65 Accounting Terms and Definitions

The following 65 Accounting Terms and Definitions are meant to supplement the previous two posts on basic accounting principles: 40 Basic Accounting Principles and Costs of Goods Sold – Additional Principles. Current and future business owners will want to read those posts and understand them thoroughly in order to move on this month with future accounting posts that are related to bookkeeping and tax savings. This post is mostly for reference and it’s a great one to bookmark for future use.

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

Accounts Receivable – An account in the balance sheet that records all the money owed to the business for goods or services provided.

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

Accounts Payable – An account in the balance sheet that records all the money that the business owes to others for goods or services provided.

Accrual Basis of Accounting – The recognition of revenue when earned and expenses when incurred, not when payment is made.

Accumulated Depreciation – The contra asset account that reflects depreciation expense over time.

Aging Schedule – A schedule that classifies accounts receivable by the amount of days the receivable has not been paid.

Assets – Tangible or intangible things that allow a firm to produce goods or services.

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

Balance Sheet – One of the basic financial statements, used to asses the economic condition of a company, it lists assets, liabilities and equity.

Books of Original Entry – Custom forms for the business where transactions are recorded.

Business Firm – An organization established to earn a profit by selling of goods or services.

Cash Basis of Accounting – A system of accounting that recognizes revenue and expense as cash as paid (compare to accrual basis above).

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

Corporations – A common form of limited liability firm.

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

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

Debits – Entries made on the right side of “T” accounts.

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

Depreciation Expense – The portion of an asset that decreases in value within the accounting period.

Dividends – Cash distributions to shareholders in a corporation.

Employee Bonding – Insurance against employee theft and embezzlement.

Equity – The difference between assets and liabilities. The portion of the company’s property that is not subject to claims by creditors.

Expense – The use of resources to produce the goods and services that are sold to customers and clients.

FIFO – A flow assumption in valuing ending inventories, 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.

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

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 liquidating value.

Gross Profit – The difference between sales and cost of goods sold.

Historical Cost Principle – The listing of asset values based on their purchase price and not current market value.

Income Statement – A financial statement, attempts to measure the economic performance of the business, reflects revenue and expenses. Also called the profit and loss statement.

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.

Lapping Schemes – Embezzlement schemes that involve the systematic misposting of customer and client payments.

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

Liabilities – A firm’s obligations to its creditors.

LIFO – An inventory flow assumption that assumes that the most recently sold inventory was the most recently purchased, first goods sold were the last ones purchased. (compare with FIFO above)

Limited Liability Firms – Firms organized under special state statutes that insure that the owner’s liabilities for the firms actions are limited to their investment.

Liquidating 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.

Loss – The excess of expenses over revenue.

Matching Concept – The idea behind accrual accounting that holds that revenue should be recognized at the same time as associated expenses are incurred.

Materiality – A threshold amount accountants utilize in deciding if adjustments are needed to a particular account.

Partnership – A business firm with more than one owner.

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 balance as purchases and sales are made, (compare with periodic inventory method above)

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

Prepaid Expenses – A firm’s payment to vendors for goods and services to be provided at some later point.

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

Profit – The excess of revenues over expenses.

Retained Earnings – Undistributed profits of a corporation.

Retainers – A form of deferred revenue collected by attorneys or other service businesses.

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

Segregation of Duties – An internal control which insures that employees with access to assets have no access to accounting records.

Shareholders – The owners of a corportation

Sole Proprietorship – A business with one owner.

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

Subsidiary Ledgers – Special records that detail the sales and payment histories for individual customers in the case of accounts receivable, or purchase and payment histories for individual vendors, in the case of accounts payable.

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

Transactions – Any events that cause a change in assets, liabilities, equity, revenue and expense.

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

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

 

Once again, this article is for reference. Future articles on other sources for learning accounting, how to do bookkeeping, and using accounting software will provide more how-to steps for small business accounting. This page would be good to bookmark for future access.

This article was not written by an accountant. Consult with an accountant or other qualified professional to perform accounting for your business.

Major source for this article: Financial Accounting: A Mercifully Brief Introduction by Michael Sack Elmaleh. Buying this book or a similar book would be beneficial to anyone who wants to learn accounting since the end-of-chapter examples and exercises can help to solidify the material in your mind.

For an explanation of why a marketing blog has posts on accounting, read September is Accounting Month.

If you have any questions on this article (or answers to questions), leave a comment below.