accounting vocabulary

Accelerated Depreciation Method

Allocates a higher depreciation in the earlier years of the asset’s life and lower depreciation in later years.

Account

A record of the business activities related to a particular item.

Accounting

A system of maintaining records of a company’s operations and communicating that information to decision-makers.

Accounting Cycle

Full set of procedures used to accomplish the measurement/communication process of financial accounting.

Accounting Equation

An equation that shows a company’s resources (assets) equal creditors’ and owners’ claims to those resources (liabilities and stockholders’ equity).

Accounts Receivable

The amounts owed to the company by its customers from the sale of goods or services on account.

Accrual-Basis Accounting

Recording revenues when goods and services are provided to customers, and recording expenses for the costs used to provide those goods and services.

Accrued Expenses

Costs incurred in the current period that have not yet been paid in cash.

Accrued Revenues

Revenues earned but not yet received in cash.

Accumulated Deficit

A negative balance in retained earnings.

Accumulated Depreciation

A contra asset account representing the total depreciation taken to date.

Acid-Test Ratio

Measures the availability of liquid current assets to pay current liabilities.

Activity-Based Method

Allocates an asset’s cost based on its use.

Addition

Occurs when a new major component is added to an existing asset.

Additional Paid-In Capital

The portion of cash proceeds from issuing stock above par value.

Adjusted Trial Balance

A list of all accounts and their balances after updating for adjusting entries.

Adjusting Entries

Entries made at the end of the period to update balances of revenues and expenses.

Aging Method

Estimates future bad debts based on the age of individual accounts receivable.

Aggressive Accounting Practices

Practices that result in reporting higher income, higher assets, and lower liabilities.

Allowance for Uncollectible Accounts

Contra asset account representing the amount of accounts receivable not expected to be collected.

Allowance Method

Method of reporting accounts receivable for the net amount expected to be collected.

Amortization

Allocation of the cost of an intangible asset over its service life.

Amortization Schedule

A table detailing cash payments, interest portions, and changes in carrying value.

Angel Investors

Wealthy individuals willing to invest in promising business ventures.

Annuity

Cash payments of equal amounts over equal time periods.

Articles of Incorporation

Describes the nature of the firm’s business activities and initial board composition.

Assets

Resources owned by a company.

Asset Turnover

Measures sales per dollar of assets invested.

Auditors

Independent professionals who express opinions on financial statements.

Authorized Stock

Shares available for sale as stated in the company’s articles of incorporation.

Average Collection Period

Approximate number of days accounts receivable are outstanding.

Average Days in Inventory

Approximate number of days inventory is held.

Balance Sheet

A financial statement presenting a company's financial position on a specific date.

Bad Debt Expense

Cost of estimated future bad debts reported as an expense.

Bank Reconciliation

Matching cash balances in bank accounts with company records.

Basket Purchase

Purchase of multiple assets for one price.

Big Bath

Recording all losses in one year to make a bad year worse.

Book Value

An asset’s original cost less accumulated depreciation.

Bond

A formal debt instrument obligating repayment of principal and interest.

Callable

A bond feature allowing early repayment at a specified price.

Capitalize

To record an expenditure as an asset.

Capital Structure

The mixture of liabilities and stockholders’ equity in a business.

Carrying Value

The amount a liability is reported at in the balance sheet.

Cash

Currency, coins, and balances in accounts.

Cash-Basis Accounting

Records revenues and expenses when cash is received or paid.

Cash Equivalents

Short-term investments with a maturity of no longer than three months.

Cash Flow to Sales

Measures operating cash flow generated per dollar of sales.

Cash Return on Assets

Measures operating cash flow generated per dollar of assets.

Chart of Accounts

A list of all account names used to record transactions.

Checks Outstanding

Checks written by the company not yet deducted from the bank balance.

Classified Balance Sheet

Balance sheet that groups a company’s assets into current assets and long-term assets and that separates liabilities into current liabilities and long-term liabilities.

Closing entries

Entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the retained earnings account.

Collusion

Two or more people acting in coordination to circumvent internal controls.

Commercial paper

Borrowing from another company rather than from a bank.

Common stock

Amounts invested by stockholders when they purchase shares of stock; external source of equity.

Comparability

The ability of users to see similarities and differences between two different business activities.

Conservative accounting practices

Practices that results in reporting lower income, lower assets, and higher liabilities.

Contingencies

Uncertain situations that can results in a gain or a loss for a company..

Contingent gain

An existing uncertain situation that might result in a gain.

Contingent liability

An existing uncertain situation that might result in a loss.

Contra account

An account with a balance that is the opposite, or “contra.” to that of its related accounts.

Contra revenue account

Can account with a balance that is opposite, or “contra,” to that of its related revenue account.

Consistency

The use of similar accounting procedures either over time for the same company or across companies at the same point in time.

Convertible

A bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock

• shares that can be exchanged for common stock

Copyright

An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software

Corporation

An entity that is legally separate from its owners and even pays its own income taxes

Cost constraint

Financial accounting information is provided only when the benefits of doing so exceed the costs.

Cost of goods sold (COGS)

Cost of the inventory that was sold during the period.

Credit

Right side of an account. indicates an increase to asset, expense, or dividend accounts, and a decrease to liability, stockholders’ equity, or revenue accounts.

Creditors

Lend money to a company, expecting to be paid back the loan amount plus interest.

Credit sales

Transfer of goods or services to a customer today while bearing the risk of collecting payment from that customer in the future. also known as sales on account or services on account

Cumulative

Preferred stock shares receive priority for future dividends, if dividends are not declared in a given year.

Current liabilities

Obligations that, in most cases, are due within one year from the balance sheet date. however, when a company has an operating cycle of longer than a year, its _______________ are defined by the length of the operating cycle, rather than by the length of one year.

Current portion of long-term debt

Debt that will be paid within one year from the balance sheet date.

Current ratio

Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.

Debt convenant

An agreement between a borrower and a lender requiring certain minimum financial measures be met or the lender can recall the debt.

Debt financing

Borrowing money from creditors (liabilities).

Debt to equity ratio

Total liabilities divided by total stockholders’ equity; measures a company’s risk.

Decision usefulness

The ability of the information to be useful in decision-making.

Declaration date

The date the board of directors announces the next dividend to be paid.

Declining-balance method

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years.

Default risk

The risk that a company will be unable to pay the bond’s face amount or interest payments as they become due.

Deferred revenues

Arise when a company receives cash in advance from customers, but goods and services won’t be provided until a later period

• cash received in advance from a customer for products or services to be provided in the future

Deposits outstanding

Cash receipts of the company that have not been added to the bank’s record of the company’s balance.

Depreciation

The process of allocating the cost of a long-term asset to expense over its useful life.

Depreciation method

The pattern in which the assets’s depreciable cost (original cost minus residual value) is allocated over time.

Direct method

Adjusts the items in teh income statement to directly show the cash inflows and outflows from operations, such as cash received from customers and cash paid for inventory, salaries, rent interest, and taxes.

Direct write-off method

Recording bad debt expense at the time we know the account is actually uncollectible.

Discontinued operation

The sale or disposal of a significant component of a company’s operations.

Discount

A bond’s issue price is below the face amount.

Dividend

Distributions to stockholders, typically in the form of cash.

Dividends in arrears

Unpaid dividends on cumulative preferred stock.

Dividend yield

Dividends per share divided by the stock price

Double taxation

Corporate income is taxed once on earnings at the corporate level and again in dividends at the individual level.

Early extinguishment of debt

The issuer retires debt before its scheduled maturity date

Earnings per share (EPS)

Net income available to common shareholders divided by average shares of common stock oustanding

Economic Entity assumption

All economic events with a particular economic entity can be idenfitied.

Ethics

A code or moral system that provides criteria for evaluating right and wrong behavior.

Equity financing

Obtaining investment from stockholders’ (stockholders’ equity)

Expenses

costs of providing products and services and other business activities during the current period