Accounting is a versatile system which serves a large number of purposes in the modern business world. Hence, the following terminologies need to be understood.
Accounting – process of identifying, measuring, and reporting financial information of an entity
Accounting Equation – assets = liabilities + equity
Accounts Payable – money owed to creditors, vendors, etc.
Accounts Receivable – money owed to a business, i.e. credit sales
Accrual Accounting – a method in which income is recorded when it is earned and expenses are recorded when they are incurred, all independent of cash flow
Accruals – a list of expenses that have been incurred and expensed, but not paid or a list of sales that have been completed, but not yet billed
Amortization – gradual reduction of amounts in an account over time, either assets or liabilities
Asset – property with a cash value that is owned by a business or individual
Audit Trail – a record of every transaction, when it was done, by whom and where, used by auditors when validating the financial statement
Auditors – third party accountants who review an entity’s financial statements for accuracy and provide a statement to that effect
Balance Sheet – summary of a company’s financial status, including assets, liabilities, and equity
Bookkeeping – recording financial information
Budgeting – the process of assigning forecasted income and expenses to accounts, which amounts will be compared to actual income and expense for analysis of variances
Capital Stock – found in the equity portion of the balance sheet describing the number of shares sold to shareholders at a predetermined value per share, also called “common stock” or “preferred stock”
Capital Surplus – found in the equity portion of the balance sheet accounting for the amount shareholders paid that is greater or lesser than the “capital stock” amount
Capitalized Expense – expenses that are accumulated, not expensed as incurred, to be amortized over a period of time; i.e. the development cost of a new product
Chart of Accounts – a listing of a company’s accounts and their corresponding numbers
Cash-Basis Accounting – a method in which income and expenses are recorded when they are paid.
Cash Flow – a summary of cash received and disbursed showing the beginning and ending amounts
Closing the Books/Year End Closing – the process of reversing the income and expense for a fiscal or calendar year and netting the amount into “retained earnings”
Cost Accounting – a type of accounting that focuses on recording, defining, and reporting costs associated with specific operating functions
Cost of Goods Sold – expenses incurred in producing inventory; this may include materials, labors, storage costs, depreciation, and overhead.
Credit – an account entry with a negative value for assets, and positive value for liabilities and equity.
Debit – an account entry with a positive value for assets, and negative value for liabilities and equity.
Departmental Accounting – separating operating divisions into their own sub entities on the income statement, showing individual income, expenses, and net profit by entity
Depreciation – recognizing the decrease in the value of an asset due to age and use
Dividends – amounts paid to shareholders out of current or retained earnings
Double-Entry Bookkeeping – system of accounting in which every transaction has a corresponding positive and negative entry (debits and credits)
Equity – money owed to the owner or owners of a company, also known as “owner’s equity”
Financial Accounting – accounting focused on reporting an entity’s activities to an external party; ie: shareholders
Financial Statement – a record containing the balance sheet and the income statement
Fixed Asset – long-term tangible property; building, land, computers, etc.
General Ledger – a record of all financial transactions within an entity
Goodwill – an intangible asset reflecting the value of an entity in excess of its tangible assets
Income Statement – a summary of income and expenses
Inventory – merchandise purchased for resale at a profit
Inventory Valuation – the method to set the book value of unsold inventory: i.e. “LIFO,” last in, first out; “FIFO,” first in, first out; “average,” an average cost over a given period, “last cost,” the cost based on the last purchase; “standard,” a “deemed” amount related to but not tied to a specific purchase, “serialized,” based on a uniquely identifiable serial number or character of each inventory item
Invoice – the original billing from the seller to the buyer, outlining what was purchased and the terms of sale, payment, etc.
Job Costing – system of tracking costs associated with a job or project (labor, equipment, etc) and comparing with forecasted costs
Journal – a record where transactions are recorded, also known as an “account”
Liability – money owed to creditors, vendors, etc
Liquid Asset – cash or other property that can be easily converted to cash
Loan – money borrowed from a lender and usually repaid with interest
Master Account – an account on the general ledger that subtotals the “subsidiary accounts” assigned to it; i.e. Cash might be the master account for a list of depository accounts at banks
Net Income – money remaining after all expenses and taxes have been paid
Non Cash Expense – recognizing the decrease in the value of an asset; i.e. depreciation and amortization
Non-operating Income – income generated from non-recurring transactions; ie: sale of an old building
Note – a written agreement to repay borrowed money; sometimes used in place of “loan”
Operating Expense (opex) – money used in the process of selling inventory (as opposed to developing inventory)
Operating Income – income generated from regular business operations
Other Income – income generated from other than regular business operations, i.e. interest, rents, etc.
Payroll – a list of employees and their wages
Posting – the process of entering then permanently saving or “archiving” accounting data
Profit – see “net income”
Profit/Loss Statement – see “income statement”
Reconciliation – the process of matching one set of data to another; i.e. the bank statement to the check register, the accounts payable journal to the general ledger, etc.
Retained Earnings – the amount of net profit retained and not paid out to shareholders over the life of the business
Revenue – total income before expenses.
Shareholder Equity – the capital and retained earnings in an entity attributed to the shareholders
Single-Entry Bookkeeping – system of accounting in which transactions are entered into one account
Statement of Account – a summary of amounts owed to a vendor, lender, etc.
Subsidiary Accounts – the subaccounts that are totaled on the financial statement under “master accounts;” i.e. “Cash-ABC Bank” might be one of several subsidiary accounts that are subtotaled under “Cash”
Supplies – assets purchased to be consumed by the entity
Treasury Stock – shares purchased by the entity from shareholders, reducing shareholder equity
Write-down/Write-off – an accounting entry that reduces the value of an asset due to an impairment of that asset; i.e. the account receivable from the bankrupt customer