A
Account - a record that shows an increase or decrease in the financial statements consisting of three parts: Title, Debit and Credit.
Account Form - A way of showing the Balance Sheet where the Assets are listed on the left. Liabilities are on the right, with equity under them.
Accounting - Information system that provides reports to stakeholders about the economic activities and condition of a business.
Accounting Cycle - The 10 step process that begins with the analyzing and journaling of transactions, and ends with preparing the records for the next period's transactions.
Accounting Equation - Assets are equal to the Liabilities plus the Owner(s)/Shareholders' Equity. The detailed equation is Assets = Liabilities + Contributed Capital + Retained Earnings. Both sides of the equation must equal.
Accounting Period Concept - The concept that the economic life of a business can be divided into time periods such as monthly, quarterly and yearly.
Accounts Payable - Future money to be paid by the company (owed by the company) for goods or services performed for the company.
Accounts Receivable - Future money to be paid to the company (owed to the company) for goods or services performed by the company. They are expected to be collected in a relatively short time, such as 30 or 60 days.
Accrual Basis of Accounting - Revenues are reported in the period in which they are earned whether or not cash has been received for them.
Accrued Assets - See Accrued Revenues.
Accrued Expenses - Expense that have been incurred but have not been recorded in the accounts. Accrued wages owed to employees at the end of a period and accrued taxes are two examples of this.
Accrued Liabilities - See Accrued Expenses.
Accrued Revenues - Revenues that have been earned but have not been recorded in the accounts. Fees for services that an attorney has provided but not yet billed and unbilled commissions by a travel agent are two examples of this.
Accumulated Depreciation Account - The account credited during the adjusting entry for depreciation of assets.
ACH - Automated Clearing House. This is a network for clearing electronic funds transfers among individuals, companies, and banks.
Adjusted Trial Balance - Trial balance done after entering adjusting entries.
Adjusting Entries - The journal entries to bring the accounts up to date during the adjusting process.
Adjusting Process - The analysis and updating of accounts at the end of the period before the financial statements are prepared.
Administrative Expenses - Expenses that are incurred in the administration or general operations of the business. These include office salaries, depreciation of office equipment, and office supplies used. Credit card expenses are generally classified as administrative expenses.
Allocation Method - The cost of an item to be depreciated over its estimated life is a fixed value and does not change as market value changes.
Allowance For Doubtful Accounts - Contra Asset used for recording amounts that are expected to not be collected in the Allowance Method.
Allowance Method - The write-off method that uses estimating uncollectable accounts at the end of the accounting period. This method allows for the matching principle to be used, matching the bad debt in the period that the transaction occurred.
APR - Annual Percentage Rate - The percentage rate if the loan were for a year.
Assets - Resources owned by a business (items that will be converted to cash or will be used by the business in the future). This includes cash, land, supplies and Accounts Receivable.
Automated Clearing House - See ACH.
Average Cost Method - This is the inventory cost method that takes the average of the purchase cost for the units on hand to determine the cost of merchandise sold. This number falls between the amounts calculated using the FIFO and LIFO methods.
B
Balance of Account - The difference between the debit and credit totals of an account.
Balance Sheet - A list of the assets, liabilities and owner's equity as of a specific date. Total of Assets must equal total of liabilities and equity. Retained earnings are brought in from the Retained Earnings Statement, and are listed under equity. There are two ways to show the Balance Sheet: Account Form and Report Form.
Bank Reconciliation A financial statement that is used to balance the cash account with amounts listed on the bank statement.
Bonds - Bonds are a form of an interest-bearing note.
Business - Organization in which basic resources (inputs - ie, material and labor) are assembled and processed to provide goods and services (outputs) to customers.
Business Entity Concept - This is the concept that the business entity is separate from its owners. Economic data should be reported for the business only.
Business Stakeholder - A person or entity that has an interest in the economic performance and well-being of a business. This includes owners, suppliers, customers and employees.
C
Capital Expense - An expense that improves the asset for its useful life, or extends the useful life of the fixed asset.
Capital Lease - A lease in which the item being leased is treated as if it were purchased by the lessor. This allows the lessor to write off the expense as an asset over the life of the lease.
Capital Market Stakeholder - Provide the major financing for the business. This includes banks and other long-term creditors.
Capital Stock - Shares of ownership of the company that are given to an individual in exchange for cash to be used by the company.
Cash and Cash Equivalents - The line on the balance sheet that represents the total of both cash and cash equivalents.
Cash Basis of Accounting - Revenues and expenses are recorded in the same period that cash is received or paid.
Cash Equivalents - Investments that are expected to be converted into cash within 90 days.
Cash Short and Over Account - The account used to note discrepancies in recording cash sales or errors in making change that cause a difference between the cash in the register, and cash on the ledger. At the end of the accounting period, a debit balance in this account is included in the Miscellaneous Expense section of the Income Statement. A credit balance is included in the Other Income section of the balance sheet.
Chart of Accounts - The listing of the accounts in the ledger. These are usually listed in the order in which they appear in the financial statements. The balance sheet accounts are usually listed first in the order of assets, liabilities and stockholder's equity.. The income statement accounts are then listed in the order of revenues and expenses.
CIA - Certified Internal Auditor, sponsored by the Institute of Internal Auditors.
CISA - Certified Information Systems Auditor, sponsored by the Information Systems Audit and Control Association.
Clearing Account - See Income Summary.
Closing - The act of zeroing temporary accounts at the end of one time period to prepare for beginning the next time period in the Accounting Period Concept.
Closing Entries - The entries used to zero out accounts during the closing process.
Closing Process - See Closing.
CMA - Certified Management Accountant. Sponsored by IMA (Institute of Management Accountants)
Contra Account - See Accumulated Depreciation Account.
Contra Asset Account - See Contra Account.
Controlling Account - The account on the general ledger that summarizes the balance of the accounts in a subsidiary ledger.
Corporation - A business that is organized under state or federal statutes as a separate legal taxable entity. These generate 90% of the total dollars of business receipts received, and comprise about 20% of the business organizations in the US.
Cost Concept - The amount entered is the exchange amount - what the willing buyer and willing seller agreed to. Actual cost. Utilizes Objectivity and Unit of Measure.
Cost of Merchandise Purchased - The net purchase, plus Transportation In.
Cost of Merchandise Sold - The amount that is reported as an expense when merchandise is sold. it is the original cost, minus Purchase Discounts, minus Purchase returns and allowances, plus transportation costs of the merchandise.
CPA - Certified Public Accountant
CPP - Certified Payroll Professional, sponsored by the American Payroll Association.
Credit - A credit is either an increase or decrease in an account. The type of account determines if it is increased or decreased. Assets, expense accounts and dividends are all decreased by credits. Liabilities, capital stock, retained earnings and revenue are all increased by credits.
Credit Memorandum - A credit invoice issued by a seller to a buyer to show the amount of and reason for sales returns and allowances.
Credit Period - The amount of time defined by the credit terms that the buyer has to pay the seller.
Credit Terms - The terms defined on the invoice for when payment is due.
D
Debit - A debit is either an increase or decrease in an account. The type of account determines if it is increased or decreased. Assets, expense accounts and dividends are all increased by debits. Liabilities, capital stock, retained earnings and revenue are all decreased by debits.
Debit Memorandum - A memorandum issued by a buyer to the seller informing the seller of the amount the buyer proposes to debit from their account due to returns, price discrepancies or other needed adjustments.
Deferred Expenses - See Prepaid Expenses.
Deferred Revenues - See Unearned Revenues.
Delivery Expense - The account generally used to show transportation charges for merchandise.
Deposits in Transit - Deposits that a company has made to a bank that have not yet appeared on the bank statement. Generally these are due to being made on the last day of the accounting period.
Depreciation - The decrease in usefulness of long life items over a period of time.
Depreciation Expense - The periodic expense of a portion of the cost of a fixed asset each year of its useful life.
Depreciation Expense Account - The account debited in the adjusting entry for depreciation.
Direct Write-Off Method - Write-Off method where bad debt expense is recorded only when an account is judged to be uncollectable and is written off.
Dividends - Distributions of earnings to a company's stockholders.
Double-Entry Accounting System - When entering transactions in a journal, each transaction affects two accounts. These transactions then have to be recorded in both accounts.
E
EFT - Electronic Fund Transfer. These are payments made electronically through an ACH, in which actual cash or paper checks are not used.
Electronic Fund Transfer - See EFT.
End-Of-Period Spreadsheet - Step 5 of the Accounting Cycle. This is an optional step that summarizes the unadjusted trial balance, the adjustments detailed in step four, what the adjusted totals are, which entries show on the Income Statement and which ones show on the Balance Sheet.
Estimated Inventory Costs - Estimations of the inventory cost when the perpetual inventory system is not used, and taking a physical inventory count is not practical. The two types of estimating inventory are retail inventory method and gross profit method.
Ethics - The moral principles that guide the conduct of individuals. In business, the main three factors of ethics are individual character (honesty, integrity, & fairness), firm culture ("Tone at the Top" - senior managers set the firm culture), and laws and enforcement (SOX).
Expenses - Operational costs of the company.
F
FASB - Financial Accounting Standards Board.
Fees Earned - Title on the Income Statement for service businesses to represent revenues.
FIFO - First-In, First-Out method of inventory costing. This assumes that the oldest items purchased for inventory are the first ones sold.
Financial Accounting - Primarily concerned with the recording and reporting of economic data and activities for a business. Primarily for owners, creditors, governmental agencies and the public.
Financial Statements - The reports that provide the information of the business' transactions. The principle statements are: Income Statement, Retained Earnings Statement, Balance Sheet, Statement of Cash Flows. Header always is three rows. First row is company name, second is type of report, third is "for the month ended" or the date (balance sheet).
Financing Activities - Cash flow generated from cash investments by stockholders, borrowings and cash dividends.
Fiscal Year - The annual accounting period adopted by a business.
Fixed Assets - Physical resources that are owned and used by a business and are permanent or have a long life. Other than land, they are subject to depreciation.
FOB - Freight on Board.
FOB Destination - Transportation where the ownership transfers to the buyer when the merchandise is delivered.
FOB Shipping Point - Transportation where the merchandise is delivered to the transportation or delivery company, and that is when the ownership is transferred to the buyer.
G
GAAP - Generally Accepted Accounting Principles. These are currently set by FASB. However, international rules are set by IFRS. Eventually, these rules may overtake FASB. The SEC has the ultimate authority per SOX on what is GAAP.
General Ledger - Primary ledger when used with subsidiary ledgers that contains all of the balance sheet and income summary accounts.
Government Stakeholders - City/State/Federal governments that have an interest in the economic performance of businesses, so they can collect taxes. Workers for the business are taxed on wages. The better a business does, the more taxes can be collected. City and state governments often provide incentives to get businesses into their jurisdictions.
Gross Pay - Total earnings of an employee for a payroll period.
Gross Profit - Net Sales minus the cost of merchandise sold. This does not take into account operating expenses.
Gross Profit Method - Estimated inventory cost method in which the estimated gross profit for the period is used to estimate the inventory at the end of the period.
H
I
IFRS - International Financial Reporting Standards
Income and Expense Summary - See Income Summary.
Income From Operations - See Operating Income.
Income Statement - Summary of the revenues and expenses for a specific period of time. All of the revenues, minus the expenses (but not dividends). If the amount is positive, Net Income. If the amount is negative, Net Loss.
Income Summary - An account used to clear the balances in the Temporary Accounts at the end of a period.
Intangible Assets - A long-term assets that is useful in the operations of the business. This includes patents, copyrights, trademarks and goodwill
Internal Stakeholders - Managers and employees of the business.
Inventory - Merchandise on hand to be sold to customers.
Inventory Card - A graphical representation that shows the transactions of purchasing and selling inventory, and the balance of the inventory for the units based off unit cost.
Inventory Cost Flow Assumption - The method used to determine the cost of merchandise sold when there are different units of the same item, that have different costs. The three methods are FIFO, LIFO and Average.
Inventory Shortage - See Inventory Shrinkage.
Inventory Shrinkage - The difference between the actual amount of inventory on hand and what is shown in the inventory records. This difference is usually caused by shoplifting, employee theft, or errors in recording or counting inventory.
Investing Activities - Cash flow generated from acquisition and sale of relatively permanent assets, such as land.
J
Journal - A record of transactions for a business.
Journal Entry - The form that the transaction is recorded in the journal. The title of the amount to be debited is listed first, followed by the amount to be debited. The title of the account to be credited is listed below and to the right of the debit, followed by the amount to be credited.
Journaling - The process of recording the transactions in a journal.
K
L
LCM Method - See Lower-of-Cost-or-Market Method.
Ledger - A group of accounts for a business entity. This is a history of the financial transactions by account.
Liabilities - Claims against the assets held by creditors (non-owners). This includes Accounts Payable.
LIFO - Last-In, First-Out method of inventory costing. This assumes that the newest items purchased for inventory are the first ones sold.
Limited Liability Company (LLC) - this combines the attributes of a partnership and a corporation in that it is organized similar to a corporation, but is taxed more like a partnership.
Lower-of-Cost-or-Market Method - Method of valuing inventory when the cost of replacing an item is lower than the original purchase cost.
M
MACRS - Modified Accelerated Cost Recovery System used by the IRS for determining fixed asset depreciation.
Managerial Accounting - Also called Management Accounting. Uses both financial accounting and estimated data for management in running day-to-day operations and planning future operations.
Manufacturing business - change basic inputs into products that are then sold to individual customers. Example: Dell Computers. NOTE: Manufacturing businesses will sometimes sell to merchandising businesses to act as the middleman to sell to the individual customers.
Matching Concept - On the Income Statement, this concept is applied by matching the expenses with the revenue generated during a period of time.
Merchandise available for sale - The beginning merchandise inventory plus any merchandise purchased during the accounting period.
Merchandise Inventory - Inventory on hand (that has not been sold) at the end of an accounting period.
Merchandising Business - Provides products they purchase from other businesses to customers. Example: WalMart.
Multiple-Step Income Statement - A type of income statement that contains several sections, subsections and subtotals
N
Natural Business Year - A Fiscal Year that ends when business activities have reached the lowest point in its annual operating cycle.
Net Income - When the total of revenues minus expenses (but not dividends) is a positive number. This is represented by a positive number on the Income Statement.
Net Loss - When the total of revenues minus expenses (but not dividends) is a negative number. This is represented by a negative number on the Income Statement.
Net Pay - The amount the employer must pay the employee. Gross pay minus all deductions.
Net Purchases - The original purchase amount, minus purchase returns and allowances, minus purchase discounts.
Net Realizable Value - The value of inventory that have to be sold below cost for one reason or another. The Net Realizable Value is equal to the estimated selling price less any direct cost of selling the merchandise.
Net sales - The amount after subtracting sales returns and allowances, and sales discounts, from sales.
Nominal Accounts - See Temporary Accounts.
Not Sufficient Funds Check - See NSF.
Notes Receivable - A customer's written promise to pay an amount and possibly interest at an agreed-upon rate.
NSF - Not Sufficient Funds Check. When a check is presented to the bank of the person writing the check, the bank may reject it if there is not enough money in the check writer's account. These checks are then returned as NSF checks.
O
Objectivity Concept - Requires that accounting records be based on objective evidence.
Operating Activities - General operating activities of the company that generate cash flow.
Operating Expenses - The selling expenses and administrative expenses of a company.
Operating Income - This is determined by taking the gross profit and subtracting operating expenses.
Operating Lease - A standard lease where the lessee records the payments by debiting rent expense and crediting cash.
Other Expenses - Expenses that cannot be traced directly to operations of the company. These include interest expenses that result from financing activities, and losses incurred in the disposal of fixed assets.
Other Income - Revenue from sources other than the primary operating activity of a business. In a merchandising business, these would include income from interest, rent and gains from the sale of fixed assets.
Other Income and Expenses - Income and expenses on the Income Statement that are not directly related to the primary operating sources of the business.
Owner's Equity - Claims against the assets held by the owners. Owners equity includes Capital Stock, Revenues and Expenses. Equity is increased by investments by owners and by revenues. Equity is decreased by expenses and dividends.
P
Par - The value of one share of stock as declared in the articles of incorporation.
Partnership - Similar to a proprietorship but are owned by two or more people. These comprise about 10% of the US business organizations. They combine the skills and resources of more than one person.
Payroll - The amount paid to employees for the services they provide during a period.
Periodic System - Merchandise accounting system, in which the merchandise on hand at the end of the period is determined by taking a physical count of the inventory. Under this system, inventory records do not show the amount available for sale, nor the amount sold during the period. This is the "old school" system of determining merchandise.
Perpetual System - The system of accounting for merchandise inventory in which each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. The amount of merchandise available for sale and the amount sold are perpetually disclosed in the inventory records. This is the modern style of determining merchandise.
Plant Property and Equipment (PP&E) - See Fixed Assets.
Post-Closing Trial Balance - A trial balance created after the closing entries have been posted to verify that the accounts are in balance for the beginning of the next period. The account names and balance should match exactly to the Balance Sheet at the end of the period.
Posting - The process of transferring transactions from the journal to the accounts in the ledger.
Prepaid Expenses - Items that are initially recorded as assets, but are expected to become expenses over time or through normal business operation. Supplies and prepaid insurance are two examples of this.
Product or Service Market Stakeholders - This includes customers who purchase products or services and vendors who supply inputs to the business.
Profit - The difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods or services.
Private Accounting - Accountants employed by a business firm or a not-for-profit organization.
Profit and Loss Summary - See Income Summary.
Profit Margin - Net Income divided by Net Sales.
Proprietorship - Owned by one individual. These comprise about 70% of the business organizations in the US. Their cost of organizing is low, are limited to the financial resources of the owner, and are used by small businesses.
Public Accounting - Accountants and their staff who provide services on a fee basis.
Public Company Accounting Reform and Investor Protection Act of 2002 - See SOX.
Purchases discounts - Amounts granted to the buyer for early payments of items purchased on account.
Purchases returns and allowances - Amounts granted to the buyer for merchandise that is returned, or reported as damaged, to the seller.
Q
R
Real Accounts - Accounts on the Balance Sheet that are carried over from one period to the next.
Receivables - Money claims against other entities including people, businesses, and other organizations.
Report Form - A way of showing the Balance Sheet where the Assets are on top, with liabilities and then equity under it.
Residual Value - The estimated value of an asset at the end of its useful life.
Retail Inventory Method - An estimated inventory cost method in which the retail prices of all merchandise are maintained and totaled. The sales for the period are deducted from the retail price of the goods that were available for sale during the period to arrive at the inventory at retail. The estimated inventory cost is then computed by multiplying the inventory at retail by the ratio of retail price for the merchandise available for sale.
Retained Earnings - A companies revenues, minus expenses, minus dividends. The amount of money left over from earnings after paying expenses and dividends.
Retained Earnings Statement - A summary of the changes in the earnings retained in the corporation for a specific period of time. Previous retained earnings, plus net income from Income Statement, minus dividends.
Revenue and Expense Summary - See Income Summary.
Revenue Expense - Expenses to fixed assets that only benefit the current period, such as general repairs and maintenance.
Revenue Recognition Concept - The accounting concept that revenue can be recognized when earned, rather than waiting for cash to be received.
Revenues - Income generated by the company.
S
Sales - The total amount charged customers for merchandise sold. This includes cash sales, and sales on account.
Sales discounts - Amounts granted by the seller for early payments of items purchased on account.
Sales returns and allowances - An amount on the Multiple-Step Income Statement that represents amounts granted by the seller for damaged or defective merchandise.
Sales Tax Payable - The account used to record the collection and payment of sales tax.
Sarbanes-Oxley Act of 2002 - See SOX.
SEC - Securities and Exchange Commission. this is the US government agency that has regulatory power over the US stock exchanges, and the reporting requirements of the corporations whose stock is traded on those exchanges.
Selling Expenses - Expenses incurred directly in the selling of merchandise. These include sales people's salaries, store supplies used, depreciation of store equipment, delivery expenses and advertising.
Service Business - Provides services rather than products to customers. Example: Airlnes.
Single-Step Income Statement - This is not as detailed as the multiple-step income statement. In this income statement, the total of all expenses are deducted from the total of all revenues in one step. This form emphasizes total revenues and total expenses as the factors that determine net income. With this form, amounts such as gross profit and income from operations are not readily available for analysis.
Slide - An error that occurs when the number is shifted one decimal place. For example, entering $2500 instead of $250.
SOX - Sarbanes-Oxley Act of 2002. Established by the Public Company Accounting Oversight Board (PCAOB). This expanded management oversight and reporting, and strengthened whistle blowing protections.
Statement of Cash Flows - A summary of the cash receipts and cash payments for a specific period of time. Net cash flow (final amount) becomes Cash on the Balance Sheet. There are three forms of cash flow that generate revenue for a business: Operating Activities, Investing Activities, and Financing Activities.
Stock - Ownership of a company. The number of shares of stock that a company can issue are declared in the articles of incorporation. There are two main classes of stock: preferred and common.
Subsidiary Ledger - A ledger containing individual accounts with a common characteristic such as Accounts Payable. The total of the subsidiary ledger is then summarized in the general ledger by a controlling account.
T
T Account - A T account is a simple representation of an account. It is named this because it resembles the letter T.
Tangible Asset - An asset that has physical substance.
Temporary Accounts - Accounts on the Income Statement, and Dividends (reported on the Retained Earnings Statement) that are not carried over from one period to the next. These accounts are zeroed out through Closing.
Trade Discounts - Discounts from the list prices in published catalogs, or special discounts offered to certain classes of buyers.
Transportation In - The cost associated with transporting merchandise purchased.
Transposition - An error that occurs when the order of the digits of a number are switched. For example, entering $2549 instead of $2594.
Treasury Stock - Stock that has been repurchased by the company.
Trial Balance - A listing of the accounts entered in the ledger to create a total of debits and credits. This is used to verify that there has not been an error in recording the debits and credits in the ledger. The total of the debits must equal the total of the credits, or there has been an error.
Two-Column Journal - An all-purpose journal used by some businesses for recording journal entries.
U
Unadjusted Trial Balance - Trial balance done prior to entering adjusting entries.
Unearned Revenues - Items that are initially recorded as liabilities but are expected to become revenues over time or through normal business operation. Unearned rent, school tuition received in advance by a school, annual retainer fee received by an attorney and magazine subscriptions received in advance by a publisher are examples of this.
Unit of Measure Concept - Economic data is to be recorded in dollars.
V
W
X
Y
Z