Glossary of Accounting Terms

Accelerated Depreciation: A method of calculating depreciation in which a greater amount of depreciation expense is recorded in the earlier years of an asset’s useful life than in later years.

Accounting Period: Any period of time designated for which financial statements are prepared.

Accounting Procedures: All procedures that discover, identify, record, classify, maintain, and summarize financial information to either produce financial reports or to provide internal control.

Accounting System: The methods and records established to identify, assemble, analyze, classify, record, and report transactions and to maintain accountability for assets and liabilities.

Account Receivable: A customer’s or client’s promise to pay for goods or services provided.

Accounts: Sub-categories of assets, liabilities, equity, revenue and expenses.

Accounts Payable: A firm’s promise to pay for goods or services provided.

Accrual Basis of Accounting: The recognition of revenue when earned and expenses when incurred as distinguished from the cash basis of accounting.

Accumulated Depreciation: The contra asset account that reflects depreciation expense taken in the current and previous periods.

Aging Schedule: A schedule that classifies accounts receivable by the amount of days the receivable has been unpaid.

Allowance for Bad Debts: A contra-asset valuation account used to estimate the portion of accounts receivable that is estimated to be uncollectable.

Amortization: The gradual reduction or liquidation of an amount over a period of time according to a specified schedule.

Annuity: A series of equal money payments made or received at equal intervals over a designated period of time.

Assets: Tangible or intangible things that allow a firm to produce goods and / or services.

Audit: A set of tests and procedures applied by an independent accounting firm to determine the accuracy of financial statements.

Balance Sheet: A financial statement that is used to determine the financial condition of a company. It lists the assets, liabilities, and equity of the firm at the end of an accounting period.

Betterment: An addition made to, or change made in, a capital asset, other than maintenance, that is anticipated to extend its expected useful life or to increase its capacity, efficiency, or quality of output.

Books of Original Entry: Forms on which transactions are initially recorded.

Book Value: The net amount at which an asset or asset group appears on the books of account, as distinguished from its market value.

Business Firm: An organization established to earn a profit by the selling of goods and/or services.

Cash Basis of Accounting: A system of accounting that recognizes revenue only when cash is received from customers or clients and expenses only when cash is paid.

Cash Equivalent: Short-term, highly liquid investments that are both readily convertible to cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less meet this definition.

Cash Flow Statement: A financial statement that reports cash flow from operating, financing, and investing activities.

Check Register: The document used to record pertinent details relating to expenses and the coding for each check issued.

Contingent Liability: Items which may become liabilities as a result of conditions undetermined at a given date, such as guarantees, pending law suits, judgments under appeal, unsettled disputed claims, unfilled purchase orders, and uncompleted contracts.

Cost Accounting: The method of accounting which provides for accumulating and recording of all the elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work or a specific job.

Cost of Goods Sold: The cost associated with selling goods (inventory).

Credits: Entries made on the right hand side of “T” accounts.

Current Assets: Resources that are available, or can readily be made available, to meet the cost of operations or to pay current liabilities.

Current Liabilities: Those obligations which are payable within one year from current assets or current resources.

Cut-Off Date: A selected date whereby transactions generally are stopped to provide for closing of the books of accounts for a given period, or for audit purposes.

Debits: Entries made on the left side of “T” accounts.

Deferred Revenue: Cash collected from customers or clients prior to the delivery of goods and services.

Depreciation: The portion of the cost of a capital asset representing the expiration in the useful life of the capital asset attributable to wear and tear, deterioration, action of the physical elements, inadequacy, and obsolescence which is charged off during a particular period. In accounting for depreciation, the cost of a capital asset, less any salvage value, is spread over the estimated useful life of such an asset.

Depreciation Expense: The portion of an asset’s cost allocated to the current accounting period.

Direct Costs: Costs that include direct materials and labor.

Direct Expenses: Expenses which are charged directly as a part of the cost of a product or service, or of a department or operating unit, as distinguished from overhead and other indirect costs which must be prorated among several products or services, departments, or operating units.

Dividends: Cash distributions from corporate profits to its shareholders.

Double Entry Bookkeeping: A system of record keeping which requires two entries to the records (a debit and a credit) for every accounting event.

Employee Bonding: Insurance against employee theft and embezzlement.

Equity: The difference between a firm’s assets and liabilities.

Estimated Revenue: This is a budgetary term that identifies revenues expected to be received or accrued during a given period.

Exchange Transactions: Transaction in which each party receives and gives up essentially equal values.

Expenses: Decreases in net total assets. Expenses represent the cost of operations incurred during the current period regardless of the timing of the related disbursements.

Fidelity Bond: A written promise to indemnify against losses from theft, embezzlement, defalcation, and misappropriation of money by employees.

FIFO: (First in, First out) A flow assumption in valuing ending inventories that assumes that the first goods sold were the first ones purchased.

Fixed Asset Schedule: A record of a firm’s assets that tracks acquisition dates and costs, depreciation methods used, and cumulative amounts of depreciation taken.

Fixed Assets: Tangible assets such as machinery and equipment, furniture and fixtures, and real property.

Fixtures: Attachments to buildings, which are not intended to be removed, and which cannot be removed without damage to the buildings. Those fixtures with useful lives presumed to be as long as that of the building itself are considered a part of the building; all others are classified as equipment.

General Journal: The journal in which all entries not recorded in special journals are recorded.

General Ledger: The collection of all accounts used by a firm to record changes in assets, liabilities, revenue, expenses, and equity.

Generally Accepted Accounting Principles (GAAP): The most widely accepted rules of financial accounting.

Generally Accepted Auditing Standards (GAAS): These are the standards established by the AICPA for the conduct and reporting of financial audits.

Going Concern Value: The combined value of a firm’s assets that would be paid by a purchaser who intended to continue operating the business.

Goodwill: The difference between a firm’s going concern value and its liquidation value.

Gross Profit: The difference between total sales and costs of goods sold.

Historical Cost Principle: The listing of asset values based upon their acquisition price rather than their current market value.

Income Statement: A financial statement that measures economic performance in the most recent accounting period. The statement reflects revenue and expenses.

Intangible Assets: Assets such as patents, trademarks, and goodwill.

Internal Controls: The procedures used by a firm to protect its assets, insure reliability of its financial information, and prevent fraud.

Inventory: Goods held by a firm for resale to its customers.

Leasehold: The right to the use of real estate by virtue of a lease, usually for a specified term of years, for which consideration is paid.

Lease-Purchase Agreements: Contractual agreements which are termed “leases,” but in substance they are purchase contracts.

Leverage: The degree to which a firm uses debt to finance its operations.

Liabilities: A firm’s obligations to its creditors.

LIFO: (Last in, First out) An inventory flow assumption that assumes that the most recently sold inventory is also the most recently purchased.

Liquidation Value: The amount that would be paid for a firm’s assets on a piece meal basis.

Liquidity: The availability of cash in a business.

Long-Term Obligations: Those obligations expected to mature at some future date and therefore not expected to be liquidated with currently existing resources or current assets.

Loss: The excess of expenses over revenue.

Matching Concept: The concept behind accrual accounting that holds that revenue should be recognized at the same time as related expenses are incurred.

Materiality: A threshold amount accountants utilize in deciding if adjustments are needed to particular accounts.

Money Market Investments: A short-term, highly liquid debt security, including commercial paper and U.S. Treasury obligations.

Notes Payable: A liability account reflecting amounts owed from an unconditional written promise to pay a certain sum of money upon demand or at a fixed or determinable time.

Notes Receivable: An asset account reflecting amounts owing from an unconditional written promise to pay a certain sum of money on demand or at a fixed or determinable time.

Notes to the Financial Statements: The summary of significant accounting policies and other disclosures required for a fair presentation of the financial statements in conformity with generally accepted accounting principles (GAAP) which are in addition to and not included on the face of the financial statements. The notes to the financial statements are in integral part of the financial statements.

Overhead: Those elements of cost necessary in the production of a good or service which are not directly traceable to the product or service. These costs usually relate to expenditures that do not become an integral part of the finished product or service, such as rent, utilities, management, and supervision.

Partnership: A form of unlimited liability firm with more than one owner.

Par Value: In the case of bonds, the amount of principal that must be paid at maturity. Par value is referred to as the face value of the security.

Periodic Inventory Method: A method of recording inventory purchases that reflects adjustments to the inventory account only at the end of an accounting period.

Perpetual Inventory Method: A method of recording inventory purchases that changes the inventory account only at the end of an accounting period.

Petty Cash: A sum of money set aside for making change or paying small obligations when the issuance of a check would be too expensive and time consuming.

Posting: The process of transferring transaction information recorded in books of original entry to general ledger “T” accounts.

Prepaid Expenses: A firm’s payment for goods and services to be provided at some later time.

Price Index: A method of comparing the purchasing power of money over different time periods.

Profit: The excess of revenues over expenses.

Purchase Order: A document that authorizes the delivery of specified merchandise or the rendering of certain services.

Replacement Cost: The amount of cash or other consideration that would be required today to obtain the same asset or its equivalent.

Retained Earnings: Undistributed profits of a corporation.

Retainers: A form of deferred revenue collected by attorneys, accounts and other professionals.

Revenue: Cash or receivables received from customers or clients in exchange for goods and services provided.

Salvage Value: An estimate of the amount that will be realized at the end of the useful life of a depreciable asset.

Securities: Bonds, notes, mortgages, or other forms of negotiable or nonnegotiable instruments.

Serial Bonds: Bonds for which the principal is repaid in periodic installments over the life of the issue.

Shareholders: The owners of a corporation.

Sole Proprietorship: An unlimited liability firm with one owner.

Straight Line Depreciation: A method of calculating depreciation expense that allocates an asset’s purchase cost evenly over the asset’s expected useful life.

Subsidiary Ledgers: Records that detail the sales and payment histories for individual customers in the case of accounts receivable, or purchase and payment histories in the case of accounts payable.

Suspense Account: An account that carries charges or credits temporarily pending the determination of the proper account or accounts to which they are to be posted. It does not appear in financial statements.

“T” Accounts: General ledger accounts that have a “T” format that clearly establish a left side and right side.

Transactions: Any events that cause a change in assets, liabilities, equity, revenue, and/or expenses.

Trial Balance: A list of balances of the accounts in a ledger kept by double entry with the debit and credit balances shown in separate columns.

Unlimited Liability Firms: Businesses whose owners remain liable for the actions of a business beyond the amount they actually invest.

Useful Life: An estimate of the total time that an asset is usable and in service.

Weighted Average Cost Method: An ending inventory valuation method based upon the weighted average of purchase costs during an accounting period.


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