ACCOUNTING TERMINOLOGIES

AICPA - AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

AAA- AMERICAN ACCOUNTING ASSOCIATION

Accounting – The process of identifying, measuring, recording and communicating the

required information relating to the economic events of an organisation to the interestedusers of
such information.

Account Payable - Amount owed to a creditor for delivered goods or completed services

Asset – asset are economic resources of an enterprise that can be usefully expressed in
monetary terms.

Account Receivable - Claim against a debtor for an uncollected amount, generally from a
completed transaction of sales or services rendered

Accountant - Person skilled in the recording and reporting of financial transactions

Accrual Basis - Method of accounting that recognizes revenue when earned, rather than
when collected. Expenses are recognized when incurred rather than when paid

Accumulated Depreciation - Total depreciation pertaining to an asset or group of assets

from the time the assets were placed in services until the date of the financial statement

Amortization - Gradual and periodic reduction of any amount, such as the periodic written
down of the cost of an intangible asset or periodic payment of mortgages or other debt

Current Asset – Current Asset are asset held on a short-term basis such as
debtors(accounts receivable), bills receivable (notes receivable), stock(inventory), temporary
marketable securities, cash and bank balances.

Fixed Asset- Fixed assets are assets held on a long-term basis,such as land, buildings,
machinery, plant etc.

Auditor - Person who audits financial accounts and records kept by others. Includes both public
accounting firms and associated persons thereof.

Bad Debt - All or portion of an account, loan, or note receivable considered to be uncollectible

Balance - Sum of debit entries minus the sum of credit entries in an account. If positive, the
difference is called a debit balance; if negative, a credit balance

Balance Sheet - Basic financial statement, usually accompanied by appropriate disclosures

that describe the basis of accounting used in its preparation and presentation of a specified date
the entity's assets, liabilities and the equity of its owners. Also known as a STATEMENT OF
FINANCIAL CONDITION

Bond - One type of long-term promissory note, frequently issued to the public as a security.
Bonds can be registered in the owner's name

Book Value - Amount, net or contra balances, that an asset or liability shows on the balance
sheet of a company. Also known as carrying value

Capital- Amount invested by the owner in the firm is known as capital.

Cash Basis - Method of bookkeeping by which revenues and expenditures are recorded when
they are received and paid

Certified Public Accountant (CPA) - Accountant who has satisfied the education,
experience, and examination requirements of his or her jurisdiction necessary to be certified as a
public accountant

Collateral – Asset provided to a creditor as security for a loan

Cost Accounting - Procedures used for rationally classifying, recording, and allocating
current or predicted costs that relate to a certain product or production process

Credit - Entry on the right side of a double-entry book-keeping system that represents the
reduction of an asset or expense or the addition to a liabilty or revenue

Creditor – Creditors are persons and/or other entities who have to be paid by an enterprise an
amount for providing the enterprise goods and services on credit.

Debit - Entry on the left side of a double-entry book-keeping system that represents the addition
of an asset or expense or the reduction to a liability or revenue

Debt - General name for money, notes, bonds, goods or services which represent amounts
owed

Debtor - Party owing money or other assets to a creditor

Discount- Discount is the deducation I the prices of the goods sold.

Depreciation - Expense allowance made for wear and tear on an asset over its estimated
useful lifee

Double-Entry Bookkeeping - Method of recording financial transactions in which each

transaction is entered in two or more accounts and involves two-way, self-balancing posting.
Total debits must equal total credits

Distribution Expense - Expense of selling, advertising, and delivery of goods and services
Earned Income - Wages, salaries, professional fees, and other amounts received as
compensation for services rendered

Earnings Per Share (EPS) - Measure of performance calculated by dividing the net
earnings of a company by the average number of shares outstanding during a period.

Expenditure- Costs incurred by a business in the process of earning revenue are known
as expenses.

Expenditure- Sending money or incurring a liability for some benefit, service or Property
received is called expenditure.

E
ntity- Entity means a thing that has a definite individual existence. Business entity means a
specifically identifiable business enterprise like Super Bazaar, Hire Jeweller, etc

Financial Statements - Presentation of financial data including BALANCE SHEETS,

INCOME STATEMENTS and STATEMENTS OF CASH FLOW, or any supporting statement that
is intended to communicate an entity's financial position at a point in time and its results of
operations for a period then ended

Gain - Excess of revenues received over costs relating to a specific transaction

Going Concern - Assumption that a business can remain in operation long enough for all of
its current plans to be carried ous.

Goodwill - Premium paid in the acquisition of an entity over the fair value of its identifiable
tangible and intangible assets less liabilities assumed

Income - Inflow of revenue during a period of time

Insolvent - When an entity's liabilities exceed its assets

Installment - Partial payment

Intangible Asset - Asset having no physical existence such as trademarks and patents

Interest - Payment for the use or forbearance of money

Inventory - Tangible property held for sale, or materials used in a production process to make
a product

Journal - Any book containing original entries of daily financial transactions

Lease - Conveyance of land, buildings, equipment or other assets from one person (lessor) to
another (lessee) for a specific period of time for monetary or other consideration, usually in the
form of rent
Ledger - Any book of accounts containing the summaries of debit and credit entries

Liability – Liabilities are obligations or debts that an enterprise has to pay at some time in
future. Liabilities are classified as long-term liabilities and short-term liabilities.

Long-term Liabilities- Long-term liabilities are those that are usually payable after a
period one year, for example, a term long form a financial institution or debentures(bonds) issud
by a compny.

Short-term Liabilities- Short-term liabilities are obligations that are

payable within a period of one year, for example, creditors, bills payable, etc.

Liquid Assets - Cash, cash equivalents, and marketable securities

Loss – The excess of expenses of a period over its related revenues its termed as loss.

Management Accounting - Reporting designed to assist management in decision-making,

planning, and control. Also known as Managerial Accounting

Marketable Securities - Stocks and other negotiable instruments which can be easily
bought and sold on either listed exchanges or over-the-counter markets

Net Assets - Excess of the value of securities owned, cash, receivables, and other assets over
the liabilities of the company

Net Income - Excess or deficit of total revenues and gains compared with total expenses and
losses for an accounting period

Net Sales - Sales at gross invoice amounts less any adjustments for returns, allowances, or
discounts taken.

Profit- The excess of revenues of a period over its related expenses during an accounting
year is profit.

Paid in Capital - Portion of the stockholders' equity which was paid in by the stockholders, as
opposed to capital arising from profitable operations

Parent Company - Company that has a controlling interest in the common stock of another

Partnership - Relationship between two or more persons based on a written, oral, or implied
agreement whereby they agree to carry on a trade or business for profit and share the resulting
profits

Par Value - Amount per share set in the Articles of Incorporation of a Corporation to be entered
in the capital stocks account where it is left permanently and signifies a cushion of Equity capital
for the protection of creditors
Prepaid Expense - Cost incurred to acquire economically useful goods or services that are
expected to be consumed in the revenue-earning process within the operating cycle

Receivables - Amounts of money due from customers or other debtors

Repairs - Expenditures made in order to keep property in good condition but that do not
appreciably prolong the life or increase the value of the property

Retained Earnings - Accumulated undistributed earnings of a company retained for future

needs or for future distribution to its owners

Return on Investment (ROI) - Ratio measure of the profits achieved by a firm through its
basic operations. An indicator of management's general effectiveness and efficiency. The
simplest version is the ratio of Net Income to total Assets

Revenues – There are the amounts of the business earned by selling its products or providing
services to customers, called sales revenue.

Short-Term – Current, ordinarily due within one year

Transaction- A event involving some value between two or more entities.

Tangible Asset - Assets having a physical existence, such as cash, land, buildings,
machinery, or claims on property, investments or goods in process

Tax - Charge levied by a governmental unit on income, consumption, wealth, or other basis

Term Loan - Loan for a specified time period

Unearned Income - Payments received for services which have not yet been performed

Working Capital - Excess of Current Assets over Current Liabilities

Work in Progress - Inventory account consisting of partially completed goods awaiting

completion and transfer to finished inventory

ACCOUNTING EQUATION

Accounting equation is based on dual aspect concept. In the dual aspect concept, every
business transaction has a two-sided effect, that is, on the assets side and also claims on
asset.

The total claims (those of outsiders and of the proprietors) will equal the total assets of
the firm. The claims, also known as equities, are of two types:-
• Owner’s capital or equity
• Liabilities or amounts due to outsiders

We can express the same as:

Assets = Liabilities + Capital

 Capital = Assets – Liabilities

Some examples will help us understand the accounting equations better

 Increase in one asset, decrease in another asset

Purchase of furniture for cash – Increase in furniture(asset) and decrease in cash(asset)

 Increase in asset, increase in liability

Purchase of furniture on credit – Increase in furniture(asset) and increase in liability

 Increase in asset, increase in owner’s capital

Capital introduce by proprietor – Increase in cash(asset) and increase in capital

 Decrease in asset, decrease in liability

Payment to creditors – Decrease in cash(asset) and decrease in creditors(liability)

 Decrease in asset, decrease in owner’s capital

Cash withdrawn by proprietor – Decrease in cash(asset) and decrease in capital

 Decrease in liabilities, increase in owner’s capital

Conversion of partner’s loan into capital – Increase in capital and decrease in
loan(liability)

 Increase in one liability, decrease in another liability

Bills payable accepted – Increase in bills payable(liability) and decrease in
creditors(liability)

 Increase in liabilities, decrease in owner’s capital

Rent outstanding – Increase in creditors for outstanding rent(liability) and decrease in
capital