Accounting Terms

Temporary Accounts

reported over a given time period, normally a year. Owner's withdrawal, revenue, and expense accounts are temporary accounts. Temporary accounts are closed into the capital account at the end of the accounting period.

T Account

a diagram used to understand the effects of accounting transactions. It is in the form of a T with the account title written at the top. Debits are recorded on the left side of the T. Credits are recorded at the right side of the T. T accounts are not a permanent method for recording transactions. Rather, they are a used to analyze specific transactions and solve particular problems.

Statement of Owner's Equity

a financial statement that shows changes that occur in the owner's equity or ownership of the company over a period of time. The changes include net income or net loss, any contributions by the owner, and any owner withdrawals.

Balance Sheet

a financial statement that shows the financial position of a company at any given point in time. It is a formal presentation of the accounting equation showing the total assets of a company, the liabilities that have claims against the assets, and the remaining owner's equity.

Income Statement

a financial statement that shows the relationship between revenues and expenses over a period of time. If revenues are greater than expenses, the result is net gain, or profit. If revenues are less than expenses, the result is net loss.

Accounting Period

a given time period for each financial reporting cycle of the company. An accounting period is usually one year. At the end of the accounting period, all financial reports are prepared, and temporary accounts are closed into the owner's equity account. Management can determine the success of the company's operations by comparing year-end reports of successive accounting periods.

Workpapers

a method for organizing the ledger account balances so that the financial statements can be easily prepared.

Journal

a record book of the transactions recorded by date.

Night Deposit

box or chute is accessible on the outside of the bank building for companies to drop their bag of cash receipts into. This chute is secure so the bags cannot be retrieved by anyone and the cash is safe until the bank opens in the morning.

Slide Errors

errors made when recording information or preparing a trial balance. A slide error occurs when the actual number is increased or decreased by ten times the amount. For example, $250 might be recorded as $2,500 or $25.

Transposition Errors

errors made when recording information or preparing a trial balance. A transposition error occurs when digits in the amounts are transposed, or switched. For example, $235 might be recorded as $253. To find out if you have made a transposition error, first find the difference between what your total is and what it should be. Then add up the digits of the difference. If you have made a transposition error, the total will be nine. Take, for example, a difference of $18, 1 + 8 = 9.

Credit

is a term used in recording an accounting transaction. A credit represents an increase to a liability account and an owner's equity account and a decrease to an asset account. Credit represents an increase in a revenue accounts, which results in an increase in owner's equity. The abbreviation for a credit is cr.

Debit

is a term used in recording an accounting transaction. A debit represents an increase to an asset account and a decrease to a liability account and an owner's equity account. A debit represents an increase in an owner's withdrawal account and an expense account, which results in a decrease in owner's equity.The abbreviation for debit is dr.

Revenue

is the increase in the earnings of the company as a result of operations or achieving the company objectives. Revenue can be derived from sale of services or goods. An increase in revenue results in an increase in owner's equity or claims on the assets of the company.

Ledger

known as the book of final entry. Entries from the journal are transferred to the ledger from the journal in a process called posting. The ledger records transactions by account. At any point in time, an account balance can be found by referring to the ledger.

Source Document

the original document that contains all the available information regarding a transaction and the circumstances surrounding it. It can be a check, invoice, receipt, memo, bank documents, or other records.

Closing the books

the process of preparing and posting the closing entries to clear the temporary account balances in preparation for the next accounting period.

Journalizing

the process of recording a transaction entry in the journal.

Posting

the process of transferring the transaction entries from the journal to the ledger.

Trial Balance

used at any given point in time to show that debits equal credits. A list of all accounts is made with their balances entered in the appropriate debit or credit column. If the total debits equal the total credits, the trial balance is said to be in balance.

Endorsement

An endorsement is made when the payee signs the check or stamps it on the back left-hand side. The endorsement authorizes the bank to transfer the cash from the payor's account to the payee's.In order to prevent an employee from taking the funds for personal use when making the deposit, the checks can include what is known as a restrictive endorsement. The endorsement will include the words "For Deposit Only," which requires the bank to transfer the cash only to the account included in the endorsement.

Signiture Card

As stated above, checks are used to make payments or purchases from a checking account. The signature on the checking account is the authorization for the bank to make the payment to the payee. Checks can be stolen and the signature forged, resulting in an illegal transfer of cash. As an additional control, a signature card is prepared. This card includes the signatures of those people who are authorized to sign checks. This card remains on file at the bank. The bank can compare the signatures on the checks with those on the signature card and, hopefully, detect any forgeries before the payment of cash is made.

Accounting Equation

Assets = liabilities + owner's equity. The accounting equation is based on the premise that outside creditors and the owner of the company have claim against the assets of the company. From the equation, one can suppose that a balance exists between the assets and the claims on those assets by creditors and the owner.

Bank Statement

At the end of each month, the bank will send out to each account holder a bank statement, or a record of the transactions that took place during the month on the account. The statement will include (1) the account number, (2) the balance at the beginning of the month, (3) the deposits and increases in cash that were made to the account, (4) the checks and other withdrawals of cash that were made against the account, and (5) the ending balance.

Deposit Slip

Cash is paid from the checking account by writing checks. In order for checks to be written, cash or funds need to be available in the checking account. The company deposits the cash it receives from customers or clients by using a deposit slip.

Account

Elements of the accounting equation are made up of categories or components called accounts. Accounts are records of specific items. Cash, accounts receivable, and inventory accounts are accounts included in assets. Accounts payable and loans payable accounts are accounts included in liabilities. Owner's equity is different. Capital and owner's withdrawal are accounts included in owner's equity. Also included in owner's equity are revenue accounts and expense accounts. Revenue accounts are made up of sales, revenues, or other accounts depending on the type of company. Expense accounts may include utilities, wages, advertising, and office supplies.

Non-Sufficient Funds checks

Examples of decreases to the bank account that are not yet recorded in the ledger are non-sufficient funds (NSF) checks and service charges. A client might pay a company a $50 check for accounting services. When the check is deposited and sent to the client's bank, the client's bank account balance may only be $45. The check will be returned to the company's bank as a non-sufficient funds check, or the client's bank will pay the check amount to the company even though the client has non-sufficient funds. Then the client's bank deducts $50 from the client's account and charges a NSF fee bringing the client's account to a negative balance. The client must deposit money to bring the account back to a positive balance as soon as possible. If the client has overdraft protection, there is a reserve amount used and no NSF fee is charged.

Book of Original Entry

The journal is the book where the transaction is first recorded. It is known as the book of original entry. The complete transaction is recorded in one place. The information in the journal provides support for the information found in a ledger.

ATM

allow their customers to make bank transactions at any time. Customers are given a plastic card with a code. When inserted into the ATM, the card allows the machine to prompt the customer for his or her code. Together, the card and the code identify the customer and the account. The customer can use the machine to make deposits, withdraw cash, and transfer cash between accounts.

Income Summary

an account used only at the time of closing the books. The balances of revenue and expense accounts are transferred to the income summary account. The resulting balance of the income summary account is then transferred to the capital account.

Fiscal Year

any twelve-month period. For example, a fiscal year can be from August 1 to the following July 31. A company may use any fiscal year as their accounting period for different reasons. If a company opens for business on August 1, it may make its fiscal year August 1 to the following July 31.

Expenses

are the costs directly associated with increasing revenue or achieving the company objectives. Examples of expenses are utilities, wages, office supplies, and costs of the goods sold. Expenses differ from assets in that they are used up, or consumed, during the operations of the business. An increase in expenses results in a decrease in owner's equity.

Owner's Equity

equates ownership and represents the claims by the owner of the company against the remaining assets after liabilities are satisfied. The dollar value of owner's equity is determined by subtracting the amount of liabilities from the amount of assets. Owner's equity is increased by contributions from the owner to the company and by revenues earned. It is decreased by the owner withdrawing assets from the company and by incurring expenses.

Copy Errors

errors made when preparing a trial balance, which were made in copying information from the ledger to the trial balance or from the journal to the ledger.

Addition Errors

errors made when preparing a trial balance, which were made in totaling the debit and credit columns of the trial balance.

Financial Statements

formal reports that show the results of operating a company, or the accounting information of a company. They are prepared at least at the end of each fiscal year. Three basic financial statements are the income statement, the statement of owner's equity, and the balance sheet.

transaction

is an economic event or occurrence that results in a change in the elements of the accounting equation. A transaction can be recorded. A specific dollar amount can be identified. Normally, something of value exchanges hands between the company and other individuals or companies with whom it does business. Sometimes, a transaction occurs within the company itself. Examples of transactions are the owner contributing money to the company, sale of inventory, purchase of equipment, and obtaining a bank loan.

Capital

is included in owner's equity. Contributions are recorded in the capital account. At the end of the accounting period (usually a year), the balances of owner's withdrawal account and all revenue and expense accounts are transferred to the capital account.

Owner's Withdrawl

is legitimately withdrawing assets from the company for personal use by the owner. An owner's withdrawal is usually in the form of cash but can be other assets as well. An owner's withdrawal results in a reduction in the amount of owner's equity or claims on the assets of the company.

Trial Balance 2

prepared after the closing entries have been prepared and posted to the ledger. The purpose is to make sure the ledger account's debit balances equal its credit balances.

Closing Entries

the journal entries prepared at the end of the accounting period that transfer the balances of the temporary accounts to the capital account. The temporary accounts are the sales or revenue accounts, the expense accounts, and the owner's withdrawal accounts.There are four closing entries that are to be prepared: close revenue account balances to the income summary account, close expense account balances to the income summary account, close the income summary account balance to the capital account, and close the owner's withdrawal account balance to the capital account.

Checks

the method of making payments from the funds or cash available in the checking account. There are three parties to a check: the bank where the checking account or cash is held, the person or company the cash is paid to (known as the payee), and the person who signs the check (the payor). A payor directs the bank to pay the cash specified on the check to the payee. A check stub or duplicate copy of the check is used to record the transaction in the journal.

Calendar Year

the designated time period from January 1 to December 31.

Chart of Accounts

A company's official list of all accounts organized by the elements of the accounting equation is called a chart of accounts. All transactions are classified under these accounts. They may be added to and adjusted by the company's management or the owner.

Cash

often thought of as currency and coin, but it comes in many different forms. The best way to learn what is considered cash is to think of cash as any asset that can be used as the equivalent of currency or coin. For example, a personal check written to the company for payment of services would be considered cash because it can be deposited in a bank account and used to make purchases or payments. The available balance on a credit card may not be considered cash, but credit card receipts from customers, which are payments for goods or services, are cash. It's a subtle difference. You can't deposit the credit card, but you can deposit credit card receipts from customers. On the other hand, inventory would not be considered cash because you could not deposit it into a bank account or use it to make payments or purchases. A bank loan is a liability. The money received from taking out the bank loan is cash.

Financial Reports

prepared from the ledger account balances.

Permanent Accounts

reported at a given point in time. Assets, liabilities, and the capital account are permanent accounts.

Assets

represent the cash or other items of value owned by the company at any given time. Assets are obtained for the purpose of meeting the objectives or goals of the company. Assets may include cash, accounts receivable, inventory held for resale, furniture, equipment, and vehicles.

Liabilities

represent the claims by outside creditors against the assets. Liabilities are the financial obligations of the company. Obvious liabilities are bank loans and accounts payable. Any other financial obligation owed by the company to someone or some other company as a result of extending credit to the company during the operations is classified as a liability.