SBFM: Accounting Terminology

ID: Q152815

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SUMMARY

This article discusses some common accounting terminology. It is not all inclusive and is meant to be used as a reference tool.

MORE INFORMATION

Accounting Cycle

All of the steps in the accounting process including analyzing and recording transactions, posting entries, adjusting and closing the accounts, and preparing financial statements; the accounting system.

Accounts Receivable

Short-term monetary assets that arise from sales on credit to customers at either the wholesale or the retail level.

Accrual Accounting

The reporting of revenues from sales in the period in which they are sold, regardless of when the cash is received, and the reporting of expenses in the period of purchase, regardless of when the payment is made.

Accrued Expense

An expense that has been incurred but is not recognized in the accounts, necessitating an adjusting entry; an unrecorded expense.

Accrued Revenue

A revenue for which the service has been performed or the goods have been delivered that has not been recorded in the accounts; an unrecorded revenue.

Accumulated Depreciation

A contra-asset account used to accumulate the total past depreciation on a specific long-lived asset.

Adjusted Gross Income (AGI)

Gross income minus deductions from gross income.

Adjusted Trial Balance

A trial balance prepared after all adjusting entries have been reflected in the accounts.

Adjusting Entry

An entry made to apply accrual accounting to transactions that span more than one accounting period or any adjustment needed to make the accounts in balance.

Aging of Accounts Receivable

The process of listing each customer in accounts receivable according to the due date of the account.

Allowance for Uncollectible Accounts

A contra accounts receivable account in which appears the estimated total of the as yet unidentified accounts receivable that will not be collected Asset, an economic resource owned by a business that is expected to benefit future operations.

Average Cost Method (ACM)

An inventory costing method under which each item of goods sold and of inventory is assigned a cost equal to the average cost of all goods purchased.

Balance Sheet

A financial statement that shows the financial position of a business at a particular date.

Bank Reconciliation

The process of accounting for the differences between the balance appearing on the bank statement and the balance of cash according to the depositor's records.

Bond

A security, usually long-term, representing money borrowed by a corporation from the investing public.

Book Value

The total assets of a company less total liabilities; owners' equity; Fixed Assets less Depreciation.

Break-Even Point

The point in financial analysis at which total revenue equals total cost incurred and at which a company begins to generate a profit.

Capital Expenditure

An expenditure for the purchase of expansion of plant assets.

Cash Basis of Accounting

A basis of accounting under which revenues and expenses are accounted for on a cash received and cash paid basis.

Cash Flow Statement

A financial statement that shows a company's sources and uses of cash during an accounting period.

Cash Payments Journal

A multi-column special-purpose journal in which disbursements of cash are recorded; also called cash disbursements journal.

Cash Receipts Journal

A multi-column special-purpose journal in which transactions involving receipts of cash are recorded.

Closing Entries

Journal entries made at the end of the accounting period that set the stage for the next accounting period by closing the expense and revenue accounts of the balances and transferring the net amount to the owner's capital account or retained earnings; clearing entries.

Comparative Financial Statements

Financial statements in which data for two or more years are presented in adjacent columnar form.

Compound Entry

A journal entry that has more than one debit and/or credit entry.

Compound Interest

The interest cost for two or more periods, if one assumes that after each period the interest of that period is added to the amount of which interest is computed in future periods. In other words, compound interest is interest earned on a principal sum that is increased at the end of each period by the interest of that period.

Consolidated Financial Statements

The combined financial statements of a parent company and its subsidiaries.

Contra Account

An account whose balance is subtracted from an associated account in the financial statements.

Controlling (or Control) Account

An account in the general ledger that summarizes the total balance of a group of related accounts in a subsidiary ledger.

Convertible Bonds

Bonds that may be exchanged for other securities of the corporation, usually common stock.

Convertible Preferred Stock

Preferred stock that can be converted into common stock.

Cost Center

Any organizational segment or area of activity for which it is desirable to accumulate costs.

Cost of Goods Sold (COGS)

An item on income statement that is computed by subtracting the merchandise inventory at the end of the year from the goods available for sale; deducted from revenue to give gross profit.

Coupon Bonds

Bonds whose owners are not registered with the issuing corporation but that have interest coupons attached.

Credit

The right side of an account.

Current Assets

Cash or other assets that are reasonably expected to be realized in cash or sold during a normal operating cycle of a business or within one year if the operating cycle is shorter than one year.

Current Liabilities

Obligations or debts that are due to be paid within the normal operating cycle of the business or within one year, whichever is longer.

Current Ratio

A measure of liquidity; current assets divided by current liabilities.

Debit

The left side of an account.

Debt to Equity Ratio

A ratio that measures the relationship of assets provided by creditors to the amount provided by stockholders.

Declining-Balance Method

An accelerated method of depreciation.

Deficit

A debit balance in the Retained Earning account.

Depreciation

The periodic allocation of the cost of a tangible long-lived asset over its estimated useful life.

Discount

To take out the interest on a promissory note in advance (verb); the amount of the interest deducted (noun).

Discounted Cash Flow

The process of discounting future cash flows back to the present using an anticipated discount rate.

Double-Declining Balance Method

An accelerated method of depreciation, related to the declining-balance method, under which the fixed rate used in the method is double the straight-line rate; this rate is the maximum allowable for income tax purposes.

Double-Entry System

A system of recording business transactions requiring that each transaction have equal debit and credit totals, thereby maintaining a balance within the accounts taken as a whole.

Earnings Per Share

An item on corporate income statements that shows the net income earned on each share of common stock; net income divided by weighted average of common shares outstanding; also called net income per share Estimated useful life:, the total number of service units (usually years) expected from a long-term asset.

Exchange Rate

The value of one currency in terms of another.

Expenditure

A payment or incurrence of an obligation to make a future payment for an asset or service rendered.

Expenses

The costs of the goods and services used up in the process of obtaining revenue; expired cost.

Extraordinary Items

Events or transactions that are distinguished by their unusual nature and the infrequency of their occurrence.

First-In, First-Out (FIFO)

An inventory costing method under which the cost of the first items purchased are assigned to the first items sold and the costs of the last items purchased are assigned to the items remaining in inventory.

Fixed Assets

Another name, no longer in wide use, for long-term non-monetary assets.

Fixed Cost

A cost that remains constant in total within a relevant range of volume or activity.

FOB Destination

A term relating to transportation charges meaning that the supplier bears the transportation costs to the destination.

FOB Shipping Point

A term relating to transportation charges meaning that the buyer bears the transportation costs from the point of origin.

Freight In

A transportation charges on merchandise purchased for resale; transportation in.

Future Value

The amount that an investment will be worth at a future date if invested at compound interest.

Generally Accepted Account Principles (GAAP)

The conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

Goodwill

The excess of the cost of a group of assets (usually a business) over the market value of the assets individually.

Gross Income

Income from all sources, less allowable exclusions.

Gross Profit

The difference between revenue from sales and cost of goods sold; also called gross profit from sales.

Gross Sales

The total sales for cash and on credit for a given accounting period.

Horizontal Analysis

The computation of dollar amount changes and percentage changes from year to year.

Income Statement

A financial statement that shows the amount of income earned by a business over an accounting period.

Income Summary

A nominal account used during the closing process in which are summarized all revenues and expenses before the net amount is transferred to the capital account or retained earnings.

Intangible Assets

Long-term assets that have no physical substance but have a value based on rights or privileges accruing to the owner.

Interest

The cost associated with the use of money for a specific period of time.

Inventory Turnover

A ratio that measures the relative size of inventory.

Journalizing

The process of recording transactions in a journal.

Last-In, First-Out (LIFO)

An inventory costing method under which the costs of the last items purchased are assigned to the first items sold and the cost of the inventory is composed of the cost of items from the oldest purchase.

Leasehold Improvement

An improvement to leased property that becomes the property of the lessor at the end of the lease.

Leverage

The use of debt financing.

Liability

A debt of the business; an amount owed to creditors, employees, government bodies, or others; a claim against assets.

Liquidation

The process of ending a business; entails selling assets, paying liabilities, and distributing any remaining assets to the partners.

Long-Term Liabilities

The debts of a business that fall due more than one year ahead, beyond the normal operating cycle, or are to be paid out of non-current assets.

Lower-of-Cost-or-Market

A method of inventory pricing under which the inventory is priced at cost or market, whichever is lower.

Marketable Securities

An investment in securities which are readily marketable; temporary investments.

Market Value

The price investors are willing to pay for a share of stock on the open market.

Merchandise Inventory

The goods on hand and available for sale to customers.

Net Income

The net increase in owners' equity resulting from the profit seeking 
operations of a company;   net income = revenue - expenses.

Operating Expenses

The expenses other than cost of goods sold incurred in the operation of a business; especially selling and administrative expenses.

Owner's Equity

The resources invested by the owner of the business; asset - liabilities = owner's equity; also called residual equity.

Par Value

The amount printed on each share of stock, which must be recorded in the capital stock accounts; used in determining the legal capital of a corporation.

Percentage of Net Sales

A method of estimating uncollectible accounts expense based on the assumption that a certain percentage of total net sales will not be collectible.

Post-Closing Trial Balance

A trial balance prepared after all adjusting and closing entries have been posted and immediately before the beginning of the next period as a final check on the balance of the ledger.

Posting

The process of transferring journal entry information from the journal to the ledger.

Preferred Stock

A type of stock that has some preference over common stock, usually including dividends.

Prepaid Expenses

The expenses paid in advance that do not expire during the current accounting period; an asset account.

Present Value

The amount that must be invested now at a given rate of interest to produce a given future value.

Price/Earnings (P/E) Ratio

A ratio that measures the relationship of the current market price of a stock to the earnings per share.

Profit Margin

A measure of profitability; the percentage of each sales dollar that results in net income; net income divided by sales.

Purchase Order

A document prepared by the accounting department authorizing a supplier to ship specified goods or provide specified services.

Purchases Journal

A type of special-purchase journal in which are recorded credit purchases of merchandise (if it is a single-column journal) or credit purchases in general (if it is a multi-column journal).

Purchases Returns and Allowances

An account used to accumulate cash refunds and other allowances made by suppliers on merchandise originally purchased for resale; a contra purchases account.

Quick Ratio

A ratio that measures the relationship of the more liquid current assets (cash, marketable securities, and accounts receivable) to current liabilities.

Receivable Turnover

A ratio that measures the relative size of accounts receivable.

Residual Value

The estimated net scrap, salvage, or trade-in value of a tangible asset at the estimated date of disposal; also called salvage value or disposal value.

Retained Earnings

The stockholders' equity that has arisen from retaining assets from earnings in the business; the accumulated earnings of a corporation from its inception minus any losses, dividends, or transfers to contributed capital.

Retained Earnings Statement

A statement that provides a summary of the changes in retained earnings during the accounting period.

Return on Assets

A measure of profitability that shows how efficiently a company is using all its assets.

Reversing Entries

The entries made after the closing of records for one accounting period that reverse certain adjusting entries; designed to aid in routine bookkeeping the next accounting period. Usually used to accrue expenses that will be paid next period.

Sales Discounts

The discounts given to customers for early payment for sales made on credit; a contra sales account.

Sales Journal

A type of special-purpose journal used to record credit sales.

Sales Returns and Allowances

An account used to accumulate amount of cash refund granted to customers or other allowances related to prior sales; a contra sales account.

Simple Interest

The interest cost for one or more periods, if one assumes that the amount on which the interest is computed stays the same from period to period.

Statement of Owner's Equity

A financial statement that shows the changes in the owner's capital investment during the year.

Stockholder's Equity

The owners' equity section of a corporation's balance sheet.

Straight-Line Method A method of depreciation that assumes that depreciation is dependent on the passage of time and that allocates an equal amount of depreciation to each period of time.

Subchapter S Corporation

A corporation established by the owners of small businesses to gain some of the legal benefits of incorporation while still being taxed as a partnership.

Subsidiary

A company whose stock is more than 50% owned by another company.

Subsidiary Ledger

A ledger separate from the general ledger; contains a group of related accounts the total of whose balances equal the balance of a controlling account in the general ledger.

T Account

A form of an account which has a physical resemblance to the letter T; used to analyze transactions.

Tangible Assets

Long-term assets that have physical substance (e.g. equipment, automobiles).

Tax Liability

The amount of tax that must be paid based on taxable income and the applicable tax table.

Trial Balance

A listing of accounts in the general ledger with their debit or credit balances in respective columns and a totaling of the columns; used to test the equality of debit and credit balances in the ledger.

Uncollectible Accounts

The accounts received from customers who cannot or will not pay.

Unearned Revenue

A revenue received in advance for which the goods will not be delivered or the services performed during the current accounting period; a liability account.

Vertical Analysis

The calculation of percentages to show the relationship of the component parts of a financial statement to the total in the statement.

Voucher

A written authorization prepared for each expenditure in a voucher system

Working Capital

The amount by which the total current assets exceed total current liabilities.

Work in Process Inventory

An inventory account unique to the manufacturing or production area to which all manufacturing costs incurred and assigned to products are charged. The balance at a period-end represents all costs assigned to goods partially completed at that particular time.

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Last Reviewed: September 15, 1996