Basic Accounting Vocabulary

Accounts Payable

The liability created by a purchase on account.

Accounts Receivable

An asset, which is a claim against the customer created by selling merchandise or services on credit.

Account

An accounting form used to record the increases and decreases in each financial statement item.

Accounting Assumptions

It provides the framework upon which accounting standards are constructed. 1

Accounting Cycle

The process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance.

Accounting Equation

It shows the relationship among assets, liabilities, and equity; expressed as Assets = Liabilities + Owner’s Equity.

Accounting Principles

It provides the framework upon which accounting standards are constructed. 2

Accounting Standards

The rules that determine the accounting for individual business transactions.

Accounting

An information system that provides reports to stakeholders about the economic activities and condition of a business.

Accrual Basis

A basis of accounting under which revenues and expenses are reported on the income statement in the period in which they are earned or incurred.

Accrual

A revenue that has been earned or an expense that has been incurred but has not been recorded.

Accumulated Depreciation

The contra asset account credited when recording the depreciation of a fixed asset.

Adjusted Trial Balance

The trial balance prepared after all the adjusting entries have been posted.

Adjusting Entries

The journal entries that bring the accounts up to date at the end of the accounting period.

Adjusting Process

An analysis and updating of the accounts when financial statements are prepared.

Assets

The resources owned by a business.

Balance of The Account

The amount of the difference between the debits and credits that have been entered into an account.

Balance Sheet

A list of the assets, liabilities, and owners equity as of a specific date, usually at the close of the last day of a month or year.

Book Value

The difference between the cost of a fixed asset and ifs accumulated depreciation.

Business Transactions

An economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations

Business

An organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

Comparability

A secondary characteristic of financial information; it includes consistent reporting, that allows users to identify similarities and differences among reported items.

Capital Account

The amount of the owners equity in the business.

Cash Basis of Accounting

A basis of accounting under which revenues and expenses are reported on the income statement in the period in which cash is received or paid.

Certified Public Accountants

Accountants who have met a state’s education, experience, and examination requirements.

Chart of Accounts

A list of the accounts in the ledger.

Closing Entries

The journal entries that transfer the balances of temporary accounts to permanent accounts at the end of the accounting period.

Closing Process

The process of transferring the balances of temporary accounts at the end of the accounting period.

Contra Accounts

An account offset against another account.

Correcting Journal Entry

An entry that is prepared to correct an error to an entry that has already been journalized and posted.

Cost Principle

A concept of accounting that states that an asset should be recorded and maintained in the accounting records at its initial transaction price.

Credit

Amount entered on the right side of an account.

Current Assets

Cash and other assets that are expected to be converted to cash or sold or used up, usually within one year or less, through the normal operations of the business.

Current Liabilities

Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets.

Debit

Amount entered on the left side of an account.

Deferral

A future revenue or expense initially recorded as a liability or asset.

Depreciate

To lose value or usefulness over time.

Depreciation

The systemic periodic transfer of the costs of a fixed asset to an expense account during its expected useful life.

Double Entry Accounting System

A system of accounting for recording transactions, based on recording increases and decreases in accounts so that debits equal credits.

Drawing Account

The amount of withdrawals made by the owner.

Expenses

Amounts used to generate revenue; assets used up or services consumed in the process of generating revenues.

Fixed Assets

Physical resources that are owned and used used in normal business operations and are permanent or have a long life; e.g. equipment, machinery, buildings, and land.

Journal Entry

The record of a transaction entered in a journal, made up of at least one debit and one credit.

Journal

The initial record in which the effects of a transaction are recorded.

Journalizing

The process of recording a transaction in a journal.

Ledger

A group of accounts for a business.

Liabilities

The rights of creditors that represent debts of the business.

Liquidity

A company’s ability to convert assets into cash.

Long term Liabilities

Liabilities that will not be due for a long time (usually more than one year).

Matching Principle

A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

Normal Balance

The side of an account (debit or credit) in which the balance normally appears based on the type of account and whether it is increased by debits or credits.

Notes Receivable

A customer’s written promise to pay an amount and possibly interest at an agreed-upon rate for which a formal, written instrument of credit has been issued.

Owners Equity

The owners right to the assets of the business after all the liabilities have been paid.

Permanent Real Accounts

Term for balance sheet accounts because they are relatively permanent with balances that carry forward year to year.

Posting

The process of transferring the debits and credits from the journal entries to the accounts.

Prepaid Expenses

Assets created by making advanced payments for expense items, such as insurance premiums or supplies, that will be used in the business in the future.

Revenue Recognition Principle

A concept of accounting that states that revenues are recorded when earned, which is when the services have been performed or products have been delivered to customers.

Revenues

Increases in owners equity as a result of providing services or selling goods to customers.

Rules of Debit and Credit

In double entry accounting system, specific rules for recording debits and credits based on the type of account.

Solvency

The ability of a firm to pay its debts as they come due.

T Account

The simplest form of an account, which consists of account title, a debit side, and a credit side.

Temporary Nominal Accounts

Term for income statement accounts because their balances relate to only one period and are not carried forward to the next period.

Trial Balance

A summary listing of the titles and balances of accounts in the ledger, which is used to verify that debits equal credits.

Unadjusted Trial Balance

A trial balance prepared at the end of an accounting period before adjusting entries are made.

Unearned Revenue

The liability created by receiving revenue in advance.