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.
