Accounting Terminology

The action or process of keeping track of your financial accounts and transactions.

The process of recording transactions throughout the year, for all aspects of your business, resulting in a set of financial statements.

Money or other obligations owed to creditors for services and materials, a Liability on the Balance Sheet.

Money or other obligations due for services rendered or items sold on terms, an Asset on the Balance Sheet.

Represents a method of recording accounting transactions when they occur, whether or not cash has changed hands.

Represents expenses that are incurred prior to being paid. For example, salaries earned by your employees and paid in a subsequent month are accrued as a liability until they are paid.

Represents revenue that is earned and recorded but not yet received in the form of cash.

The amount of depreciation recorded for an asset since the date the asset was placed into service.

A method of obtaining the expenses incurred by an intangible asset arising from a decline in value as a result of use or the passage of time. Amortization is the acquisition cost minus the residual value of an asset, calculated systematically over an asset’s useful economic life.

The things a company owns, represented on the Balance Sheet as accounts in your Chart of Accounts.

The amount you can estimate you will not collect on debts owed to your business.

The primary financial statement that shows detailed assets, liabilities and equity at a point in time.

An estimate of your business’s expected revenue and expenses used to track progress over the course of a fiscal period.

Represents a method of recording accounting transactions most easily described as accounting for cash transactions. Entries do not affect your financial statements until cash changes hands. In this environment, you do not track receivables and payables. Cash received is recorded as income when received and expenses are recorded when paid.

A list of categories or accounts where transactions are recorded.

An account that is offset against another account, typically with the opposite normal balance.

Represents the cost of items or services sold to customers.

A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is represented as the right side of a T account.

This account represents year to date earnings, not yet recorded into the Retained Earnings account.

A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is represented as the left side of a T account.

Represents income received but not yet earned. This is typically a liability account.

An annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.

Every accounting transaction is comprised of debits that equal credits.

The owner’s interest in the business, which is the total assets minus the total liabilities of a company.

Costs incurred in the business used to generate revenue.

One of the ways to valuate inventory where the cost of an item is recognized on a rotating basis by recording the cost of the oldest items first.

A collection of core reports, including the balance sheet, profit and loss, and the statement of owners equity which taken together represent the financial health of a business.

A period of 12 months, typically a calendar year, but not always, used to track the financial transactions and reports of a business.

Method of record keeping and reporting whereby assets and liabilities are grouped according to the purpose for which they are to be used. Generally used by government entities and not-for-profits.

Generally accepted accounting principles which are a set of norms, rules, and procedures necessary to define the accounting practices of a business, as defined by the Financial Accounting Standards Board or FASB.

One of the key accounting journals used to record transactions that do not typically fall into the other journals.

An accounting record where all of your accounts are maintained.

Represents your revenue from sales of inventory or services, less Cost of Goods Sold, before overhead expenses.

A report defining the revenues and costs of a business over a specific period of time, for example, a quarter or fiscal year.

Physical property held for sale or materials used in a production process to make a product.

A bill prepared by a seller of goods or services and submitted to a customer.

Account ledgers where entries are recorded.

A standardized list of accounts containing the summaries of debit and credit entries.

A complete record of the transactions recorded in each individual account.

The things a company owes in cash or other resources.

Accounting method of valuing inventory under which the costs of the last goods acquired are the first costs charged to expense. One of the ways to valuate inventory where the cost of an item is recognized on a roating basis by recording the cost of the newest, or last, items first.

A debt that falls due more than one year in the future that is to be paid out of noncurrent assets.

The amount added to the price of a product by a retailer to arrive at a selling price.

Excess of the value of assets owned over the liabilities owed by a company.

Difference between current assets and current liabilities; also known as working capital.

Excess or deficit of total revenues compared with total expenses and losses for an accounting period.

Total income minus total expenses.

Sales of gross invoiced amounts less any adjustments for returns, allowances, or discounts taken.

Profit before Other Income is added and Other Expenses are subtracted.

The difference between the revenues of a business and the related costs and expenses, excluding income derived from sources other than its regular activities and before income deductions.

All the costs associated in acquiring an asset.

Represents the expenses of a business independent of how much revenue is generated. Can also be considered Fixed Costs, things like rent, salaries, and utilities.

Relationship between two or more persons based on a written, oral, or implied agreement whereby they agree to carry on a trade or business for profit and share the resulting profits. Unlike a corporation’s shareholders, the partnership’s general partners are liable for the DEBTS of the partnership. A form of business ownership between two or more parties who agree on the management of a business.

A small amount of cash on hand that a company keeps to pay for minor expenses in an office.

An actual count of all merchandise available for resale at the end of an accounting period

Costs incurred to acquire goods or services that are used in the revenue-generating process of a business.

Represents expenses that are paid in advance of incurring them. For example, you might pay a year’s worth of insurance and accrue 1/12 of it each month. This is typically an asset account.

The primary financial statement that shows detailed revenues and expenses for a period of time.

Used to measure the percentage of each sales dollar that results in net income.

Long-term tangible assets used in the continuing operation of a business over a period of time.

A form of ownership, by an individual as opposed to a partnership or corporation. Also known as a sole proprietorship.

Written authorization to a vendor to deliver specified goods or services at an agreed upon price.

A temporary ACCOUNT used under the PERIODIC INVENTORY SYSTEM to record the TOTAL COST of all MERCHANDISE purchased for resale during an accounting period. An account is used to record the total cost of goods acquired for resale during an accounting period.

Discounts taken by a business in return for payment for goods purchased for resale.

An example of a contra account is used to track refunds, credits or allowances made by a supplier when goods or services are returned.

Another term for the financial reports produced quarterly, often at the request of owners, investors or your accountants.

Comparison of two sets of numbers to demonstrate the basis for the difference between them, often associated with banking accounts when comparing the book balance to the bank balance.

Represents the cumulative net income or loss of a business since its inception.

Any exchange of goods or services for money.

A discount that is given to a buyer for early payment for a sale made on terms or credit.

A tax that is levied by a state or city government on the retail sale of goods and services.

All debt obligations coming due within one year are shown on a balance sheet as current liabilities.

One of the core financial statements of a business. It categorizes net cash provided or used during a period as operating, investing and financing activities, and reconciles beginning and ending cash and cash equivalents.

A method of depreciation that reflects an equal amount of wear and tear during each period of an asset’s useful life.

Customer and vendor balances that equal the amount of the Accounts Receivable and Accounts Payable General Ledger accounts.

An accelerated method of depreciation in which the depreciable value of an ASSET is multiplied by a decreasing fraction each year of the asset’s useful life.

A graphical representation in the form of a ‘T’ showing debits (on the left) and credits (on the right) in a specific general ledger account

A list of all your General Ledger accounts and their current balances.

Payments received for services that have not yet been performed.

Consumption tax levied on the value added to a product at each stage of its manufacturing cycle as well as at the time of purchase by the ultimate consumer.

Supplier of goods or services that may be a manufacturer, importer, or wholesale distributor.

An average cost method for determining the cost of ending inventory under the periodic inventory system.

An inventory account consisting of partially completed goods awaiting completion and transfer to finished inventory.