over the relevant period under a stated definition.
Use a consistent denominator when comparing a period’s NOPAT with capital.
Learn it in contextBalance sheet
A statement of recognized assets, liabilities and equity at a date.
It is a snapshot, not a year’s revenue.
Learn it in contextBasis point
One hundredth of a percentage point.
A move from 10% to 12% is 200 basis points.
Learn it in contextBook value
A carrying amount under accounting rules; for equity, recognized assets minus liabilities.
Book equity need not equal market capitalization.
Learn it in contextBookings
A defined operating measure often describing contracts or orders secured.
A signed annual subscription is not necessarily annual revenue earned today.
Learn it in contextBreak-even
The activity level at which the specified revenues cover the specified costs.
Fixed costs 4,000 divided by unit contribution 20 gives 200 units.
Learn it in contextCAC
Customer acquisition cost under a defined spending and customer-count scope.
Match acquisition spending with the customers and period it is intended to measure.
Learn it in contextCAGR
Compound annual growth rate between positive starting and ending values over a stated number of years.
100 growing to 121 in two years has 10% CAGR.
Learn it in contextCapital expenditure (capex)
Spending on recognized long-lived assets or improvements under the applicable criteria.
Capitalization does not eliminate the cash payment.
Learn it in contextCapital gain
A tax characterization of a gain subject to taxpayer, asset and transaction rules.
A financial statement’s “gain” label does not determine its tax character.
Learn it in contextCarrying amount
The amount at which an asset or liability is recognized after relevant adjustments.
An asset’s carrying amount can differ from both market value and tax basis.
Learn it in contextCarve-out
A defined portion of a larger business separated for reporting or a transaction.
Its perimeter may cross legal entities and operating segments.
Learn it in contextCash conversion cycle
DSO plus DIO minus DPO: an approximation of the days between funding operations and collecting from customers.
45 collection days + 60 inventory days − 30 payment days = 75 days.
Learn it in contextCash flow
Movement of cash over a period, separated from accrual earnings.
Borrowing creates financing cash without revenue.
Learn it in contextCash flow from operations (CFO)
Cash generated or used in activities classified as operating under the reporting rules.
An indirect bridge adjusts net income for noncash and operating timing differences.
Learn it in contextCash runway
An estimate of how long usable cash can support modeled spending and receipts.
Cash 120 and steady monthly burn 20 suggests six months before reserves and changing flows.
Learn it in contextCOGS
Cost of goods sold: the recognized cost of inventory sold during the period.
Beginning inventory + purchases − ending inventory, with other movements addressed.
Learn it in contextCommon-size analysis
Expressing statement line items relative to a consistent base.
Divide each income-statement line by revenue to compare cost structure across scale.
Learn it in contextComprehensive income
Net income plus other comprehensive income, excluding owner transactions.
OCI is rule-defined; it is not an optional place to hide losses.
Learn it in contextConsolidation
Combining controlled entities as one reporting group, with required eliminations and attribution.
Internal sales are removed so only external group revenue remains.
Learn it in contextContract asset
A right to consideration for performance already provided that is conditional on more than time.
Additional performance may be required before the amount becomes an unconditional receivable.
Learn it in contextContract liability
An obligation to provide goods or services for consideration already received or due.
An upfront annual service payment is earned over the service pattern.
Learn it in contextContribution margin
Revenue less the variable costs included in the stated definition, expressed as an amount or ratio.
It covers fixed costs before creating profit. It is not automatically gross margin.
Learn it in contextControl
The relationship that determines whether an investor consolidates an entity under the applicable framework.
Voting percentage is relevant but not the only factor in every arrangement.
Learn it in contextCovenant
A contractual condition or restriction, often in a financing agreement.
Use the agreement’s definition of debt and EBITDA for its leverage test.
Learn it in contextCredit
The right side of a ledger account; it increases some account types and decreases others.
A credit increases a loan liability but decreases the business’s cash asset.
Learn it in contextCurrent ratio
Current assets divided by current liabilities.
A large inventory balance can raise the ratio without improving near-term cash availability.
Learn it in contextDCF
Discounted cash flow: valuing future cash using timing- and risk-consistent discount rates.
Show how much value comes from the terminal period.
Learn it in contextDebit
The left side of a ledger account; not a universal synonym for expense or bad news.
Debiting cash increases the asset.
Learn it in contextDeferred revenue
A common label for revenue-related contract liabilities or unearned consideration.
Cash collected before performance is not automatically profit.
Learn it in contextDeferred tax asset (DTA)
A recognized future tax benefit from deductible differences or eligible carryforwards, subject to the rules.
An allowance may reduce a gross DTA that is not expected to be realizable under the required assessment.
Learn it in contextDeferred tax liability (DTL)
A recognized future tax consequence of taxable temporary differences, subject to exceptions.
Faster tax depreciation can leave a lower tax basis than book carrying value.
Learn it in contextDepreciation
Systematic allocation of a tangible asset’s depreciable amount across its useful life.
It is not a precise measure of market-price decline.
Learn it in contextDiluted EPS
EPS reflecting the effects of dilutive potential common shares under the applicable methods.
Some instruments adjust both earnings and shares; anti-dilutive ones are excluded.
Learn it in contextDIO
Days inventory outstanding: inventory relative to period cost of sales, scaled by days.
Average balances usually better match a period flow than an arbitrary date.
Learn it in contextDirect cost
A cost economically traceable to a specified product, activity or other cost object.
Direct does not necessarily mean variable.
Learn it in contextDis-synergy
An adverse effect of combining or separating operations relative to the comparison case.
Losing group purchasing discounts can increase standalone costs.
Learn it in contextDividends
Distributions to owners in their ownership capacity.
They reduce equity and are not ordinary operating expenses.
Learn it in contextDPO
Days payable outstanding: trade payables relative to purchases, often approximated by COGS, scaled by days.
Longer supplier payment time can preserve cash but may damage relationships.
Learn it in contextDSO
Days sales outstanding: receivables relative to credit sales, scaled by days.
Lower DSO can release cash without adding revenue.
Learn it in contextDuPont analysis
A decomposition of ROE into net margin, asset turnover and the equity multiplier using consistent measures.
High ROE may partly reflect leverage rather than stronger operating margins.
Learn it in contextEBIT
Earnings before interest and taxes; under the SEC discussion, start with GAAP net income and add the relevant items.
It can differ from operating income when nonoperating income is present.
Learn it in contextEBITDA
EBIT before depreciation and amortization; a non-GAAP measure in the SEC reporting context.
It omits capex, working-capital needs, interest and tax from a cash analysis.
Learn it in contextEBT
Earnings before tax, often called pretax income.
It generally includes financing effects such as interest.
Learn it in contextEffective interest
Interest measured using the effective yield on a financial instrument’s carrying amount.
A discounted bond’s interest expense can exceed its cash coupon.
Learn it in contextEffective tax rate (ETR)
Income tax expense divided by the relevant pretax income, usually expressed as a percentage.
Permanent differences and tax-estimate changes can move it away from statutory rates.
Learn it in contextEnterprise value (EV)
The value of the operating enterprise under a stated bridge to equity and other claims.
A simple bridge subtracts net debt to obtain equity value.
Learn it in contextEPS
Earnings per share, using income available to common shareholders and the relevant share count.
Revenue divided by shares is revenue per share, not EPS.
Learn it in contextEquity
The residual interest in recognized assets after liabilities are deducted.
Contributions, earnings, distributions and other equity movements change the balance.
Learn it in contextEquity multiplier
Average assets divided by average equity in a common DuPont decomposition.
A higher multiplier can indicate greater financial leverage.
Learn it in contextFair value
A measurement based on the relevant standard’s market-participant and measurement-date framework.
It is not automatically the seller’s historical book amount.
Learn it in contextFIFO
First-in, first-out inventory cost allocation.
Older costs reach COGS before newer layers under the method.
Learn it in contextFixed cost
A cost unchanged within a specified activity range and period.
Another facility can create a step increase beyond the current range.
Learn it in contextFlow
A quantity measured over an interval.
Annual sales and quarterly cash collections are flows.
Learn it in contextFree cash flow (FCF)
An explicitly defined residual cash measure; commonly CFO minus capex, but definitions differ.
Unlevered FCF uses a different funding perspective from some CFO-based measures.
Learn it in contextGAAP
Generally accepted accounting principles for a particular reporting jurisdiction.
US GAAP and another country’s GAAP are not interchangeable labels.
Learn it in contextGoodwill
A residual recognized in a business combination after required identifiable-net-asset measurements and other elements.
It is not simply purchase price less seller book equity.
Learn it in contextGross margin
Gross profit divided by revenue, under a stated cost-of-sales scope.
Price 125 less cost 100 gives a 20% margin, not the 25% markup.
Learn it in contextGross profit
Revenue less cost of sales.
It excludes some expenses that still need to be covered before net income.
Learn it in contextIFRS
International Financial Reporting Standards issued by the IASB.
Specific differences from US GAAP affect comparability; the label alone is not a full analysis.
Learn it in contextImpairment
A reduction of carrying value required when the applicable asset-specific recoverability or valuation test is met.
Goodwill tests differ from held-and-used equipment tests.
Learn it in contextIncome statement
A statement of revenues, expenses, gains and losses over a period.
Also called a statement of operations or P&L.
Learn it in contextIndirect cash flow method
A reconciliation from earnings to operating cash using noncash, classification and timing adjustments.
Subtract a receivables increase when it represents revenue not yet collected.
Learn it in contextIntangible asset
An identifiable nonphysical asset recognized under the applicable criteria.
An acquired patent is distinct from residual acquisition goodwill.
Learn it in contextInterest coverage
An earnings measure divided by interest cost under a stated definition.
It does not by itself cover principal maturities or every covenant.
Learn it in contextInventory
Goods or production resources recognized as held for sale or consumption in production.
The cost becomes COGS when sold, with other reductions such as write-downs separately considered.
Learn it in contextIRR
A discount rate that makes a cash-flow series’ NPV zero, when a useful solution exists.
Unusual cash-flow signs can produce multiple IRRs.
Learn it in contextJournal entry
A dated record of equal total debits and credits for a transaction or adjustment.
Borrowing debits cash and credits debt.
Learn it in contextLease liability
An obligation for relevant lease payments measured under the applicable lease standard.
It often begins from a present-value calculation.
Learn it in contextLeverage
Use of financing claims or fixed costs to amplify residual outcomes, depending on context.
Debt can magnify both equity returns and downside risk.
Learn it in contextLiability
A recognized obligation of the entity.
A customer advance can be a service obligation even when cash has already arrived.
Learn it in contextLIFO
Last-in, first-out inventory cost allocation.
Permitted under US GAAP but prohibited under IFRS.
Learn it in contextLiquidity
Ability to meet cash obligations when they come due.
A profitable company can have insufficient cash at a debt maturity.
Learn it in contextLTM / TTM
Last or trailing twelve months: a moving twelve-month period.
Prior full year − prior comparable YTD + current YTD.
Learn it in contextLTV
Estimated customer lifetime value under specified contribution, retention, cost and discount assumptions.
It is an estimate of future economics, not cash already received.
Learn it in contextMarket capitalization
Market price per share multiplied by relevant outstanding equity shares.
It is an equity value, not the same as enterprise value.
Learn it in contextMarkup
Price less cost, divided by cost.
A 25% markup on 100 gives price 125 and a 20% margin.
Learn it in contextMateriality
Decision relevance of an omission or misstatement, considering magnitude and nature in context.
A universal percentage cannot justify every intentional small error.
Learn it in contextMD&A
Management’s discussion and analysis of results, condition and related matters in a filing.
Separate management’s explanation from your independently supported conclusion.
Learn it in contextNet debt
Debt less the cash included in a stated netting definition.
Not all cash is necessarily excess or unrestricted.
Learn it in contextNet income
The period’s bottom-line earnings after recognized expenses, gains, losses and taxes in the relevant scope.
It is not the same as cash generated or income available to common shareholders in every case.
Learn it in contextNon-GAAP measure
A financial measure that adjusts or differs from the comparable GAAP measure within the relevant regulatory definition.
Transparent arithmetic alone does not make an exclusion economically fair.
Learn it in contextNoncontrolling interest (NCI)
The ownership interest in a consolidated subsidiary not attributable to the parent.
Consolidation can include full revenue while earnings are separately attributed.
Learn it in contextNOPAT
Net operating profit after a normalized operating tax charge under a stated definition.
It aims to separate operating return from financing structure.
Learn it in contextNPV
Net present value: discounted cash inflows minus discounted outflows at the relevant required return.
A positive accounting profit does not guarantee positive project NPV.
Learn it in contextOCI
Other comprehensive income: specified non-owner equity changes outside net income.
It is governed by standards, not freely chosen for unwanted items.
Learn it in contextOperating income
A reported operating profit or loss subtotal under the company’s framework and presentation.
It is not another name for EBITDA.
Learn it in contextOperating leverage
Sensitivity of operating profit to changes in activity when fixed costs are present.
Near break-even, modest sales changes can produce large percentage profit changes.
Learn it in contextOpex
Operating expenses; the exact included cost categories depend on context and presentation.
Check whether COGS or D&A is included before building a profit bridge.
Learn it in contextOpportunity cost
The value of the next-best alternative forgone by a decision.
A low-contribution order can displace a more valuable use of limited capacity.
Learn it in contextP/E
Equity price or value relative to the relevant earnings per share or net income.
Negative or near-zero earnings can make it unhelpful.
Learn it in contextPerformance obligation
A qualifying promise to transfer a distinct good or service in a customer contract.
A device and distinct future support may require separate price allocation.
Learn it in contextPermanent difference
A book-versus-tax difference with no future reversal under the stated tax treatment.
A permanently nondeductible expense can raise the ETR without a DTA.
Learn it in contextPP&E
Property, plant and equipment: recognized tangible long-lived operating assets.
A net PP&E rollforward links capex, depreciation and disposals.
Learn it in contextPrepaid expense
A payment recorded as a right to future benefit before that benefit is consumed.
Prepaid insurance becomes expense across the coverage period.
Learn it in contextPresent value
Today’s equivalent of a future amount under a specified discount rate and timing.
121 in two years at 10% discounts to 100.
Learn it in contextPrincipal
The borrowed amount or the party controlling a specified good/service, depending on context.
Loan principal repayment is different from interest; revenue principal status is a different term.
Learn it in contextPro forma
A presentation showing specified hypothetical transaction effects; regulatory pro forma information has defined requirements.
It is not a universal synonym for optimistic adjusted earnings.
Learn it in contextPurchase price allocation
Identifying and measuring acquired assets and liabilities before determining goodwill and other acquisition effects.
Missing acquired technology can overstate residual goodwill.
Learn it in contextQuality of earnings
Analysis of how reported earnings represent sustainable operations, estimates and cash economics.
Normalize consistently and retain the cash consequences of excluded costs.
Learn it in contextR&D
Research and development activities and their costs under the relevant accounting rules.
US GAAP generally expenses R&D with exceptions; IFRS qualifying development can differ.
Learn it in contextReceivable
A right to collect consideration, generally unconditional except for time in a customer-contract setting.
Collecting it exchanges receivables for cash without earning the same revenue twice.
Learn it in contextReconciliation
A supported bridge explaining differences between records, balances or measures.
A bank reconciliation checks the ledger against an independent cash record.
Learn it in contextResidual value
Estimated amount remaining after an asset’s useful life under the depreciation model.
Subtract it from cost before straight-line allocation.
Learn it in contextRetained earnings
Accumulated earnings retained in equity after distributions and other relevant adjustments.
It is not a dedicated savings account.
Learn it in contextRevenue
Income from ordinary customer-related activities recognized under the applicable rules and business model.
A customer advance is not all earned revenue before performance.
Learn it in contextRight-of-use asset
The recognized right to use a leased underlying asset during a period.
It does not mean the lessee owns the building.
Learn it in contextROE
Return on equity: relevant net income relative to average equity under a consistent definition.
Tiny or negative book equity can make the ratio misleading.
Learn it in contextROIC
Return on invested capital: NOPAT relative to consistently defined average operating capital.
Show whether goodwill and leases are included.
Learn it in contextSG&A
Selling, general and administrative expenses.
Sales staff, finance and headquarters costs can sit here; not every item has the same cost behavior.
Learn it in contextStandalone costs
The costs required for a business to operate independently under specified future assumptions.
They can exceed the historical parent allocations.
Learn it in contextStock
A balance at a date, or an equity security, depending on context.
Inventory on December 31 is a stock; annual COGS is a flow.
Learn it in contextStock-based compensation
Compensation involving equity-related instruments under applicable recognition rules.
Noncash expense does not mean owners bear no economic cost.
Learn it in contextStranded costs
Costs retained by the parent after the separated business leaves.
An allocation disappearing does not cancel a lease or remove staff.
Learn it in contextSunk cost
A cost already incurred that the current decision cannot change.
A future choice should consider differential cash flows and opportunity costs.
Learn it in contextSynergy
A benefit expected from combining operations relative to a defined standalone comparison.
State actions, timing, integration costs and risks.
Learn it in contextTax basis
An asset or liability’s amount for determining tax consequences under applicable law.
Book carrying value 70 and tax basis 50 produce different gains on a sale for 90.
Learn it in contextTaxable income
Income calculated under a jurisdiction’s tax rules for the relevant taxpayer and period.
It is not automatically GAAP pretax income or cash receipts.
Learn it in contextTemporary difference
A difference between book carrying amount and tax basis with future taxable or deductible consequences, subject to rules.
Different book and tax depreciation schedules can reverse over time.
Learn it in contextTerminal value
Value assigned to cash flows beyond an explicit forecast period.
A perpetuity-growth model requires discount rate greater than growth.
Learn it in contextTrial balance
A list of ledger balances used to check equality of total debits and credits.
A balanced false or omitted transaction can escape this check.
Learn it in contextTSA
Transitional services agreement supporting a separation for a defined period.
Its scope, service levels, pricing and exit plan affect standalone readiness.
Learn it in contextUnlevered free cash flow
Cash flow to capital providers before debt financing distributions under a defined operating model.
A common form is NOPAT + D&A − capex − increase in operating NWC.
Learn it in contextValuation allowance
A reduction of a gross DTA under the US GAAP recoverability assessment.
Releasing it can improve tax expense without new operating cash.
Learn it in contextVariable cost
A cost that changes with activity within a specified range and model.
If unit variable cost exceeds price, extra volume increases losses.
Learn it in contextWACC
Weighted-average cost of capital, estimated consistently with the risk and financing claims being valued.
It is typically paired with unlevered cash flows, not an arbitrary after-interest measure.
Learn it in contextWeighted-average shares
Shares outstanding weighted by the portion of the reporting period they participated.
A midyear issuance should not always be treated as if it existed all year.
Learn it in contextWorking capital
A family of definitions: broad current assets less current liabilities, or a scoped operating investment measure.
Operating NWC often uses receivables + inventory − payables and excludes cash and debt.
Learn it in contextYTD
Year to date: cumulative activity from the beginning of the fiscal year to a specified date.
Subtract comparable YTD periods to derive a standalone quarter when appropriate.
Learn it in context