Accounting Glossary

Account balance is the difference between the debit and the credit side of a T account.
Accounting is a service-based profession that provides reliable and relevant financial information useful in
making decisions.
Accounts receivable refer to amounts of future cash receipts that are due from customers (i.e., amounts to be
collected in the future). Accounts receivable are shown on the asset side of the balance sheet.
Accrual (or accrual-based) accounting recognizes the effects of accounting events when such events occur
regardless of the time cash is exchanged.
Accrued expenses are expenses incurred but not yet paid in cash. When recorded, such expenses are
usually shown in the liabilities section of the balance sheet.
Accrued revenue is revenue earned but not yet received. When recorded, such amounts are usually shown
as interest receivable in the balance sheet and interest revenue in the income statement.
Accumulated depreciation represents an estimated cost of an asset used in operations. Accumulated
depreciation is a cumulative of all depreciation expenses recognized for a particular asset. Accumulated
depreciation is an example of a contra asset account. This account is included in the balance sheet under
related asset accounts.
Adjusting entries adjust the account balances before the final financial statements are prepared. Each
adjusting entry affects one balance sheet account and one income statement account.
Allocation is a process of assigning a portion of an entire amount to each of several accounting periods.
Allowance for doubtful accounts (also called allowance or reserve for bad debts) is the company's best
estimate of uncollectible accounts receivable. It is determined based on certain historical or current data
about the company's financial activity.
Allowance method of accounting for bad debts is the practice of reporting accounts receivable at the net
realizable value. This method involves estimating uncollectible accounts at the end of each period.
Amortization is allocation of the cost of intangible assets to expense in a systematic and rational manner over
the useful life of the asset.
Asset exchange transactions occur when only asset accounts are engaged in a transaction. For example,
collection of cash on accounts receivable is an asset exchange transaction. Total assets remain unchanged
after such transactions.
Asset source transactions result in an increase in an asset account and in one of the claim accounts (liability
or equity accounts).
Asset use transactions result in a decrease in an asset account and in one of the claim accounts (liability or
equity accounts).
Assets are economic recourses of a business used to accomplish its main goal, i.e., increase owners' wealth.
Balance sheet presents assets, liabilities and owner's equity at a specific date. A balance sheet is also called
Statement of Financial Position.
Book value, also referred to as carrying value, is the result of asset and related contra asset accounts offset.
In other words, book value is the difference between an asset account (i.e.,cost) and corresponding contra
asset account (i.e., accumulated depreciation).
Cash (or cash-basis) accounting recognizes the effects of accounting events when cash is exchanged
regardless of the time events occur. Cash-basis accounting is not in accordance with generally accepted
accounting principles (GAAP).
Cash flow statement summarizes information about cash outflows (payments) and inflows (receipts). This
statement may also include certain information not related to actual cash flows.
Cash inflows are sources of cash; for example, payments from customers, capital acquisitions, etc.
Cash outflows are uses of cash; for example, payments to vendors, paying off bank loans, etc.
Claims exchange transactions increase one claim account and decrease another. Thus, only claim accounts
are involved in such transactions. Total claims remain unchanged. For example, recording salaries payable is
an example of a claim exchange transaction.
Claims: A company's assets belong to the resource providers who are said to have claims on the assets.
Closing entries are made to free up (to zero) the nominal (temporary) accounts so that they are prepared to
be used in the next accounting period.
Closing the accounts, or closing the books is the process of transferring the balances from the temporary
accounts to the permanent account, Retained Earnings.
Contra asset account is one that is offset against an asset account on the balance sheet. Contra asset
accounts have credit balances and thus, reduce asset account balances.
Contributed capital is a component of equity resulting from contributions of capital resources from owners.
Cost of goods available for sale is the cost of goods acquired during a period plus the cost of goods on hand
at the beginning of the period. This cost represents all inventories available for sale during the period.

Cost of goods sold (COGS) is the difference between the cost of goods available for sale and the cost of
goods on hand at period end. This cost represents the cost of goods sold by the company during the period.
Credit is the right side of a T account.
Debit is the left side of a T account.
Deferral refers to recognition of revenues or expenses at some time after cash has been transferred.
Depletion is allocation of the cost of natural resources to expenses in a systematic and rational manner over
the resources useful life.
Depreciation is allocation of the cost of property, plant, and equipment to expenses over their useful
(economic) life in a systematic and rational manner.
Direct write-off method of accounting for bad debt is the practice of recording bad debt expense when a
particular account is determined to be uncollectible. No allowance for bad accounts is recorded at the end of
each period under this method. Receivables write-off is recorded directly in the bad debt expense account in
the income statement.
Discount amortization is the process of converting discounts on notes payable to interest expense over a
specified period of time.
Discount bonds are bonds that have interest included in the face value. When the note matures, the borrow
only pays the face value, which includes interest in it.
Double-declining method applies a constant rate (double of the straight-line rate) to the net book value of the
asset and produces a decreasing annual depreciation expense over the asset useful life. The decrease in
depreciation relates to the decrease in the asset's net book value in each subsequent period.
Double-entry bookkeeping rule states that any transaction is recorded at least twice.
Double-entry recording system provides for the equality of total debits and total credits.
Equity is what the company "owes" to owners.
Expenses are decreases in assets or increases in liabilities that result from operating activities undertaken to
generate revenue.
External users are parties outside the reporting entity (company) who are interested in the accounting
information.
Financial accounting provides information that is designed to satisfy the needs of external users. Such
reporting is usually done in the form of financial statements.
Financial reporting is a process through which companies communicate information to the public.
First-in, first-out (FIFO) inventory costing method assumes that the costs of earliest inventories acquired are
the first to be recognized as the cost of goods sold.
Gains are similar to revenues; however, gains result from incidental transactions rather than from operating
activities.
General journal (book of original entry) contains records about all transactions of an entity. In particular, the
journal includes such data as the event date, accounts involved, explanations and amount(s).
Generally Accepted Accounting Principles (GAAP) are common standards that indicate how to report
economic events.
Gross margin is the difference between the sales revenue (i.e., revenue generated from sales) and the cost of
goods sold. Gross margin shows what profit the company made after cost of goods sold, but before any other
expenses (selling and administrative, etc.).
Historical cost is based on the dollar amount originally exchanged to acquire an asset. Such cost includes the
purchase price and any additional costs necessary to obtain the asset and prepare it for the intended use.
Additional costs (costs besides the purchase price) may include transportation costs, insurance for asset
delivery and others. A historical cost also refers to an accounting principle requiring financial statements to be
based on original costs.
Income statement presents revenues and expenses and resulting net income or loss for a period of time. An
income statement is also called Statement of Operations, Earnings Statement, or Profit and Loss Statement
(P/L).
Intangible assets may be represented by a piece of paper or document. The real value of such assets is the
rights and privileges extended to their owners. Examples of intangible assets can be patents, trademarks and
customer lists.
Interest expense is the charge that a business needs to take and record when using somebody's money.
Interest expense is an income statement account which decreases equity.
Interest payable is a liability account that shows future interest payments for using somebody's money. For
example, taking a long in a bank usually means that the borrower will pay the principal and interest. Such
interest is show in the interest payable account until paid.
Interest receivable represents future cash receipts of interest by a company. Interest receivable account is
shown on the asset side of the balance sheet.
Interest revenue is the amount of interest earned. Interest revenue (or just interest) may be earned on an
investment such as a savings account or certificate of deposit. Interest revenue is an income statement
account that increases equity.

Interest is excess of money over the initial invested amount (principal). Interest is usually set as a percentage
to the principal.
Interest-bearing notes require an interest to be paid in addition to the face value. In other words, such notes
require the borrower to pay the face value and interest at the maturity date.
Internal users are parties inside the reporting entity (company) who are interested in the accounting
information.
Inventory is a current asset on a company's balance sheet. Inventory includes goods for resale, raw materials,
spare parts, etc.
Last-in, first-out (LIFO) inventory costing method assumes that the cost of latest inventories acquired are the
first to be recognized as the cost of goods sold.
Ledger is a collection of all accounts a business maintains in its accounting system. With the development of
computerized accounting systems, ledgers are often in the form of electronic records (databases).
Liabilities are debts and obligations of a company.
Long-term operational assets are defined as recourses with economic lives of more than a year that a
business possesses and uses in generating revenue.
Losses are similar to expenses in the way that both decrease assets or increase liabilities; however, losses
differ from expenses in that they are caused by incidental transactions, rather than from ordinary operating
activities.
Lower of cost or market (LCM) rule states that if the market value of ending inventory is lower than the book
value of such inventory, the resultant loss must be recognized in the current period.
Managerial accounting provides information that is useful in running a company by internal users. Such
reporting is usually accomplished through custom designed reports.
Market value is the amount that would have been paid to replace the merchandise.
Merchandise inventory is goods that are held for resale by a merchandising company.
Multiple-step income statement shows numerous steps in determining a net income (or net loss). Each step
provides a different measure of a company's results of operations.
Net income is the excess of asset increases (revenues) and asset decreases (expenses) for a period. Note
that distributions do not fall under expenses caption and thus are not used in calculating the net income.
Net loss is the opposite of net income. Net loss results from the excess of asset decreases (expenses) over
asset increases (revenues) for a period.
Net realizable value is what the company expects to collect from its customers. This value is determined by
subtracting the estimate of uncollectible accounts (allowance for doubtful accounts)from accounts receivable.
Note payable is an obligation in the form of a written promissory note signed by the borrower. The note
includes the information on the rate of interest, the term of maturity, and collateral pledged to secure the loan.
Notes receivable are claims that require a formal instrument as proof of the debt and usually provide for
payment of interest by the debtor. Notes receivable are often long-term claims to be settled in more than 90
days.
Operating income is the difference between the gross margin and selling and administrative expenses.
Period costs are costs associated with a specific period and not a specific product. Period costs include
selling and administrative expenses.
Periodic inventory system adjusts the inventory account only at the end of an accounting period. Purchases
and sales do not affect the inventory account during the accounting period, but do affect at the period end.
Permanent accounts are balance sheet accounts. They are not closed each period. Their balances are
carried forward into the next period. Permanent accounts are also called real accounts.
Perpetual inventory system means that the inventory account is adjusted perpetually. The inventory account is
affected each time inventory is sold or purchased.
Posting is the process of transferring the accounting information from journals to the ledger. For example, all
information from a cash journal is posted to the ledger to update the cash account(s).
Prepaid expenses are expenses paid in cash and recorded as assets before they are used or consumed.
Prepaid expenses are usually shown in the assets section on the balance sheet.
Prepaid insurance is used to keep track of cash paid for insurance coverage that has not been expensed.
Prepaid insurance is an asset account and presented in the assets section on the balance sheet.
Principal is the amount initially invested (or borrowed).
Product costs are costs required to produce inventory and make it ready for sale. Such costs are directly
associated with inventory production.
Recognition is the fact of recording an event in financial records (books).
Retained earnings form a component of equity resulting from earnings activities.
Revenue is an increase in assets or decrease in liabilities resulting from the operating activities of an entity.
Salary payable represents amounts of future cash payments to employees for work that has already been
performed.
Salvage value is portion of an asset cost that is expected to be recovered at the end of its useful life.

Selling and administrative expenses are expenses of selling and administrative nature that are not directly
traceable to a specific product. Examples are advertising, administrative salaries and insurance, among
others.
Single-step income statement shows only one step in determining a net income (or net loss).
Source document serves as a basis for an accounting entry. Source documents are what accountants use to
record accounting transactions. Source documents are also called business documents.
Specific identification is an actual physical flow inventory costing method in which items still in inventory are
specifically costed to arrive at the total cost of the ending inventory.
Statement of changes in equity shows all changes in owner's equity for a period of time. This statement is
also called Owners' Equity Statement.
Straight-line depreciation is a depreciation method in which periodic depreciation is the same for each period
of the asset useful life.
Sum-of-the-years-digits method applies a decreasing rate to the asset depreciable value and produces a
decreasing depreciation expense over the useful life of the asset. The decreasing rate equals the fraction of a
current year's digit to the total of all year digits in the asset useful life.
Supplies is an asset account used to keep track of supplies (i.e., pencils, paper). The Supplies account is
increased when new supplies are acquired and decreased when supplies are used / expensed(usually in a
single adjusting entry at period end).
T account is an individual accounting record that shows information about increases and decreases in one
balance sheet or income statement account. It is so called because it has a form of letter T.
Tangible assets are those which one can touch and include natural recourses, machinery, tools, equipment,
buildings and land, among others.
Temporary accounts are closed at the end of each period. These are mostly income statement accounts,
except for a distribution account that is equity statement account. Temporary accounts are also called nominal
accounts.
Transportation-in expenditures are cost incurred to delivery inventory from the vendor (supplier) to the
company. Transportation-in costs are treated as part of the inventory costs (product costs).
Transportation-out expenditures are expenses incurred to deliver products from the company to the customer.
Transportation-out expenditures are treated as period costs and expensed in the period of occurrence.
Trial balance is a list of all accounts with their balances at a point in time.
Unearned revenue represents cash received and recorded as liabilities before revenue is earned. These
amounts are shown in the liabilities section on the balance sheet.
Units-of-production method determines the useful life of an asset based on the units of production. Each
period, the units of production determine the depreciation expense.
Useful life is a term of service during which an asset is expected to provide benefits to a company.
Warranty is the seller or manufacturer's promise to do something for a customer (repair, exchange, refund)
about a bad or broken product during a specified time period without additional charges (for free).
Weighted-average (average cost) inventory costing method assumes that the average cost of inventories is to
be recognized as the cost of goods sold.