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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



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