accounting definitions

Accelerated depreciation
A method of allocating the cost of a fixed asset over its useful life in a manner that allows more cost to be depreciated in the earlier years than later years. The rationale supporting this method is that a fixed asset is more productive in its
earlier years than in its later years
.
Account
1) A ledger that records the activity of increases and decreases of a particular nature. 2) One of the accounts that make up the general ledger accounts. 3) An account that is listed on the chart of accounts
.
Account payable
A current liability owed by the company to a vendor for purchase of goods or
services
.
Account receivable
A current asset owed to the company by customers when they purchase goods and services
.
Accounting
The function of gathering and recording financial information of a business entity for the purpose of preparing summary reports that can be analyzed and used to make managerial decisions
.
Accounting environment
Refers to the community of accounting, such as types of business organizations, flexibility of accounting rules, who the accounting authorities are, who uses financial statements, who the accounting professionals are and what accounting systems are available
.
Accounting equation for the balance sheet
Assets = Liabilities + Equity. Provides the underlying foundation for double-entry
accounting
.
Accounting equation for the statement of income
Revenue - Expenses = Net Income or Loss. Measures whether the company sustained a profit or a loss from their sales activity during an accounting period
.
Accounting framework
Assets, liabilities, equity, revenue, expense
.
Accounting model
A format that depicts the debits and credits and increases and decreases for
each section in the accounting framework
.
Accounting periods
One of the six basic assumptions of accounting information. The assumption that reports of activity are measured during specific time-intervals called "accounting periods". An accounting period is an interval between one point in time and another during which the financial activity of a business is measured. Usually by
month or quarter but not longer than one year
.
Accounts receivable turnover ratio
Total credit sales for the year divided by the total amount of accounts receivable outstanding. Provides a way to measure collection success
.
Accrual basis
The method by which revenues are recorded when earned and expenses are recorded when they are incurred, as opposed to a cash-basis method of accounting that measures revenue when cash is received and measures expenses when they are paid. The accrual method must be used in order for financial statements to be considered prepared according to Generally Accepted Accounting Principles (GAAP
).
Accumulated depreciation
The total depreciation that has been expensed since a fixed asset was originally acquired. The accumulated amount offsets the fixed assets and results in the net book value of the fixed assets
.
Accumulated net income
An equity account of a sole proprietorship that reflects an accumulation of prior year profits and losses. It is the account that current year revenue and expense accounts are closed into at the end of each year.


Accurate
One of the three criteria of "Dependability" which is one of the two primary characteristics of accounting information. For financial statements of be considered reasonably accurate or valid, means that they say what they mean to say. They are not overstated or understated.


Acid-test ratio
The ratio of quick current assets to current liabilities. This ratio measures the ease in which the company can pay off its short-term liabilities, therefore a 1 to 1 ratio is deemed acceptable. Anything less is questionable. It is one of the ratios that tests the financial health of a business and is also known as the quick ratio.


Additional Paid-in-Capital
Capital paid in by stockholders in excess of the stated value of the stock that was issued to them.


Adjusting journal entry
Same as journal entry.


Agent
A person authorized to act on behalf of another person
.
Allocate
To spread the cost of an item systematically among other items. For example, a check amount was written to replenish petty cash and can be allocated among several expense accounts such as postage, office expense, and meals and
entertainment.


American Institute of Certified Public Accountants
The primary association of certified public accountants. Members are bound to follow the ethical and auditing standards prescribed by the AICPA and to financial accounting standards prescribed by the Financial Accounting Standards Board (FASB).


Amortization
Spreading the cost of intangible assets over a uniform period of time. Similar to the process of depreciation.


Analogical
Based on an analogy.


Analogy
Correspondence in some respects between otherwise dissimilar things.


Asset
An economic resource a company has possession and control over that will provide a future benefit.


Audit
The process of examining a company's financial records by either external or internal auditors for the purpose of rendering an opinion as to the quality of the financial records.


Audit trail
The ability to follow a summary number back to its original source.


Auditors


See audit




Bad debt
An account receivable amount from a customer that will never be collected
.
Balance
1) The amount remaining in a general ledger account. Or 2), whether the two sides of a ledger are "in" balance or "out" of balance, i.e., the debits either equal or don't equal the credits
.
Balance Sheet
One of the three primary financial statements, the balance sheet reflects the measurement of the company's assets, liabilities and equity position at a given point in time
.
Bank charge
Service fees and other charges a bank levies on its customers
.
Bank reconciliation
A process by which to compare an entity's book cash balance with the bank's cash balance as of a given period to note any discrepancies
.
Bankrupt
When a company's liabilities exceed their assets to such an extent they seek protection under the law from creditors
.
Beginning inventory
The amount of inventory on hand or recorded as of the beginning of the accounting period. Also, the beginning inventory figure is the ending inventory
figure from the previous accounting period
.
Big picture
Accounting jargon for knowing how all the general ledger accounts function in an accounting system
.
Billings
Invoices sent to customers or clients that reflect the amount due for goods sold or services rendered
.
Book inventory
The amount of inventory recorded in the general ledger as opposed to the actual amount of inventory on hand
.
Book value
The difference between the original cost of an asset and its accumulated depreciation
.
Books
A general reference to all of the financial journals and ledgers associated with a set of financial statements
.
Bottom line
A popular way of referring to Net Profit or Loss
.
Budget
An itemized summary of probable expenses and revenue for a given accounting period
.
By-product
Something produced in the making of something else



Calendar year
The period between January 1, and December 31, of a year. It can be the fiscal year for a business entity.

Capital
The amount of the owner's equity in a business.

Capital asset
An asset with a life longer than one year. Usually refers to a tangible fixed asset.

Capital lease
A lease agreement that is in fact a contract of sale, causing the lease to be set up similar to a long-term notes payable. Also called a "lease obligation".

Capital stock
A general ledger account found in the equity section of a balance sheet. The account shows the amounts stockholders paid to acquire their shares of stock.

Capitalize
To record an expenditure as an asset rather than as an expense. Also, it can refer to the process of contributing cash or property to the business by the owners.

Cash
Money on-hand or in the bank.

Cash Basis
Measures revenue when cash is received and measures expenses when they are paid.

Cash discount
An offer to reduce the sales price if prompt payment is made.

Cash flow
The difference between cash in and cash out of a business. The amount of cash remaining is referred to as cash flow.

Cash flows statement
One of the three primary financial statements. It is a report that shows where the cash came from (sources) and where the cash went (uses). A cash flow statement shows the inflows and outflows of cash in three classifications; operating activities, financing activities and investing activities.

Caveat Emptor
Latin for "Let the Buyer Beware". An admonition that the buyer should be cautious when buying goods and services in the market place.

Certified Public Accountant
A person who has been licensed by their state board of accountancy to practice public accounting.

Charge
Used as a verb meaning to debit a general ledger account.

Charge off
To record as an expense an amount that was recorded as an asset. For instance, when an account receivable is considered to have no more future value as an asset, it can be "charged off" to bad debt expense.

Chart of accounts
A list of all the names and numbers of the accounts found in the general ledger.

Closing entries
Journal entries that close the ending balances of the revenue and expense accounts and transfer them into the appropriate equity account in the balance sheet, i.e., retained earnings, owner's equity or partner's equity, etc.

Collateral
Assets that are pledged to be used in case a borrower defaults on a loan.

Common stock
Stock, held by shareholders of a corporation, that has no preferential treatment associated with it.

Comparability
One of the four secondary characteristics of accounting information. If accounting methods have been consistent from period to period then financial statement information can be compared to other financial statement information. For instance, information that is compared from a prior accounting period to a current accounting period or to a projected accounting period can determine if there are any similarities or differences. If apples are compared to apples then the information can be depended on.

Compound interest
Interest calculated on the principal plus the amount of previously accumulated interest.

Conservatism rule
One of the five rules of operation of financial statements. Takes into consideration the uncertainty and risks inherent in business situations. Stresses prudence when recording transactions. Revenue is recorded when it is "reasonably certain" the transaction will actually happen, i.e., when goods and services are delivered. Losses are recorded when "reasonably possible" which means they are likely to occur. Expenses are recorded when assets are consumed or used under the matching rule.

Consistency
One of the four secondary characteristics of accounting information. A company's method of accounting should remain the same from accounting period to accounting period in order for the user of the financial statements to be able to depend on them. For instance, switching from accrual to cash, straight-line depreciation to double-declining depreciation, the retail inventory method to the perpetual inventory method every once in a while would only cause confusion and prove that the financial statements were not to be trusted.

Continuity
1) Refers to making sure that the beginning balance of the equity accounts of an entity are the same as the ending balance of the equity accounts in the previous accounting period or year. See Consistency 2) Also refers to the concept of a "going concern" assumption that the entity will still be in business tomorrow.

Contra account
An account that accumulates amounts that are actually subtractions from another account. For instance, Accumulated Depreciation is subtracted from Fixed Assets because depreciation represents a fraction of the cost of fixed assets as they are being used.

Contributed capital
The amount of money or property that an owner personally puts into a business in return for an equity position.

Control account
A general ledger account that consists of a summary of detailed information coming from a subsidiary ledger. For example accounts receivable is the control account for the individual accounts receivable subsidiary ledgers.

Controller
A person who is in charge of the accounting system of a business.

Corporation
A body of persons granted a charter legally recognizing it as a separate entity having its own rights, privileges, and liabilities distinct from its individual owners.

Cost
A monetary measure of the amount of resources used for some purpose.

Cost of capital
Amount of interest paid for the use of capital.

Cost of goods sold
The cost of goods that have been removed from inventory and delivered to customers (sold) during an accounting period.

Cost of sales
Direct costs associated with sales revenue during an accounting period.

Covenants
A binding agreement made by two or more persons or parties.

Credit
1) (Noun) The right-hand side of a ledger page, an amount entered on the right-hand side of a ledger page. 2) (Verb) To record a credit entry to the right hand side of a ledger page. 3) Can also be when a vendor extends the privilege of paying an invoice at a later date.

Credit sales
Sales that result in an accounts receivable balance.

Creditor
A party to whom money is owed.

Current assets
Assets that are expected to be used up within one year.

Current liabilities
Obligations that will be paid within one year.

Current ratio
The total of current assets divided by the total of current liabilities.



Earnings
The same as net income or net profit.


Economic life
Same as service life or useful life. The period of time that an asset is expected to provide benefits.


Economic resource
A good or service that is acquired by an entity that is expected to provide future benefits.


Elements
In accounting, the elements refer to the general ledger accounts.


Employee
A person who works for another in exchange for financial compensation.


Ending inventory
The amount of inventory on hand at the end of an accounting period.


Entity
In business, it is referred to as a separate organization unto itself. In accounting, it is an organization for which a set of accounts is kept.


Entrepreneur
One who organizes, operates, and assumes the risk in a business venture in expectation of gaining the profit.


Entry
A transaction that is recorded in the books.


Equity
The value of assets above any liabilities.


Expenditure
The purchase of goods or services by cash or credit that have not expired or been used yet.


Expense
1) All goods and services or any resources that are acquired are considered to be an asset of an entity. When an asset is used or consumed it is considered to be an expense resulting in a decrease in equity. 2) An expenditure made to acquire an asset is an unexpired cost. An expired cost is an expense. 3) Revenue increases equity, expenses decrease equity.


Expense rule
One of the five rules of operation of financial statements. When an asset is "used" it becomes an expense that must be Recognized (recorded) within the accounting period in which it was consumed.


Expensing
The process of charging the cost of an asset to expense resulting in a debit to the general ledger accounts.


Expired cost
Same as expens

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