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Accounting Flow Intuition: BASE Formula definitions

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  • Base Formula
    A calculation tool in accounting: beginning balance plus additions minus subtractions equals ending balance, used to track changes in any account.
  • Beginning Balance
    The amount present in an account at the start of a period, reflecting what was carried over from previous periods.
  • Additions
    Increases to an account during a period, such as credit sales for receivables or net income for retained earnings.
  • Subtractions
    Reductions from an account, like cash collected from receivables or dividends paid from retained earnings.
  • Ending Balance
    The final amount in an account after accounting for all additions and subtractions during a period.
  • Accounts Receivable
    An asset account representing amounts owed by customers for sales made on credit, awaiting cash collection.
  • Credit Sales
    Sales where payment is deferred, increasing accounts receivable rather than immediately increasing cash.
  • Cash Collected
    Money received from customers, especially as payment for previously recorded accounts receivable.
  • Retained Earnings
    An equity account holding accumulated net income not yet distributed to shareholders as dividends.
  • Net Income
    The result of revenues minus expenses for a period, which increases retained earnings.
  • Dividends
    Distributions of earnings to shareholders, reducing retained earnings but not considered an expense.
  • Equity Account
    A category in accounting representing ownership interest, such as retained earnings, affected by net income and dividends.
  • Asset Account
    A category in accounting for resources owned by a company, like accounts receivable, increased by additions and decreased by collections.
  • Algebra
    A mathematical method used to solve for unknowns in the base formula when one variable is missing.
  • Income Statement
    A financial report showing revenues and expenses, with the bottom line providing net income for the period.