Accounting Terminology

Current assets

Cash and other resources of a business expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer.

Materiality

Concept that all items that are reasonably likely to impact investors' decision-making must be recorded or reported in detail in a business's financial statements using GAAP standards. (not relevance)

Allowance for doubtful accounts

Contra asset account with a balance approximating uncollectible accounts receivable.

Accrued expenses

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for these transactions involve increasing expenses and increasing liabilities.

Liabilities

Creditors' claims on an organization's assets; involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events.

Accumulated depreciation

Cumulative sum of all expense recorded for a plant asset. This is a contra asset account.

Expenses

Decrease in equity from costs of providing products and services to customers.

Balance sheet

Describe's a company's financial position at a point in time, typically presented in either the account form or the report form.

Dividends

Distributions, typically cash or additional stock shares, to owners of a company. These are not an expense.

Closing entries

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawals (dividends for a corporation) accounts to the capital account (or retained earnings for a corporation).

Salvage value

Estimate of amount to be recovered at the end of an asset's useful life; also called residual or scrap.

Depreciation

Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.

Statement of retained earnings

Explains changes in equity from net income/(loss) and any dividends over a period of time.

Merchandise inventory

Goods that a company owns and expects to sell to customers.

Classified balance sheet

Groups permanent accounts into categories on a financial statement with current items being reported before noncurrent items.

Fraud triangle

Highlights three factors that push a person to commit illegal acts: opportunity, pressure (incentive), and rationalization (attitude).

Adjusting entry

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.

Mortgage

Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower's assets identified in the agreement.

Useful life

Length of time an asset will be productively used in the operations of a business.

Adjusted trial balance

List of accounts and balances prepared after period-end adjustments are recorded and posted.

Unadjusted trial balance

List of accounts and balances prepared before accounting adjustments are recorded and posted.

Post-closing trial balance

List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Straight-line depreciation

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

Perpetual inventory system

Method that maintains continuous records of the cost of inventory available and the cost of goods sold.

Direct write-off method

Method that records the loss from an uncollectible account receivable at the time it is determined to be uncollectible; no attempt is made to estimate bad debts.

Gross profit

Net sales minus cost of goods sold.

Intangible assets

Noncurrent resources used to produce or sell products or services; usually lack physical form and have uncertain benefits.

Current liabilities

Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer.

Long-term liabilities

Obligations not due to be paid within one year or the operating cycle, whichever is longer.

Bookkeeping

Part of accounting that involves recording transactions and events, either manually or electronically. Typically does not include the preparation of financial statements.

Revenue recognition principle

Prescribes that revenue is recognized when goods or services are delivered to customers.

Market value per share

Price at which stock is bought or sold at a given point in time.

Financial accounting

Primarily provides information for the needs of external users.

Allowance method

Procedure that (a) estimates and matches bad debts expense with sales for the period and/or (b) reports accounts receivable at estimated realizable value.

Internal controls

Procedures to protect assets, ensure reliable accounting, promote efficiency, and uphold company policies and include separation of duties, establishment of responsibilities, and regular independent reviews.

Amortization

Process of allocating the cost of an intangible asset to expense over its estimated useful life.

Aging of accounts receivable

Process of classifying accounts receivable by how long they are past due for purposes of estimating uncollectible accounts.

Payable

Promises to pay an amount to an entity in the future for products or services that have been provided.

Profit margin

Ratio of a company's net income to its net sales; the percent of income in each dollar of revenue.

Unearned revenue

Recorded when customers pay in advance for products or services that the company will provide in the future.

Journalizing

Recording transactions in the records of the company.

Accounting cycle

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or optional reversing entries).

Cash discount

Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period.

Sales returns and allowances

Refunds or credits given to customers by the seller for unsatisfactory merchandise. Sometimes the product is sent back to the seller and sometimes the customer keeps the product.

Bank reconciliation

Report that explains the difference between the book (company) balance of cash and the cash balance reported on the bank statement, for purposes of computing the adjusted cash balance.

Receivable

Represents an amount owed to the company for products or services that the company has already provided.

Assets

Resources that a company owns or controls and are expected to yield future benefits for the company.

Accrued revenues

Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for these transactions involve increasing assets and increasing revenues.

Expense recognition/matching principle

Salaries are not recorded when the employees are paid, the salaries are recorded in the same period that the employee's work generated revenue.

Cash equivalents

Short-term investment assets that are readily convertible to a known cash amount or sufficiently close to their maturity date (usually within 90 days) so that market value is not sensitive to interest rate changes.

Double-entry accounting

System that requires the accounting equation remain in balance. This means each transaction has at least two accounts, at least one debit and one credit, and total debits equal total credits.

Plant assets

Tangible long-lived assets used to produce or sell products and services; also called fixed assets.

Supplies

Tangible resources owned by a company that will be used by the company within a year.

Federal Insurance Contributions Act (FICA) taxes

Taxes assessed on both employers and employees; for Social Security and Medicare programs.

Purchases discount

Term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period.

Account balance

The difference between total debits and total credits for an account, including the beginning balance.

Audit

The examination of whether financial statements are prepared using proper concepts and rules.

Common stock

The increase in equity representing an owner's investment in the company. These are NOT considered revenues of the company.

Debit

The left side of an account. When a company obtains an asset this will increase the asset.

Time period assumption

The life of a company can be divided into set periods, such as months, quarters, and years, and reports are prepared for those periods.

Equity

The owner's/shareholder's claims on assets of the company, also called net assets.

Credit

The right side of an account. When a company fulfills an obligation this will increase a revenue.

Normal balance

The side that increases the balance of an account.

Generally Accepted Accounting Principles (GAAP)

These concepts and rules govern financial accounting in the United States.

Revenues

These increase equity and are generated by providing products and/or services to customers.

Income statement

This financial statement shows the overall profitability of a company for a specific period of time, such as a month, quarter, or year.

Financial Accounting Standards Board (FASB)

This group is given the task of setting concepts and rules that apply to financial reporting in the United States.

Securities and Exchange Commission (SEC)

This is a United States agency that oversees proper use of the concepts and rules by companies that sell stock and debt to the public in the United States.

Retained earnings

This is increased by revenues & gains; decreased by expenses, losses, and dividends; and is carried forward from period to period.

Statement of cash flows

This is the final financial statement prepared by the company at the end of a financial period and is segregated into the sections operating, investing, and financing activities.

Paid-in capital

Total amount of cash and other assets received from stockholders in exchange for stock.

Net pay

Total compensation earned by an employee less all deductions; also called take-home pay.

Gross pay

Total compensation earned by an employee.

Investing activities

Transactions that involve purchasing and selling long-term assets; includes making and collecting notes receivable and investments in other than cash equivalents.

Financing activities

Transactions with owners and creditors that include obtaining cash from issuing debt, repaying amounts borrowed, and obtaining cash from or distributing cash to owners.

Posting

Transferring journal entry information to the ledger.

General journal

Used to record any transaction that the company makes to change the balance in at least two accounts. This includes the date, accounts, and amounts of all transactions.

Par value of stock

Value assigned a share of stock by the corporate charter when the stock is authorized.

Cost of goods sold

Value of inventory sold to customers during a period. Not the price the buyer pays for the inventory.

Prepaid expense

When a company pays for a product or service prior to the product being used or the service being provided to the company.

Notes receivable

Written promise to obtain a specific sum of money on a specified future date; recorded by the holder of the agreement.

Bond

Written promise to pay the par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000.

Expanded accounting equation

Assets = Liabilities + Contributed capital + Retained earnings + Revenues − Expenses − Dividends.

Accounting equation

Assets = Liabilities + Equity

Liquidity

Availability of resources to meet short-term cash requirements.

Trial balance

A list of all ledger accounts and their balances at a point in time. This is NOT a financial statement.

Chart of accounts

A list of all ledger accounts with an identification number assigned to each account.

General ledger

A record of all accounts used by a company and shows the beginning balance, increases, decreases, and ending balance in each of the accounts.

Corporation

A separate entity with the same rights and responsibilities as a person, pays additional income taxes, issues stock to shareholders, and has an indefinite business life.

Contra account

Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account's balance.

Measurement/Cost principle

Accounting information is measured on a cash or equal-to-cash basis. If a company receives $1,000 for services, those services are valued at $1,000.

Accrual basis accounting

Accounting system that recognizes revenues when goods or services are provided and expenses when incurred; the basis for GAAP.

Permanent accounts

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed.

Temporary accounts

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period.

Operating activities

Activities that involve the production or purchase of merchandise and the sale of goods or services to customers, including expenditures related to administering the business.

Capital expenditures

Additional costs of plant assets that provide material benefits extending beyond the current period.

Net income

Amount earned after subtracting all the expenses from all the revenues for a period.

Principal of a note

Amount that the signer of a note agrees to pay back when it matures, not including interest.

Accounts receivable

Amounts due from customers for credit sales; backed by the customer's general credit standing.

Book value

Asset's acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account.