ACCOUNTING EQUATION - A mathematical
expression used to describe the relationship between
the assets, liabilities and owner's equity of the
business model. The basic accounting equation states
that assets equal liabilities and owner's equity,
but can be modified by operations applied to both
sides of the equation, e.g., assets minus liabilities
equal owner's equity.
ACCRUAL BASIS OF ACCOUNTING - An
accounting basis wherein revenue and expenses are
recorded in the period in which they are earned or
incurred regardless of whether cash is received or
disbursed in that period. This is the accounting basis
that generally is required to be used in order to
conform to generally accepted accounting principles
(GAAP) in preparing financial statements for external
users.
CASH BASIS OF ACCOUNTING - The accounting
basis in which revenue and expenses are recorded in
the period they are actually received or expended
in cash. Use of the cash basis generally is not considered
to be in conformity with generally accepted accounting
principles (GAAP) and is therefore used only in selected
situations, such as for very small businesses and
(when permitted) for income tax reporting.
COMPLETED CONTRACT METHOD OF ACCOUNTING
- A method of revenue recognition for long-term contracts
(i.e., contract which span more than one accounting
period) whereby the total contract revenue and related
cost of performance are recognized in the period in
which the contract is completed. This method stands
in contrast to the percentage-of-completion method
of accounting and is most often used when significant
uncertainty exists with respect to the total cost
of performing the contract and, accordingly, the ultimate
amount of profit to be recognized thereon.
PERCENTAGE-OF-COMPLETION METHOD OF ACCOUNTING
- A method of revenue recognition for long-term contracts
(i.e., contracts which span more than one fiscal period)
under which a portion of the total contract revenue,
and a share of contract costs, is recorded in each
period based on the relative cost or effort applied
during that period. This method stands in contrast
to the completed contract method of accounting, and
is considered appropriate when the total cost of performing
the contract and, accordingly, the ultimate profit
to be recognized thereon, is reasonably determinable
and predictable.
