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94 terms

Terms Definitions

Accelerated

depreciation

Depreciation method that allows large depreciation deductions in the

early years of an asset's life and smaller ones later.

Account One specific ledger item, such as cash, that will be shown on a

financial statement.

Accounting cycle Actions taken at the end of an accounting period to reconcile the

business transactions of that period.

Accounting equation Assets = Liabilities + Equity

Accounting period Period of time for which the company is reporting financial

information. Typical accounting periods would be monthly, yearly, and

quarterly.

Accounts Payable

ledger

A subsidiary ledger with accounts for each creditor of the business. It

is used to record purchases, payments, and credits.

Accounts Receivable

ledger

A subsidiary ledger used to record the activities of each credit account

for a business.

Accounts payable A liability that results from buying goods and services on credit during

the normal operations of a business. In many business transactions,

accounts payable are due within 30 days of the transaction date.

Accrual basis of

accounting

Accounting system that requires revenue and expense to be reported

when they occur.

Accruals Revenue or expense amounts that have been accumulating for the

business but have not been recorded in the journal(s).

Accrued expense An expense that has not yet been paid, but the company has received

the benefit.

Adjusted bank

balance

The amount that should be in the bank after a bank reconciliation.

Adjusted book

balance

The checkbook balance after completing a bank reconciliation.

Adjusted trial

balance

The trial balance after the adjusting entries have been recorded.

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Adjusting entries Special entries which are required to bring accounts to the correct

balance at the end of an accounting period.

Aging of Accounts

Receivable method

A method of estimating bad debts by calculating the length of time an

account is past due and applying a business defined percentage to the

amount that will be uncollectable.

Allowance for

Doubtful Accounts

account

A special account created to hold the estimated uncollectable account

amount.

Allowance method A method of estimating the amount of uncollectable accounts

receivable accounts and posting that amount to the general journal.

Amortization Method used to record the expensing of intangible assets.

Assets Resources owned or controlled by a company.

Audit Process of checking each entry in a set of books to make sure it agrees

with the original paperwork (invoices and receipts).

Bad debts expense A special account created to record the exact amount of uncollectable

accounts for a business.

Balance per bank The balance of a business's bank account, as reported on a bank

statement.

Balance per book The balance of a business's checkbook, as recorded in the checkbook or

check register.

Balance sheet Financial statement that reports a company's financial status on a

specific date. It lists its assets, liabilities and equity. It uses values from

the income statement and statement of owner's equity.

Balancing Adding or subtracting the previous balance to the current balance.

Bank reconciliation The process of comparing and correcting the bank statement data

against the business's checkbook data.

Bank statement A monthly document created by a business's bank detailing the

activities on the business's bank accounts.

Betterment Item that improves (betters) a plant asset.

Bonds payable Money that is due to a bond holder but has not yet been paid.

Book value The value of an asset when you take the original cost less any

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accumulated depreciation.

Break even When a company's revenues equal its expenses.

Cash A business asset, which can include a business's currency or coin,

checks, cashiers' checks, or money orders payable to the business,

along with money held in the business's bank accounts.

Cash basis of

accounting

Accounting system that records accounting transactions based on when

the cash is received.

Cash disbursements

journal

A journal used to record all payments of cash by the company.

Cash equivalents Business investments that can be converted quickly to cash.

Cash payments

journal

A special journal used to record cash disbursements by the business.

Cash receipts journal A special journal used to record cash received by the company.

Chart of accounts A list of all accounts used by the company.

Check A written authorization for a bank to release a specific amount of a

business's cash funds to a creditor.

Classification

structure

A special type of balance sheet that allows for additional sub-headings.

Close Setting temporary capital accounts to zero.

Closing The process of bringing an account balance to zero. This is usually

only done for temporary accounts.

Closing entries Entries which are used to close out the temporary accounts.

Compound entry A journal entry with more than one debit or credit.

Conservatism An accounting concept that states the revenue is only recorded when

fully realized.

Contingent liability A potential liability that could arise from a past business activity.

Contra An account which is an offset to another account.

Control account General ledger account for which a subsidiary ledger is kept.

Copyright Exclusive right to distribute a work of literature, music, art, or other

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items. A copyright has a life of 70 years beyond the creator's life span.

Corporation A state-chartered legal entity, in which the assets and liabilities remain

separate from its owners.

Credit An entry that is recorded in the credit (right) column of an account.

Credit memorandum Issued by a supplier to a receiving business as notification that a

specific amount has been subtracted from its amount due. This is

usually issued for purchase returns or purchase allowances.

Credit sales Sales made by a business for which the customer agrees to pay at a

later date.

Creditor Person or business granting credit to another person.

Current assets Assets which will be used up or converted into cash within a short

period of time, typically a year.

Current liabilities Debts which will become due within a short period of time, typically a

year.

Current ratio A calculation used to determine a company's liquidity. The formula is

current assets divided by current liabilities.

Debit An entry that is recorded in the debit (left) column of an account.

Debtor Person or business borrowing money from another person.

Deferrals Revenue or expense amounts recorded in the journal(s) for which thebusiness has not actually received or provided payment yet.

Deferred taxes A liability that results from the temporary difference in taxes due based

on the company's accounting records and tax return information.

Depletion Method to record the using, or consumption, of natural resources

Deposit The amount of cash placed in a bank by a business.

Deposits in transit Deposits made by the business after the bank statement is issued.

Depreciation The expensing of an asset's useful value over the time period it is being

used. A loss of value over time. Many assets depreciate as they get

older.

Direct Write-Off

method

A method of removing uncollectable amounts directly from the

Accounts Receivable account.

Double-entry A system whereby a debit entry is always entered with a corresponding

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accounting credit entry. This is also referred as double-entry bookkeeping.

Drawing An account which keeps track of owner withdrawals from the

company.

EFTPS Electronic Federal Tax Payment System. This system allows taxpayers

to remit taxes electronically.

Enterprise Resource

Planning (ERP)

Software that integrates all of the company's operations with the

accounting system.

Equity The company owner's claim on a company's assets. Also known as

owner's equity or capital.

Event A happening that has a measurable effect on the accounting equation

Exempt Used to describe an employee who is not protected by the Fair Labor

Standards Act of 1938.

Expenses The outflow of assets or the incursion of liabilities.

External transactions Exchanges between business entities that result in a change to the

accounting equation.

Extraordinary repair Repair that extends the useful life of a plant asset.

FASB Financial Accounting Standards Board

FICA Federal Insurance Contributions Act. Taxes collected through this act

fund the social security and Medicare programs.

FUTA Federal Unemployment Tax Act. This act requires the payment of a

federal tax to provide benefits to unemployed workers.

Fair Labor

Standards Act

A federal law that establishes a minimum hourly wage and requires

overtime to be paid when more than 40 hours are worked in a week.

This law applies to businesses engaged in interstate commerce either

directly or indirectly.

Financial accounting Communicates financial information to external users.

Financial statements Specific documents created by accountants to report the financial

position of a business.

First-in first-out

(FIFO)

The method of inventory costing in which the cost of the first items

purchased is assigned to the inventory first.

Fixed asset The assets a company uses in operating its business. It is a synonym for

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fixed assets and property, plant, and equipment.

Franchise license License to operate a franchise, granted by the owner of the franchise.

Freight In account A special temporary expense account used to track the charges for the

delivery of merchandise purchased for resale. This account is included

in the Cost of Goods Sold account.

GAAP Generally accepted accounting principles

General journal The journal used to record all business transactions for a business.

General-purpose

financial statements

Reports with information for a broad spectrum of external users.

Includes balance sheets, cash-flow statements, income statements, and

statements of owner's equity.

Goodwill Additional value a business has beyond the difference between its

assets and liabilities.

Gross pay Employee's pay before any deductions.

Gross profit method The method of valuing inventory that uses the ratio of cost of goods

sold to net sales.

IASB International Accounting Standards Board

Inadequacy Asset is no longer able to meet the company's needs due to growth of

the business.

Income statement Financial statement showing the revenues and expenses of a company'sbusiness operations as either net income, net loss, or break even.

Income summary A special account used to hold values during the closing process.

Indefinite useful life Asset that has an unlimited life.

Installment payments A form of credit offered by larger businesses to help customers

purchase large ticket items. This form of credit usually includes

interest.

Intangible asset Asset that is not physically used in the operations of the company, butthat gives the owner certain benefits.

Internal control

system

A system used by a business to protect its assets and encourage

efficiency and accuracy.

Internal controls Policies that allow managers to control and monitor business activities

such as company policies, accounting procedures, and physical

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safeguards to protect assets.

Internal transactions Exchanges within a business entity that might or might not affect the

accounting equation.

Inventory Goods kept on hand by a business for resale.

Journal A record of all transactions occurring in the business. A file used to

record business transactions in chronological order.

Journalizing The process of recording a transaction in a journal.

Last-in first-out

(LIFO)

The method of inventory costing in which the cost of the last items

purchased is assigned to the inventory first.

Leasehold

improvement

Improvement made to leased property

Ledger A special file maintained by all businesses into which transactions for a

period of time are entered. The values for ledger entries are provided

by the journal(s).

Liabilities Debts or obligations a company owes to its creditors.

Line of credit An offer of credit from a business to a customer. The customer can

make purchases and then make one lump payment at the end of the

period.

Liquidity Describes how easily something can be converted to cash.

Long-term liability An amount that is due on a date beyond the next year or the company's

normal operating cycle.

Lookback period The four quarter period ending on June 30th of the preceding year.

Lower of cost or

market (LCM)

The accounting rule that requires a business to provide a non-

overstated value of its inventory when reporting.

Managerial

accounting

Communicates financial information to internal users (management).

Market price The price for a business to purchase an inventory item.

Markon The difference in the cost of an item from purchase price to sale price.

Matching taxes Taxes that the employer pays to match the amount of tax withheld from

the employee.

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Modem A device used to transmit data through telephone lines.

Natural resource Asset such as oil, gas, and timber, that is consumed by a business.

Net income When a company's revenues exceed its expenses.

Net loss When a company's expenses exceed its revenues.

Net pay Employee's pay after all deductions have been take out.

Non-current assets Assets that are not expected to be used up in the current operating

cycle (approximately one year) of a business.

Non-current

liabilities

Debts which are not due in the current operating cycle (approximately

one year) of a business.

Note payable written promise to pay a certain amount of money on a specific date.

Also referred to as a promissory note.

Obsolescence Asset is no longer efficient in producing a product or service due to

technological innovations.

Ordinary repair Repair needed to keep assets in normal operating condition. This repair

is treated as an expense at the time it is incurred.

Outstanding checks Checks written by the business after the bank statement is issued.

Owner's investments Assets provided by the owner for a company.

Owner's withdrawals Assets removed from a company by the owner for personal use.

Partnership An association of two or more persons who carry on as co-owners of a

business for profit.

Patent Exclusive right to produce and distribute items. Patents have a life of

20 years.

Percent of Accounts

Receivable method

A method of estimating bad debts by calculating the total accounts

receivable accounts by a business-defined percentage.

Percent of Sales

method

A method of estimating bad debts by calculating the total credit sales

by a business-defined percentage.

Periodic inventory

system

A system of inventory tracking in which counts of inventory are

completed only on set occasions.

Permanent accounts Accounts that are not set to zero during the closing process. Assets,

liabilities, and capital accounts are permanent accounts.

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Perpetual inventory

system

A system of inventory tracking in which technology allows for the

inventory levels to be monitored at all times.

Petty cash A small fund of cash set up within a business to pay for unexpected

expenses.

Petty cash analysis

sheet

A worksheet used to enter information regarding the transactions of the

petty cash fund.

Physical inventory The process of counting all of the items in inventory.

Plant assets The assets a company uses in operating its business. It is a synonym for

fixed assets and property+F99, plant, and equipment.

Post-closing trial

balance

A trial balance after the closing process has been completed.

Posting The process of recording the journal information into the individualaccounts.

Posting reference A reference that tells you where an entry originated and where it was

posted.

Prepaid expense An expense that has been paid in advance of when the item will

actually be used.

Property, plant, and

equipment

The assets a company uses in operating its business. It is a synonym for

fixed assets and plant assets.

Prove Verifying the accuracy of the subsidiary journal.

Purchase Allowance A deduction in the amount owed by a purchaser to a supplier due to

defective or incorrect merchandise.

Purchase Return Merchandise returned to a supplier who then provides a credit

memorandum for the entire purchase.

Purchase Returns

and Allowances

An account used to record all returns and allowances received by the

business. It can also be used to track the history of supplier problems.

Purchase invoice A list of items sent to a business and the amount owed by that business.This is a bill.

Purchase order A written order to the suppliers of a business for a set quantity of

specific products at a set price and at set credit terms. This must be

signed by someone with authority to purchase for the business.

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Purchase requisition A list of merchandise a business needs to purchase to refill inventory

levels.

Purchases account A special temporary expense account used to track merchandise

purchased for resale by the business. It is included in the Cost of Goods

Sold account.

Purchases journal A special journal used to record only credit purchases of merchandise

for resale.

Realized gain or loss Gain or loss that is recorded in the general journal and is shown on the

income statement.

Receiving report A report made by a business when a shipment is received from a

supplier. It lists the products received and their condition on arrival.

Retail method The method of valuing inventory that uses the ratio of cost to retail

price.

Revenue The influx of assets from the sale of goods or services, or from the use

of company money or property.

SEC Securities and Exchange Commission

SUTA State Unemployment Tax Act. This act requires payment of a state tax

to provide benefits to unemployed workers.

Sales Returns and

Allowances account

A special account created to track the amount of returns and

allowances for a business for a period.

Sales allowance When a business accepts an item back from a customer or seeks to

offset a problem with an item by crediting the customer's account with

a partial amount of the purchase price.

Sales journal A journal used to record sales on account of inventory.

Sales return When a business accepts an item back from a customer and issues a

full credit to the customer's account.

Salvage value The estimated value of an asset when a company is finished with it.

Schedule of Accounts

Payable

A list of all of the accounts in the Accounts Payable ledger and their

current balances.

Sole proprietorship A business owned and operated by one person.

Source document The business document that supports a journal entry.

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Special journal A journal that is designed to group together transactions of a similar

type.

Specific identification The method of inventory costing in which each item is tracked and

recorded according to its purchase and sale price.

Statement of owner's

equity (SOE)

Financial statement showing changes in the owner's equity based on

net income or net loss and owner investments and withdrawals.

Straight line

depreciation

An often used depreciation method whereby an asset's value is written

off in equal amounts over the life of the asset.

Subsidiary ledgers Ledgers which contain the details for a general ledger account.

Common subsidiary ledgers are accounts payable and accounts

receivable.

T-account A tool used to learn the double-entry accounting system. It has the

appearance of the letter T. The left side is for debit entries and the right

side is for credit entries. The account title appears at the top of the T.

Taxes payable Taxes that are due but have not yet been paid.

Temporary accounts Accounts that will have a zero balance when closing is complete.

Revenue, expense, drawing, and income summary are temporary

accounts.

Trademark Distinct identifying symbols or names of a company.

Transaction Any event that affects the accounting equation. A business activity thatcan be recorded in a journal.

Transaction analysis Keeps the accounting equation balanced

Trial balance A complete list of all business accounts and their current balances.

Unearned revenue Revenue for which a company has been paid, but the goods or services

have not yet been delivered to the customer.

Unrealized gain or

loss

Gain or loss that is not recorded in the general journal or shown on the

income statement. Some gains are not immediately recognized so as to

not overstate earnings in the current period.

Useful life The period of time an asset can be productively used.

Voucher system A system that requires all payments from the business to be made only

with proper authorization.

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W-4 Employee's Withholding Allowance Certificate. Used to determine the

amount of federal income tax withheld from an employee's paycheck.

Wage base limit A limit beyond which wages will not be taxed.

Wage-bracket

method

A commonly used technique for computing employee federal income

tax deductions.

Wages payable Wages that have been earned by the employees but are not yet paid to

them.

Warranty A promise from a seller to correct or replace a product or service that is

not up to performance expectations.

Weighted average The method of inventory costing in which the average cost of the items

on hand is assigned to the inventory.

Worksheet A tool used by accountants to assist in financial statement preparation.It has columns for the beginning trial balance, adjustments, and the

adjusted trial balance.