Glossary Of Accounting Terms

Michael Sack Elmaleh , CPA, CVA

Accelerated Depreciation. A method of depreciation in which a greater amount of depreciation expense is recorded in the earlier years of an assets useful life than in later years.

Account Receivable. A customer’s or client’s promise to pay for goods or services provided.

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

Accounts Payable. A firm’s promise to pay a vendor for goods or services provided.

Accrual Basis of Accounting. The recognition of revenue when earned and expenses when incurred as distinguished from the cash basis of accounting.

Accumulated Depreciation. The contra asset account that reflects depreciation expense taken in the current and previous periods.

Aging Schedule. A schedule that classifies accounts receivable by the amount of days the receivable has been unpaid.

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 statement information.

Balance Sheet. One of the basic financial statements that is used to asses the financial condition of a company. It lists the assets, liabilities and equity of the firm at the end of the accounting period.

Books of Original Entry. Specially designed forms on which

transactions are initially recorded.

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

Cash Basis of Accounting. A system of accounting that recognizes revenue only when cash is received from customers or clients and expenses only when cash is paid to vendors.

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 hand side of “T” accounts.

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

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

Depreciation Expense. The portion of an asset’s cost allocated to the current accounting period.

Dividends. Cash distributions from corporate profits to its shareholders.

Employee Bonding. Insurance against employee theft and embezzlement.

Equity. The difference between a firm’s assets and its liabilities.

Expense. The use of resources to produce the good and services sold to customers and clients.

FIFO. (First in, First out) A flow assumption in valuing ending inventories that assumes that the 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.

Fixed Assets. Tangible assets such as machinery and equipment, furniture and fixtures and real property.

General Ledger. The collection of all accounts used by a firm to record changes in assets, liabilities, revenue, expense and equity.

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 upon their acquisition price rather than their current market value.

Income Statement. A basic financial statement that attempts to measure economic performance in the most recent accounting period. The statement reflects revenue and expenses.

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 involves 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. (Last in, First out) An inventory flow assumption that assumes that the most recently sold inventory is also the most recently purchased.

Limited Liability Firms. Firms organized under special state statutes that insure that the owners’ liabilities for the firm’s 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 particular accounts.

Partnership. A form of unlimited liability 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 are made.

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 corporation.

Sole Proprietorship. An unlimited liability firm with one owner.

Straight Line Depreciation. A method of depreciation expense that allocates an asset’s purchase cost evenly over the asset’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 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.