Accounting and Bookkeeping Terms

Liquidity

A Term used to describe the solvency of a business, and which has special reference to the degree of readiness in which assets can be converted into cash without loss.

Capital Assets

A collective term which included all fixed assets, consisting of Furniture and Fixtures, Land, Buildings, Machinery, etc.

Insolvent:

A company is insolvent if it has insufficient funds (all of its assets) to pay its debts (all of its liabilities).

Credits

A credit is one component or every accounting transaction indicating the source of the item received. Credits increase liabilities and equity and decrease assets on the balance sheet. Credits increase revenue and decrease cost and expenses on the income statement or profit and loss statement.

Accounts Payable

A current liability representing the amount owed by a business to a creditor for the merchandise or services purchased on open account (i.e., without the giving of a note or other evidence of debt).

Debits

A debit is one component of every accounting transaction showing what the company received as a result of that transaction. Debits increase assets of a company and decrease liabilities and equity of a company. Furthermore, debits decrease sales, and increase cost and expenses on the Profit and Loss Report.

Error of Original Entry

A double-entry term which means that a transaction has been entered with the wrong amount.

Error of Omission

A double-entry term which means that a transaction has been omitted from the books entirely.

Error of Commission

A double-entry term which means that one or both sides of a double-entry have been posted to the wrong account (but is within the same class of account). Example: Petrol expense posted to Vehicle maintenance expense.

Error of Principle

A double-entry term which means that one or both sides of a double-entry have been posted to the wrong account (which is also a different class of account). Example: Petrol expense posted to Fixtures and Fittings.

Drawing Account

A drawing account is the amount of cash drawn out by a sole proprietorship and by partners of a partnership. The drawing amount reduces capital in a sole proprietorship and a partnership. It is nontaxable for income tax purposes.

Historical Cost:

A generally accepted accounting principle requiring all financial statement items be based upon original cost. ____________ means what it cost the company for the item. It is not fair market value. This means that if your company purchased a building, it is recorded on the balance sheet at its __________. It is not recorded at fair market value which would be what your company could sell the building for in the open market.

Journal

A journal is the chronological, day-to-day transactions of a company. Revenue by sources is recorded in the sales journal and cash receipts journal. Expenses by sources are recorded in the accounts payable journal and cash disbursements journal. A general journal is used to record period ending adjusting journal entries. The Payroll Journal is dedicated to payroll entries. The general journal is used for occasional and year-end adjusting and correcting entries. The Standard Entries Journal is for adjusting entries that occur monthly, such as depreciation and matching FICA. (Original Book of Entry)

Nominal Ledger

A ledger which holds all the nominal accounts of a business.

Debtors

A list of customers who owe money to the business.

Aging Report

A list of customers' accounts receivable amounts by age. The report is usually divided into columns of 30-day increments such as 0-30, 31-60, 61-90, 91-120, and 120+. It alerts management to any slow playing customers

Creditors

A list of suppliers to whom the business owes money.

FIFO (First in, first out)

A method of inventory valuation in which the first items entered into inventory are considered the first items out.

Depreciation

A method of recovering the cost of an asset over the assets useful life or recovery period

Cash Flow Statement

A report describing the changes in the cash balances on the Balance Sheet. There are three categories: Cash Flows from Operating Activities, Cash Flows from Investing Activities, and Cash Flows from Financing Activities.

Account

A section in a ledger devoted to a single aspect of a business (e.g. a Bank account, Wages account, Office Expenses account).

Cash Control

A system of verifying the accuracy of all cash receipts and all cash disbursements.

Invoice:

A term describing an original document either issued by a business for the sale of goods on credit (a sales invoice) or received by the business for goods bought (a purchase invoice).

Journal entries

A term used to describe the transactions recorded in a journal.

Allowance for Bad Debts

Also called Allowance for Doubtful Accounts. It is an estimate of uncollectible customer accounts. It is called a "contra" account because it is listed with the current assets on the balance sheet although it is a credit balance account. The account balance is determined through use of the Historical Method or Over 90 days Past Due Method

Fixed Assets (Net)

Also called Book Value. Fixed assets net are all property, plant, leasehold improvements, and equipment, net of accumulated depreciation. For example, if the total fixed assets are 500,000 and accumulated depreciation is 100,000; fixed assets net would be 400,000.

Capital

Also known as Owner's Equity and Net Assets, it is the result of subtracting Liabilities from Assets. Businessmen will use the term "________" to describe the amount of money or other resources owned or used to acquire future income or benefits. The amount subscribed and paid by stockholders.

Installment Sale

An installment sale is selling property and receiving the sales price over a series of payments. A down payment is normally made and the balance of the sale is an installment sale. An example would be fifteen (15) years.

Assets

Anything owned by an individual or a business, which has commercial or exchange value; are balance sheet accounts. Examples are cash, accounts receivable, inventory, and fixed assets.

Fixed Capital

Capital invested in fixed assets, such as land, buildings, machinery, etc.

Net Earnings

Earnings after deductions.

Expense Accounts

Expense accounts are the accounts a company uses to keep track of costs of doing business. When recording an expense transaction, it is a debit because it reduces capital. Expenses are included in the income statement or profit and loss statement. Expense accounts reduce income. Examples of expense accounts are salary and wages, payroll taxes, advertising, depreciation, and repairs and maintenance.

Accrued Liability Expenses

Expenses incurred during a fiscal period but not paid by the end of that fiscal period

Deferred expenditure

Expenses incurred which do not apply to the current accounting period. Instead, they are debited to a 'Deferred expenditure' account in the non-current assets area of your chart of accounts. When they become current, they can then be transferred to the profit and loss account as normal.

Fixed Cost

Fixed cost is an operating expense that is incurred to provide facilities and organization which are kept in readiness to do business without regard to actual volumes of production and sales. Fixed costs remain relatively constant until changed by managerial decision; within general limits they do not vary with business volume. Examples are: interest on bonds, rent, property tax, depreciation (sometimes in part). These are operating expenses that are incurred to provide facilities and organizations that are kept in readiness to do business without regard to volumes of production and sales. These fixed costs remain relatively constant until changed by managerial decision. Some examples of fixed costs are rent, property taxes, and interest expense.

Gross Profit or Margin:

Gross profit or gross margin is net sales minus cost of sales or cost of goods sold. For example, if net sales were 400,000 and cost of sales were 300,000, gross profit would be 100,000. Gross margin of profit measures the ability of both to control costs and to pass along price increases through sales to customers. Gross margins vary with the type of business. For example a restaurant and bar would have a greater gross margin than a discount chain, like Wal-Mart, that depends upon volume to make money.

Aging Accounts Receivable

Grouping customer accounts according to due dates

Income Accounts

Income accounts are the accounts that a company keeps track of its sources of income. Examples of income accounts are merchandise sales, legal and professional fees, consulting fees, and interest income. Income accounts are credit balance accounts that increase profits.

Accrued Income

Income earned during a fiscal period but not actually received during that fiscal period.

Inventory:

Inventory is the cost of goods a company holds for sale to customers. The inventory can be merchandise a company buys for resale, or it can be merchandise that a company manufactures or processes, selling the completed product to the customer. Inventory can be valued using the following methods: Specific Identification, FIFO, or LIFO.

Balance Sheet

It is a financial "picture" of a company at a given date in time; lists a company's assets, liabilities, and the difference between the two, which is the company's equity, or net worth. An itemized statement which lists the total assets and the total liabilities of a given business to portray its net worth at a given moment of time.

Chart of Accounts

It is a systematic listing of all accounts used by a company. Accounts are classified into six categories: Assets (1000), Liabilities (2000), Equity/Capital (3000), Revenue (4000), Cost of Sales (5000), and Expenses (6000-7000). Think of it as a table of contents.

Customer Deposits

It is also called Unearned Revenue and Prepaid Income. Customer Deposits represents money the company received in advance of providing a service or product to a customer. Customer Deposits is classified as a current liability on the balance sheet. It is classified as a liability because the company still owes the service or product to the customer. An example would be taking a deposit on a job before the job is started, or a Lay away Deposit.

Income Statement:

It is also called a profit and loss statement or P&L. An income statement lists the company's income by revenue sources, cost of sales, expenses by various categories, and net income which is gross profit minus total expenses.

Net Worth

It is also called equity or capital. Net worth or equity is the difference between total liabilities and total assets. For example, if total assets of a sole proprietorship are 500,000 and total liabilities are 350,000, the total net worth would be 150,000. In a corporation, net worth or stockholders equity consists of capital stock, capital surplus, and retained earnings (earned surplus).

General Ledger

It is also known as G/L and The Final Book of Entry. It is collection of all balance sheets, income, and expense accounts used to keep the accounting records of a company. A General Ledger is a perpetual record of the activity and balances of the accounts. Each company has only one General Ledger.

Cost Of Goods Sold

It is the cost of inventory items sold to a company's customers.

Bank Reconciliation

It is the verification of the company's checkbook balance through comparing entries to those on the bank statement. Included is a list of outstanding deposits and outstanding checks. Verification of a bank statement balance and the depositor's checkbook balance.

Break-Even Point

It is the volume point at which revenues and costs are equal; a combination of sales and costs that will yield a no-profit, no-loss operation.

Credit Memo

It is the writing off of all or part of a customer's account balance. A credit memo would be required when a customer returns some merchandise that was bought. A credit memo would also occur when a customer overpaid on his or her account.

Intangible Assets

Items of non-physical nature such as goodwill, patents, and trademarks that are of value to a company as a going concern, the value being dependent upon the rights and earning power that possession confers upon the owner.

LILO: Last In Last Out

LILO: Last In Last Out. A method of valuing stock.

Liabilities

Liabilities are what the company owes its creditors. Liabilities are balance sheet accounts. Examples of liabilities are accounts payable, payroll taxes payable, rent payable, long- term debt, and income taxes payable.

Long-Term Liabilities

Long-term liabilities or noncurrent liabilities are liabilities of a company that are due in more than one year. An example of a long-term liability would be a bank debt maturing in five years.

Accounts Receivable

Money owed a business enterprise for merchandise bought on open account.

Entry

Part of a transaction recorded in a journal or posted to a ledger.

Cost

Purchase price or expense paid to acquire something.

Cash in Hand:

See Undeposited funds account.

Amortization Expense

That portion of an intangible asset that is being written off for the year. For example, if goodwill has a fifteen-year life with a value of 60,000, the amortization expense on the straight-line method would be 4,000 (60,000 divided by 15 years.)

Maturity Value

The (usually projected) value on the date it becomes due.

Accumulated Depreciation

The accumulation of amounts charged to expense to write off the cost of a fixed asset over its estimated useful life. The account does not necessarily measure the decline in value of the related asset nor does it represent a specific fund or cash or other assets set aside to replace the related asset

Gross Profit on Sales

The amount by which the net sales exceed the cost of goods sold.

Average Inventory

The approximate amount of merchandise on hand during a certain period.

Average Daily Balance

The average amount of money that a customer keeps on deposit. It is determined by adding the daily balances of an account for a given length of time, and dividing the total by the number of days covered.

Cost of Labor

The cost of labor used in the actual production of the goods.

Margin

The difference between the cost and the selling price of merchandise; expressed as a percentage with the difference as the numerator and the cost as the denominator.

Markup

The difference between the cost and the selling price of merchandise; expressed as a percentage with the difference as the numerator and the cost as the denominator.

Net Loss

The excess of the total expenses over the gross profit.

Net Sales:

The final amount of sales, determined by subtracting the amount of sales returns and allowances and sales discount from the total amount of sales, for a fiscal period.

Amortization

The gradual reduction of a debt by means of equal periodic payments sufficient to meet current interest and liquidate the debt at maturity. When the debt involves real property, often the periodic payments include a sum sufficient to pay taxes and hazard insurance on the property.

Last-In-First-Out (LIFO)

The letters LIFO represents "last-in-first-out". It is an inventory cost flow method whereby the last goods purchased are assumed to be the first goods sold by the company so that the ending inventory is priced as though the remaining items were the first goods purchased.

Materials and Supplies

The materials used in the actual production or processing of the goods.

Inventory Turnover

The number of times a business turns its merchandise inventory into sales each year.

Capital Stock:

The ownership shares of a corporation authorized by its articles of incorporation, including common and preferred stock.

Accrual Basis

The practice of record keeping by which income is recorded when earned and expenses are recorded when incurred, even though the cash may not be received or paid out until later. Also includes A/R, A/P, and inventory.

Cash Basis:

The practice of recording income and expenses only when cash is actually received or paid out

Amount Realized

The selling price minus the selling expenses.

Nominal Accounts

The temporary accounts, such as the income statement accounts and owner's drawing accounts. They will be zero-out or closed at the end of the period and will be opened in the following period with zero balance.

Fiscal year

The term used for a business's accounting year. The period is usually twelve months which can begin during any month of the calendar year (e.g. 1st April 2008 to 31st March 2009).

Gross earnings

The total Earnings prior to deductions.

Landed Costs

The total costs involved when importing goods. They include buying, shipping, insuring and associated taxes.

Cost of finished goods:

The value (at cost) of newly manufactured goods shown in a business's manufacturing account. The valuation is based on the opening raw materials balance, less direct costs involved in manufacturing, less the closing raw materials balance, and less any other overheads. This balance is subsequently transferred to the trading account.

Fixed Assets:

These are also known as Property Plant and Equipment. Fixed assets are those assets of a permanent nature required for the normal conduct of a business. A fixed asset is a tangible item that has a future economic benefit. Fixed assets are higher valued items (such as more than 500) which will not be normally converted into cash during the ensuing fiscal period and have more than a twelve-month life. Fixed assets include furniture, fixtures, equipment, land, and buildings. Accounts receivable and inventory are not fixed assets.

Accrued Expenses

These are expenses incurred during an accounting period for which payment has not been made.

Accrued Liability

These are liabilities which have occured, but have not been paid during an accounting period. Examples would include accrued wages payable, accrued sales tax payable, and accrued rent payable.

Dividends

These are payments to the shareholders of a limited company.

Ending Inventory

This is inventory figured at the end of the tax year and is used as the beginning inventory for the next year's return.

Beginning Inventory

This should be the same as last year's closing inventory.

Generally Accepted Accounting Principles

also known as GAAP. are rules that are used to record accounting transactions on an accrual basis of accounting. Cash basis of accounting is a comprehensive basis other than generally accepted accounting principles.

Cash Flows from Financing Activities

are money used to or provided from financing activities. An example would be moneys received from borrowing from a bank. Another example would be moneys received from a stockholder loan. Another example would be capital contributions by partners in a partnership. Moneys used to reduce principal on a long-term debt would be an example of moneys used by financing activities.

Cash Flows from Investing Activities

are moneys used or provided from investing activities. An example would be moneys used to purchase property and equipment. Another example would be money received from the sale of company stock.

Cash Flows from Operating Activities

are moneys used or provided from normal operating activities of an entity.

Bad Debts

are the amounts due on open account that have been determined as uncollectible.

Current Assets

assets of a company that are reasonably expected to be realized in cash, or sold, or consumed during the normal operating cycle of the company (usually one year). Current assets examples are accounts receivable, cash, inventories, and prepaid expenses.

Accounting Equation

assets= liabilities + equity. The basis of the balance sheet and double-entry accounting.

Net Income

is also called net profit or earnings. Net income is the difference between a company's gross profit and its total expenses. For example, if gross profit of a company is 400,000 while expenses are 300,000, the net income would be 100,000. The net income is found at the bottom of the income statement and often times referred to as "The Bottom Line" by business owners.

Current Liabilities

liabilities to be paid within one year of the balance sheet date. Examples of current liabilities are accounts payable, accrued wages payable, accrued rent payable, payroll taxes payable and current portion of long-term debt.

Closing

refers to procedures that take place at the end of an accounting period, which is at the end of the year. Adjusting entries are made. The income and expense accounts are closed. The net income or loss that results from the closing of these accounts is transferred to an equity account called Owner's Equity for a sole proprietorship; Partner's Equity for a partnership; and Retained Earnings for a corporation.

Adjusting Entries

special entries that are made up prior to closing the books for the accounting period. An example would be adjusting payroll taxes to actual based upon supporting documentation.

Equity

the net worth of a company, also known as Capital. ASSETS MINUS LIABILITIES = NET WORTH OR EQUITY. It is also known as capital for a sole proprietorship and for partnerships. Equity includes capital contributions by a sole proprietorship and capital contributions by a partnership. It also includes common stock issued by a corporation. Net income from a company increases equity while a net loss reduces equity. Dividends paid by a corporation reduce equity. Treasury stock and stock dividends reduce equity of a corporation. Capital withdrawals reduce capital in a sole proprietorship and a partnership.