Accounting Dictionary

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Here you can find Accounting Dictionary created with the purpose to include major accounting terms, concepts and definitions, provide their meanings and explain their essence. Exploring Accounting Dictionary is necessary since before starting the accounting learning process and also being in the middle of it you will need to understand certain accounting terms. Proper understanding of accounting terminology will allow you to understand accounting theory and practical examples better and enhance your learning attempts.

Account is a record used in double entry accounting aimed to record each type or class of asset, liability, equity, revenue and expense. Since double entry accounting is used, each account has two sides, i.e. Debit side and Credit side, where increases and decreases in the balance of a certain account are recorded. Each account also has opening and closing balance. For Asset class accounts opening and closing balance is always on the Debit side (Left side – like in the accounting equation). For Liability and Equity class accounts opening and closing balance is always on the Credit side (Right side – like in the accounting equation). Revenue and Expense accounts do not have opening and closing balances, i.e. they are equal to zero, since final balances of these accounts at the end of the accounting period are transferred to the Equity class account – Retained earnings.

Accounting is a system, including theory, concepts, techniques and procedures, which are used to process financial data and get information for reporting, planning, control, decision making and other purposes. Also we can call Accounting as a system, the essence of which is a process of recording, classifying, reporting and interpreting financial data of a business. So result of Accounting is financial data expressed in monetary means to be used for decision making by the users of such financial data.

Accounting equation is a reflection of the assets the business owns and financial means how these assets are being financed, i.e. by own means (Equity) or by borrowed means (Liabilities). Since all the assets are financed by either Equity or Liabilities, there is an equation between these items, i.e. ASSETS=LIABILITIES+EQUITY and such expression is called Accounting Equation.

Accounts Payable are amounts which are owed by a business to its suppliers for the goods and services acquired. Suppliers are included into the category of Creditors, since they finance acquisition of the business by the borrowed means. Accounts Payable are attributed to the Liability class account and must be returned (paid back) within a certain period of time, which is agreed between the business and particular supplier.

 Accounts Receivable are amounts which customers owe to the business for the goods supplied or services provided. Such customers are usually called Debtors. Accounts Receivable are attributed to the Asset class account, since these balances represent assets to which a business has an ownership title, i.e. a right to claim these amounts back.

Accumulated depreciation is a share of the original cost of the fixed asset, which was included into expenses in the income statement. Accumulated depreciation is a contrary account to the cost of the fixed asset, i.e. when the acquisition cost of the fixed asset is gradually included into the Income Statement, Depreciation Expenses account is debited and Accumulated Depreciation account is credited. On the Balance Sheet acquisition cost of the fixed asset is decreased by the accumulated depreciation and Net Book Value, i.e. difference between cost of fixed asset and accumulated depreciation, is indicated on the Balance Sheet.

Asset is a resource of the business which is expected to bring economic value and benefits in the future accounting periods and which can be reliably measured in monetary items. So Asset is recognized in the accounting only when it is valuable by expected benefits it can bring in the future and it has monetary value, which can be estimated and expressed reliably. Depending on the period through which assets will bring benefits, they can be short-term (consumed within a year) and long-term (consumed within period of time longer than one year.

Balance sheet is one of the three main financial statements. It reflects financial position of the business as of particular date. Balance Sheet shows structure of the asset the business owns and structure of the financial means, how these assets are financed, i.e. Liabilities and Equity. This financial statement must reflect different categories of Assets (short-term and long-term), different categories of Liabilities (short-term and long-term) and part of Equity (share capital, retained earnings).

Bank Reconciliation Statement is a statement reflecting and explaining the difference between balance on the cash book and balance on the bank statement. Differences between these two balances are explained by different timing in issuing and clearing cheques and other timing differences. All these reasons for the difference are presented in the Bank Reconciliation Statement.

Credit is a right side of the account in the Double entry accounting system.

 Creditors are entities and individuals borrowing financial means to the business, i.e. those to whom business owes money. All the debt to Creditors is reflected as Liabilities on the Balance Sheet and this is one type of the financial means by which assets belonging to the business are being financed. All Liabilities have their maturity date, i.e. have to be paid back on the certain date.

Current Assets are assets which are intended to be converted into cash or consumed in the normal usual business operations within one year. Current Assets are reflected separately on the Balance Sheet since they represent quite liquid items (which quite quickly can be converted into cash), which have to be disclosed separately.

Current Liabilities are liabilities which will be due within short period, which is usually less than one year. Generally such liabilities are paid out of Current Assets. Current Liabilities are reflected separately on the Balance Sheet since they represent debt of the business which will have to be paid back within short period of time and is compared with the Current Assets to determine whether the business have enough of them to cover Current Liabilities.

 Debit is a left side of the account in the Double entry accounting system.

Declining Balance Depreciation is a method of depreciation which results in declining periodic depreciation amounts charged to expenses during the useful life of the asset. Applying this method of depreciation means that in first years of the fixed asset usage the asset is depreciated quicker, i.e. higher amounts of depreciation are being charged to the depreciation expenses account in the Income Statement. Such charge decreases over the useful period of the asset.

 Deferral is a postpone in recognition of expenses which have been already paid or revenue already received due to certain circumstances. This is basically related to the Matching Principle, i.e. when expenses must be recognised only when they were actually incurred to earn revenue and revenue is recognised when it is earned.

Depreciation is a decrease in the value of the fixed asset during its useful life. Depreciation concept applies only to the Fixed Asset category, i.e. those assets which re being used by the business for a period longer than one year. Depreciation means that acquisition cost of the fixed asset is not included into the expenses on the Income Statement at the moment of acquisition, but is distributed over the useful life of the asset, i.e. period during which the asset will be used by the business to earn income.

 Dividend is a distribution of profit to the shareholders, i.e. investors owning shares of the entity. Dividends directly decrease net profit and are paid out to the shareholders. All the profit or its share can be distributed to the shareholders in the form of dividends.

 Direct Write off Method is related to the write off of uncollectible Accounts Receivable and their inclusion into expenses.

This is a common practice that business sells goods or provides services on credit, i.e. customer pays for the purchase later after the sale. In case of sale on credit Asset is created and such asset is called Accounts Receivable, which represents a debt from customer for goods sold or services provided.

It might happen that customers fail to pay their debts and Accounts Receivable become uncollectible. If there is no chance to recover a debt from a customer, Accounts Receivable must be written off. Such write off is called Direct Write Off Method, when debt of certain customer is being included into the expenses decreasing balance of Accounts Receivable.

The following entry is made:
D Expenses
C Accounts Receivable

 Double Entry Accounting is a system of a process of recording business transactions by reflecting decreases and increases in accounts (categories of assets, liabilities and equity) which results in equality between Debit and Credit. The basis for Double Entry Accounting is an Accounting Equation, which reflects equality between Debit and Credit, i.e. total value of assets equals total sum of equity and liabilities. In Double Entry Accounting each business transaction is recorded by at least two entries, therefore is is called double entry. Double entry accounting system means that each transaction is recorded by at least two entries in the accounting books, i.e. Debit and Credit. This is reflection of the Accounting Equation where assets are equal to the sum of liabilities and equity and each transaction has twofold impact on it, therefore at least two entries are made.

Equity is a right of shareholders to claim properties belonging to the business. Such right is residual, i.e. shareholders can claim only those properties which remain after liabilities have been paid.

Expense is an asset or part of the asset which was consumed in the process of earning revenue. This is a basis for Matching Principle, which says that expenses can be recognised only when they were incurred to earn revenue.

 Financial Accounting is a separate type of accounting the aim of which is to record transactions applying Generally Accepted Accounting Principles and periodically prepare Financial Statements based on such records.

Financial Statements in their turn are used by certain entities or individuals to judge on the results and success of business operations and make certain decisions related to the interests of such users. There might be a lot of different parties interested in the data provided by the Financial Accounting, i.e. investors, creditors, customer, suppliers, employees, tax authorities, statistical bodies, governmental institutions and others. Each of them use the financial statements for their own purposes.

First In First Out Method is a method to value inventory. Application of this method is based on the assumption that first those inventory items which were acquired at the earliest are being sold and their cost is included into the Cost of Goods Sold. Note, that this is an assumption for the accounting purposes, so this does not mean that physically entity must sell the oldest items first. However for the purpose of Cost of Goods Sold calculation this assumption is used.

Fiscal Year is an accounting period of one year applied by the entity for Financial Accounting purposes. So Financial Statements are prepared for a period of one year – fiscal year.

 General Journal is a prime entry book used to record transactions which had an impact on the financial position of the business. In practice it is used to record only those transactions which do not fit to any other prime entry book, like sale or purchases day book or others. Usually General Journal has two column format. One column is for Debit and the other column is for Credit. While recording the transaction in the General Journal we must record names of the accounts impacted and description of the transaction. This information will be used to track financial data and post it properly to the General Ledger.

General Ledger is the main principal ledger, which includes all Asset, Liability, Equity, Income and Expenses accounts. It is used in combination with other subsidiary ledgers to record and classify financial data.

 Generally Accepted Accounting Principles are guidelines, which are generally accepted for the purpose of preparation of the financial statements. They are required in order to provide the same basis for recording and reporting transactions and ability to compare financial statements of different businesses since they will be prepared in line with the same widely known and recognized principles.

 Goodwill is an intangible asset related to the business and resulting from a certain favourable circumstances, like reputation, product advantage, skills, location and other.

 Gross Pay includes total employee earnings for a particular period.

Gross Profit is a difference between sales revenue and cost of goods sold. This difference must be positive to result in Gross Profit.

 Income Statement is a summary of Sales Revenue and Expenses incurred to earn such revenue for a particular period of time.

Income Summary Account is an account which is used to close revenue and expenses accounts and to summarise total revenue and total expenses for the accounting period. Since revenue and expenses accounts are used to record accounting data only for a period, opening and closing balances of these accounts are equal to zero. These accounts are closed through the Income Summary in order to calculate the result of operations for period (profit or loss) and to record it in the Retained Earnings account.

Installment Method is a method to recognise revenue where every cash payment from the installment sales is considered to include partial payment of inventory cost and gross profit, i.e. when scheduled payment is received it is recognised as revenue and at the same time certain percentage of inventory cost is included into the Cost of Goods Sold. This percentage is usually based on the share of the scheduled payment in the total value of the sale.

 Intangible Asset is a long-term asset used by the business in its activities, not held for sale, which does not have physical qualities, i.e. intangible.

 Invoice is a source document provided by the seller (from the side of seller – Sales Invoice) to the customer (from the side of customer – Purchase Invoice) to support sale. Invoice includes all the details of the sale, i.e. names of seller and customer, description, quantities and price of goods, total amount payable, due date and other necessary information. Invoice is one of the most important source documents, since it is a prove than transaction occurred and should be recorded.

Journalizing is a process during which transaction is being recorded into the journal.

Last in First Out is a method to value inventory. This method is based on the assumption that first those inventory items which were acquired at the latest are being sold and their cost is included into the Cost of Goods Sold. Note that this is an assumption for the accounting purpose, so this does not mean that physically entity must sell first the items which were acquired at the latest. However for the purpose of Cost of Goods Sold calculation this assumption is used.

 Liability is a type of financing used to finance Assets of the business, which represent a debt having maturity date, i.e. obligation to repay it back within certain period of time.

 Long-term Liability is a Liability which must be repaid back within a period longer than one year.

Lower Cost or Market is a method to value inventory, when for the reporting purposes the value which is lower of cost and market value is reported as inventory value. The purpose of this method is to conservatively reflect fair value of inventory.

Managerial Accounting is a type of accounting which uses historic and forecasted (estimated) data and provides it to the management in the convenient form for the purpose of business management, daily operations and future planning. Managerial Accounting reports do not have necessary comply with any determined standard, i.e. the layout is not regulated and is not generally accepted. Each entity is free to decide what kind of reports it needs and what form those report should have.

 Matching is a basic accounting principle determining that all Revenue must be matched with Expenses incurred to earn or obtain this Revenue during a particular period of time.

 Multiple Step Income Statement is a statement providing certain categories of Revenue and Expenses before Net Income is presented. In this statement you can find separately reported Gross Profit, Selling and Administrative Expenses, Operating Profit, Interest Expenses, Profit Before Tax.

Net Book Value is an amount which represents value of the fixed asset reflected on the Balance Sheet and which is a difference between the Costof the asset and Accumulated Depreciation, i.e. share of the cost which was included into the expenses through the period the asset was already used in the operations of the business. Rarely Net Book Value corresponds to the fair value of the asset, i.e. value for which the asset can be sold at the particular date.

Net Income is a positive difference between all revenue and expenses in the Income Statement for a particular period of time.

Net Loss is a negative difference between all revenue and expenses in the Income Statement for the particular period of time.

 Net Pay is gross pay less deductions related to payroll, i.e. obligations of the employee for certain payments, which are being withheld by the entity paying salary from this salary.

 Operating Profit is a difference between Gross Profit and Operating Expenses. This difference must be positive to result in Operating Profit. Negative amount means Operating Loss and inability of the business to generate profit from ordinary main activities.

Par Value is an initial value of the share.

Payroll is the total amount paid to employees during a particular period.

Periodic Inventory Accounting System is an inventory accounting system, applying which only inventory sales revenues are being recorded each time such sale is made. Inventory quantity is not updated each time after the sale is made. Cost of inventory on hand is estimated at the end of the period taking physical inventory count. This quantity is used to calculate Cost of Good Sold, i.e. Cost of Goods Sold=Opening Inventory+Purchases-Closing Inventory.

Perpetual Inventory Accounting System is an inventory accounting system, applying which not only inventory sales revenue are being recorded each time such sale is made, but also inventory quantity is updated each time and records can provide at any moment quantity of inventory on hand.

Point of Sale Method is a revenue recognition method where revenue is recognised when the ownership title to the goods is passed to the customer despite that cash can be received after some period of time. This method is in line with the Accrual Accounting Principle, when recognition of revenue and expenses is done without taking into account whether cash was received or not.

Posting is process during which amounts recorded in the journals as Debit and Credit are being transferred to the General Ledger accounts.

 Prepaid Expenses represent acquired asset or service which was not consumed to earn revenue during the current accounting period.

Purchase Discounts are discounts taken by the purchaser for early payment of the amount due.

Conditions are usually expressed in the following way: D/X, n/Y, where

• D – percentage of the discount,

• X – number of days during which purchaser will have to pay its debt to get a discount,

• n/Y – normal payment period.

Therefore is debt is paid earlier, lower amount must be paid and the difference between debt to the supplier and the amount paid is accounted for as Purchase Discounts.

Purchase Returns and Allowances include reduction in inventory purchases, which result from inventory returned to the supplier or from reduction of the original inventory price.

Purchase Order is a source document issued by the purchaser and provided to the supplier. This document requests delivery of certain goods or services, specifying quality, quantity and other requested delivery conditions.

 Residual Value is an estimated recoverable cost of Plant Asset at the end of its usage in the business operations, i.e. this is the amount of cash business intends to receive for the sale of the Plant Asset at the end of its useful life.

Retained Earnings are net income generated by the business and not distributed to the shareholders as dividends. Retained Earnings amount can also be negative, which means that there is an accumulated loss in the business, which was not covered by the shareholders.

Retained Earnings Statement is a statement summarising changes in Retained Earnings for a certain period of time.

 Revenue is a gross increase in Equity due to performed business operations, i.e. sale of goods or provision of services.

Sales discounts are discounts provided by the seller for early payment of the debt for the goods supplied or services provided.

Conditions are usually expressed in the following way: D/X, n/Y, where

• D – percentage of the discount,

• X – number of days during which customer will have to pay its debt to get a discount,

• n/Y – normal payment period.

Therefore is debt is paid earlier, lower amount must be paid and the difference between debt from the customer and the amount of cash received is accounted for as Sales Discounts, which represent expenses for the business.

Sales Returns and Allowances include reduction in sales revenue due to inventory returns by customers or reduction in selling price of inventory.

Selling Expenses are expenses directly incurred in connection of selling goods, i.e. all the activities performed to sell goods and related to the earning of sales revenue. In the Income Statement such expenses are presented separately to provide information to the users on how much the business spends on selling efforts comparing to other expenses and comparing to the sales revenue.

 Single Step Income Statement is an Income Statement with the total revenue and total expenses amounts and difference between them, without specifying revenue and expenses into categories. In such Income Statement there are not items, like Gross Profit, Operating Profit, Profit Before Tax.

 Statement of Cash Flows is a financial statement providing change of cash position of the business for a particular period of time. It provides summary of major Cash Receipts (sources of cash inflow) and Cash Payments (sources of cash outflow).

Statement of Owners’ Equity is a summary of changes in Equity for a certain period of time.

Straight Line Depreciation Method is a depreciation method providing equal amounts of depreciation expenses (i.e. share of Plant Asset Cost) being included into the expenses over the estimated useful life of the plant asset. Each year the amount of depreciation expenses charged to the Income Statement will be the same.

Subsidiary Ledger is a ledger including information on individual accounts with common features. Examples can be Accounts Receivable or Accounts Payable subsidiary ledgers, which provide details on the corresponding debts from customer or debts to suppliers. Subsidiary Ledgers complement General Ledger, since they include more details on the balances of General Ledger accounts.

 Sum of the Years Digits depreciation method is a depreciation method resulting in declining periodic depreciation charge to the expenses over the estimated life of the plant asset.

T account is a form of the account like T letter, which has Left side for Debit entries and Right side for Credit entries used to record change in separate categories of Assets, Liabilities, Equity, Income and Expenses.

 Trial Balance is a list of all General Ledger accounts grouped into the accounts with Debit and Credit balances. Total sum of debits must equal to total sum of credits.

 Unearned Revenue is a receipt of revenue in advance before its earning. Unearned Revenue recorded as liability in the Balance Sheet represents obligation of the entity to deliver goods or provide services.

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