Basic Accounting Knowledge Required for US CMA

The US CMA certification is a marvelous path to enhance one’s career and stand out from the crowd of conventional applicants vying for accounting job profiles. However, before going head on into the world of US CMA, it is important to understand the skills and basic accounting knowledge a CMA US needs. To get a better understanding of the skill sets required to be a CMA, it is important to understand what a CMA US does.

Here’s a summary of some of the financial and accounting duties that Morgan International says real world US CMAs perform:

· External Financial Reporting

· Planning and Budgeting

· Performance Management

· Cost Management

· Internal Controls

· Profitability Analysis

· Risk Management

· Investment Decision

Therefore, to undertake the US CMA certification, it is essential that the candidate must have completed a bachelor degree.

The skills a CMA needs to augment his pursuit of the much-coveted profiles of US CMA are:

· Knowledge of basic accounting, generally accepted accounting principles (GAAP) and basic tax principles

· Clear theoretical conception and practical applicability of cost accounting

· Good grasp on finance tools, such as discounted cash flow

· A good grounding in economics

· Knowledge in both human capital management and financial capital management

· Well-versed in areas such as capital investment, operational structuring and foundational risk assessments

· Softer skills such as communication and presentation skills, writing, persuasion and interpersonal skills.

If you are serious about the CMA with no accounting experience, or get detached from your study for a prolonged period then you should start by getting up to speed with accounting basics. The idea is to get familiar with basic accounting concepts and principles. It is also a good way to decide whether you like this field enough to take the exam.

Hence, before going to study your US CMA review materials or start taking classes, be sure you have gathered or recapitulate your basic accounting terminologies/concepts for a smooth US CMA journey.

Basic accounting concepts used in the business world cover revenues, expenses, assets, and liabilities. These elements are tracked and recorded in documents including balance sheets, income statements, and cash flow statements. Introduction to accounting frequently identifies assets, liabilities, and capital as the field’s three fundamental concepts.

Assets describe an individual or company’s holdings of financial value. Liabilities are debts and unpaid expenses. Capital describes the money the entity has on hand. Accounting is the process of tracking and recording financial activity. People and businesses use the principles of accounting to assess their financial health and performance.

Accounting also serves as a useful way for people and companies to honor their tax obligations. The history of accounting dates back to ancient times. In the modern world, it is most closely associated with businesses’ financial reporting.

However, everyone can benefit from a knowledge of accounting basics. Here in this article, you can find the basic accounting terms and concepts which will surely benefit you in your US CMA journey.

Simple Accounting Definitions:

1. Accounting Period

An accounting period defines the length of time covered by a financial statement or operation. Examples of commonly used accounting periods include fiscal years, calendar years, and three-month calendar quarters. Some organizations also use monthly periods. Each accounting period covers one complete accounting cycle. An accounting cycle is an eight-step system accountants use to track transactions during a particular period.

2. Accounts Payable

Accounts payable (AP) tracks money owed to creditors. Examples include bank loans, unpaid bills and invoices, debts to suppliers or vendors, and credit card or line of credit debts. Rarely, the term “trade payables” is used in place of “accounts payable.” Accounts payable belong to a larger class of accounting entries known as liabilities.

3. Accounts Receivable

Accounts receivable (AR) tracks the money owed to a person or business by its debtors. It is the functional opposite of accounts payable. Accounts receivable are sometimes called “trade receivables.” In most cases, accounts receivable derive from products or services supplied on credit or without an upfront payment. Accountants track accounts receivable money as assets.

4. Accrual basis accounting

Accrual basis accounting (or simply “accrual accounting”) records revenue- and expense-related items when they first occur. For example, a customer purchases a $2,000 product on credit. Accrual accounting recognizes that $2,000 in revenue on the date of the purchase. The method contrasts with cash basis accounting, which would record the $2,000 in revenue only after the money is actually received. In general, large businesses and publicly traded companies favor accrual accounting. Small businesses and individuals tend to use cash basis accounting.

5. Accruals

Revenues and expenses recognized by a company but not yet recorded in their accounts are known as accruals (ACCR). By definition, accruals occur before an exchange of money resolves the transaction. For example, a company that hired an external consultant would recognize the cost of that consultation in an accrual. That cost would be recognized regardless of whether or not the consultant had invoiced the company for their services.

Accounts payable and accounts receivable are accrual types. Others include accrued costs (costs incurred but not resolved during a particular accounting period) and accrued expenses (expenses or liabilities incurred but not resolved during a particular accounting period).

6. Assets

Assets are items of value, or resources that a business owns or controls. More technical and precise definitions specify two technicalities: First, assets result from past business activities. Second, they will or are expected to generate future economic value. Assets come in many types and classes. Types include current and noncurrent, operating and non-operating, physical, and intangible. Classes include broad categories such as cash and equivalents, equities, commodities, real estate, intellectual property, and fixed income, among others.

7. Balance Sheet

A balance sheet (or “statement of financial position”) is a standard financial statement. It specifies the business’ current state regarding its assets, liabilities, and owners’ equity. Some sources abbreviate the term as BAL SH. Accountants use multiple formats when creating balance sheets: classified, common size, comparative, and vertical balance sheets. Each format presents information as line items that combine to provide a snapshot summary of the company’s financial position.

8. Capital

In common usage, capital (abbreviated “CAP.”) refers to any asset or resource a business can use to generate revenue. A second definition considers capital the level of owner investment in the business. The latter sense of the term adjusts these investments for any gains or losses the owner(s) have already realized.Accountants recognize various subcategories of capital.

Working capital defines the sum that remains after subtracting current liabilities from current assets. Equity capital specifies the money paid into a business by investors in exchange for stock in the company. Debt capital covers money obtained through credit instruments such as loans.

9. Cash Basis Accounting

Cash basis accounting records revenues and expenses when the money involved in each transaction officially changes hands. It contrasts with accrual basis accounting. Accrual accounting recognizes revenues and expenses when they occur without regard to whether the associated funds have been exchanged.

10. Cash Flow

Cash flow (CF) describes the balance of cash that moves into and out of a company during a specified accounting period. Accountants track CF on the cash flow statement.

11. Chart of Accounts

Accountants record financial transactions in a bookkeeping system known as a general ledger. A chart of accounts (COA) is a master list of all accounts in an organization’s general ledger. Five main types of accounts appear in a COA: assets, equity, expenses, liabilities, and revenues.

12. Closing the Books

The informal phrase “closing the books” describes an accountant’s finalization and approval of the bookkeeping data covering a particular accounting period. When an accountant “closes the books,” they endorse the relevant financial records. These records may then be used in official financial reports such as balance sheets and income statements.

13. Credit

Credits are accounting entries that increase liabilities or decrease assets. They are the functional opposite of debits and are positioned to the right side in accounting documents.

14. Debit

Debits are accounting entries that function to increase assets or decrease liabilities. They are the functional opposite of credits and are positioned to the left side in accounting documents.

15. Depreciation

Depreciation (DEPR) applies to a class of assets known as fixed assets. Fixed assets are long-term owned resources of economic value that an organization uses to generate income or wealth. Real estate, equipment, and machinery are common examples. Fixed assets can decline in value. Accountants record those declines as depreciation.

16. Diversification

Diversification describes a risk-management strategy that avoids overexposure to a specific industry or asset class. To achieve diversification, people and organizations spread their capital out across multiple types of financial holdings and economic areas. The term is also widely used in finance and investing.

17. Dividends

In corporate accounting, dividends represent portions of the company’s profits voluntarily paid out to investors. Investors are often paid in cash, but may also be issued stock, real property, or liquidation proceeds. In most cases, dividends follow a regular monthly, quarterly, or annual payment schedule. However, they can also be offered as exceptional one-time bonuses.

18. Double-Entry Bookkeeping

Double-entry systems record each financial transaction twice: once as a credit, and once as a debit. When the sum total of all recorded debits and credits equals zero, the accounting books are considered “balanced.” The system is also known as double-entry accounting. It is a completer and more accurate alternative to single-entry accounting, which records transactions only once. Single-entry systems account exclusively for revenues and expenses. Double-entry systems add assets, liabilities, and equity to the organization’s financial tracking.

19. Equity

At a basic level, equity describes the amount of money that would remain if a business sold all its assets and paid off all its debts. It therefore defines the stake in a company collectively held by its owner(s) and any investors.The term “owner’s equity” covers the stake belonging to the owner(s) of a privately held company. Publicly traded companies are collectively owned by the shareholders who hold its stock. The term “shareholder’s equity” describes their ownership stake.

20. Fixed Cost

A fixed cost (or fixed expense) is a cost that stays the same regardless of increases or decreases in a company’s output or revenues. Examples include rent, employee compensation, and property taxes. The term is sometimes used alongside “operating cost” or “operating expense” (OPEX). OPEXs describe costs that arise from a company’s daily operations. However, these costs can be fixed or variable. Variable costs change as output or revenues change.

21. General Ledger

Businesses and organizations use a system of accounts known as ledgers to record their transactions. The general ledger (GL or G/L) is the master account containing all ledger accounts. It holds a complete record of all transactions taking place within a specified accounting period. Major examples of individual accounts in a general ledger include asset accounts, liability accounts, and equity accounts. Each transaction recorded in a general ledger or one of its sub-accounts is known as a journal entry.

22. Generally Accepted Accounting Principles

Generally accepted accounting principles (GAAP) describe a standard set of accounting practices. GAAP are endorsed by organizations including the Financial Accounting Standards Board and the U.S. Securities and Exchange Commission (SEC), among others. However, GAAP are only one of multiple such standards.

One well-known alternative is International Financial Reporting Standards (IFRS). In the United States, privately held companies are not required to follow GAAP, but many do. However, publicly traded companies whose securities fall under SEC regulations must use GAAP standards.

23. Gross Profit

Gross profit (or gross income) defines the value of the products and services sold by a business before factoring in the cost of goods sold. If the gross profit is a negative number, it is instead called a gross loss. It contrasts with “net profit,” which describes the actual profit earned after accounting for those costs. Gross margin is a related term: It specifies the value of the organization’s net sales, minus the cost of goods sold. Net sales are calculated by correcting gross sales for adjustments such as discounts and allowances.

24. Income Statement

An income statement is a type of financial document businesses generate. It specifies the total revenues earned by the company in a given accounting period, minus all expenses incurred during the same period. Other terms used to describe income statements:

· Earnings statement

· Profit and loss statement

· Statement of financial result(s)

· Statement of operation

Income statements are one of three standard financial statements issued by businesses. The other two include the balance sheet and cash flow statement.

25. Inventory

As used in accounting, inventory describes assets that a company intends to liquidate through sales operations. It includes assets being held for sale, those in the process of being made, and the materials used to make them.

26. Liability

A liability (LIAB) occurs when an individual or business owes money to another person or organization. Bank loans and credit card debts are common examples of liabilities. Accountants also distinguish between current and long-term liabilities. Current liabilities are liabilities due within one year of a financial statement’s date. Long-term liabilities have due dates of more than one year.

The term also appears in a type of business structure known as a limited liability company (LLC). LLC structures allow business owners to separate their personal finances from the company’s finances. As such, owners cannot be held personally liable for debts incurred solely by the company.

27. Liquidity

In accounting, liquidity describes the relative ease with which an asset can be sold for cash. Assets that can easily be converted into cash are known as liquid assets. Accounts receivable, securities, and money market instruments are all common examples of liquid assets.

28. Net Profit

Net profit describes the amount of money left over after subtracting the cost of taxes and goods sold from the total value of all products or services sold during a given accounting period. It is also known as net income. If the net profit is a negative number, it is called net loss. The related term “net margin” refers to describing net profit as a ratio of a company’s total revenues. Net profit contrasts with gross profit. Gross profit simply describes the total value of sales in a given accounting period without adjusting for their costs.

29. On Credit

Accountants track partial payments on debts and liabilities using the term “on credit” (or “on account”). Both versions of the term describe products or services sold to customers without receiving upfront payment.

30. Overhead

Overhead (O/H) costs describe expenses necessary to sustain business operations that do not directly contribute to a company’s products or services. Examples include rent, marketing and advertising costs, insurance, and administrative costs. Businesses must account for overhead carefully, as it has a significant impact on price-point decisions regarding a company’s products and services. Overhead costs must be recouped through revenues.

31. Payroll

Tracking operations that record, administrate, and analyze the compensation paid to employees are collectively known as payroll accounting. Payroll also includes fringe benefits distributed to employees and income taxes withheld from their paychecks.

32. Return on Investment

Usually expressed as a percentage, return on investment (ROI) describes the level of profit or loss generated by an investment. Accountants calculate ROI by dividing the net profit of an investment by its cost, then multiplying by 100 to generate a percentage. For example, consider a person who invests $10,000 in a company’s stock, then sells that stock for $12,000. The exchange would generate an ROI of 20%. When an investor incurs a loss, the ROI is expressed as a negative number.

33. Revenue

Revenue (REV) describes the income a business earns by selling products and/or services associated with its main operations. For example, a restaurant’s revenue covers all food and beverage sales. It would not cover additional sources of income, such as the liquidation of equipment or real estate owned by the business. The terms “revenue” and “sales” can be synonymous. For example, revenue is used to establish the datapoint comprising the “sales” component of a price-to-sales calculation.

Single-Entry Bookkeeping: Single-entry bookkeeping records all revenues and expenses with a single entry in the company’s books. It is also known as single-entry accounting. Single-entry systems are simplified financial tracking methods often used exclusively by small businesses. Transactions are recorded in a document known as a “cash book.” It contrasts with the more precise and accurate double-entry accounting method. Double-entry accounting records all transactions twice: once as a debit, and once as a credit.

34. Trial Balance

A trial balance is a report of the balances of all general ledger accounts at a point in time. Accountants prepare or generate trial balances at the conclusion of a reporting period to ensure all accounts and balances add up properly. In professional practice, trial balances function like test-runs for an official balance sheet.

35. Variable Cost

Variable costs are expenses that can change depending on the volume of goods produced or sold by a company. For example, a manufacturer would incur higher costs if it doubled its product output. Companies may also face higher tax rates as their sales and profits rise. These are both examples of variable costs. By comparison, fixed costs remain the same regardless of production output or sales volume. Examples of fixed costs include rent, wages, and salaries.

Summary

The world of knowledge is infinite, which means that there is no end to learning, unlearning and relearning new skills that are in sync with the changing times. The same is in the case of accounting, where managerial accountants need to have varied basic accounting skills and need to keep themselves abreast of the new developments in the domain.

However, there are certain jargon, buzzwords and basic accounting skills that are considered as a prerequisite to becoming a successful management accountant. Some of the basic accounting terms required to make your US CMA journey better has been discussed here. However, going through the basic accounting books are highly recommended.

To make your US CMA journey smooth, Uplift Professionals, an IMA approved premier training institute of US CMA has introduced special orientation classes on basic accounting for its students apart from the regular US CMA classes as an add-on at no extra cost. This is going to be highly beneficial for students who don’t have basic accounting degree, the working professionals who are not in touch with study for prolonged period and obviously to students who are weak in basic accounting concepts.

For Further Information/Assistance, Contact: www.upliftprofessionals.in/CMA