Accounting Cycle

All of the steps in the accounting process including analyzing and recording transactions, posting entries, adjusting and closing the accounts, and preparing financial statements; the accounting system. Back to the top

Accounts Receivable
Short-term monetary assets that arise from sales on credit to customers at either the wholesale or the retail level. Back to the top

Accrual Accounting
The reporting of revenues from sales in the period in which they are sold, regardless of when the cash is received, and the reporting of expenses in the period of purchase, regardless of when the payment is made. Back to the top

Accrued Expense
An expense that has been incurred but is not recognized in the accounts, necessitating an adjusting entry; an unrecorded expense. Back to the top

Accrued Revenue
A revenue for which the service has been performed or the goods have been delivered that has not been recorded in the accounts; an unrecorded revenue. Back to the top

Accumulated Depreciation
A contra-asset account used to accumulate the total past depreciation on a specific long-lived asset. Back to the top

Adjusted Gross Income (AGI)

Gross income minus deductions from gross income. Back to the top

Adjusted Trial Balance

A trial balance prepared after all adjusting entries have been reflected in the accounts. Back to the top

Adjusting Entry
An entry made to apply accrual accounting to transactions that span more than one accounting period or any adjustment needed to make the accounts in balance. Back to the top

Aging of Accounts Receivable

The process of listing each customer in accounts receivable according to the due date of the account. Back to the top

Allowance for Uncollectible Accounts

A contra accounts receivable account in which appears the estimated total of the as yet unidentified accounts receivable that will not be collected Asset, an economic resource owned by a business that is expected to benefit future operations. Back to the top

Average Cost Method (ACM)

An inventory costing method under which each item of goods sold and of inventory is assigned a cost equal to the average cost of all goods purchased. Back to the top

Balance Sheet
A financial statement that shows the financial position of a business at a particular date. Back to the top

Bank Reconciliation
The process of accounting for the differences between the balance appearing on the bank statement and the balance of cash according to the depositor's records. Back to the top

Bond
A security, usually long-term, representing money borrowed by a corporation from the investing public. Back to the top

Book Value
The total assets of a company less total liabilities; owners' equity; Fixed Assets less Depreciation. Back to the top

Break-Even Point
The point in financial analysis at which total revenue equals total cost incurred and at which a company begins to generate a profit. Back to the top

Capital Expenditure
An expenditure for the purchase of expansion of plant assets. Back to the top

Cash Basis of Accounting

A basis of accounting under which revenues and expenses are accounted for on a cash received and cash paid basis. Back to the top

Cash Flow Statement

A financial statement that shows a company's sources and uses of cash during an accounting period. Back to the top

Cash Payments Journal

A multi-column special-purpose journal in which disbursements of cash are recorded; also called cash disbursements journal. Back to the top

Cash Receipts Journal

A multi-column special-purpose journal in which transactions involving receipts of cash are recorded. Back to the top

Closing Entries

Journal entries made at the end of the accounting period that set the stage for the next accounting period by closing the expense and revenue accounts of the balances and transferring the net amount to the owner's capital account or retained earnings; clearing entries. Back to the top

Comparative Financial Statements

Financial statements in which data for two or more years are presented in adjacent columnar form. Back to the top

Compound Entry
A journal entry that has more than one debit and/or credit entry. Back to the top

Compound Interest
The interest cost for two or more periods, if one assumes that after each period the interest of that period is added to the amount of which interest is computed in future periods. In other words, compound interest is interest earned on a principal sum that is increased at the end of each period by the interest of that period. Back to the top

Consolidated Financial Statements

The combined financial statements of a parent company and its subsidiaries. Back to the top

Contra Account
An account whose balance is subtracted from an associated account in the financial statements. Back to the top

Controlling (or Control) Account

An account in the general ledger that summarizes the total balance of a group of related accounts in a subsidiary ledger. Back to the top

Convertible Bonds
Bonds that may be exchanged for other securities of the corporation, usually common stock. Back to the top

Convertible Preferred Stock

Preferred stock that can be converted into common stock. Back to the top

Cost Center
Any organizational segment or area of activity for which it is desirable to accumulate costs. Back to the top

Cost of Goods Sold (COGS)

An item on income statement that is computed by subtracting the merchandise inventory at the end of the year from the goods available for sale; deducted from revenue to give gross profit. Back to the top

Coupon Bonds

Bonds whose owners are not registered with the issuing corporation but that have interest coupons attached. Back to the top

Credit
The right side of an account. Back to the top

Current Assets
Cash or other assets that are reasonably expected to be realized in cash or sold during a normal operating cycle of a business or within one year if the operating cycle is shorter than one year. Back to the top

Current Liabilities
Obligations or debts that are due to be paid within the normal operating cycle of the business or within one year, whichever is longer. Back to the top

Current Ratio
A measure of liquidity; current assets divided by current liabilities. Back to the top

Debit
The left side of an account. Back to the top

Debt to Equity Ratio

A ratio that measures the relationship of assets provided by creditors to the amount provided by stockholders. Back to the top

Declining-Balance Method
An accelerated method of depreciation. Back to the top

Deficit
A debit balance in the Retained Earning account. Back to the top

Depreciation
The periodic allocation of the cost of a tangible long-lived asset over its estimated useful life. Back to the top

Discount
To take out the interest on a promissory note in advance (verb); the amount of the interest deducted (noun). Back to the top

Discounted Cash Flow

The process of discounting future cash flows back to the present using an anticipated discount rate. Back to the top

Double-Declining Balance Method

An accelerated method of depreciation, related to the declining-balance method, under which the fixed rate used in the method is double the straight-line rate; this rate is the maximum allowable for income tax purposes. Back to the top

Double-Entry System
A system of recording business transactions requiring that each transaction have equal debit and credit totals, thereby maintaining a balance within the accounts taken as a whole. Back to the top

Earnings Per Share

An item on corporate income statements that shows the net income earned on each share of common stock; net income divided by weighted average of common shares outstanding; also called net income per share Estimated useful life:, the total number of service units (usually years) expected from a long-term asset. Back to the top

Exchange Rate
The value of one currency in terms of another. Back to the top

Expenditure
A payment or incurrence of an obligation to make a future payment for an asset or service rendered. Back to the top

Expenses
The costs of the goods and services used up in the process of obtaining revenue; expired cost. Back to the top

Extraordinary Items
Events or transactions that are distinguished by their unusual nature and the infrequency of their occurrence. Back to the top

First-In, First-Out (FIFO)

An inventory costing method under which the cost of the first items purchased are assigned to the first items sold and the costs of the last items purchased are assigned to the items remaining in inventory. Back to the top

Fixed Assets
Another name, no longer in wide use, for long-term non-monetary assets. Back to the top

Fixed Cost
A cost that remains constant in total within a relevant range of volume or activity. Back to the top

FOB Destination
A term relating to transportation charges meaning that the supplier bears the transportation costs to the destination. Back to the top

FOB Shipping Point

A term relating to transportation charges meaning that the buyer bears the transportation costs from the point of origin. Back to the top

Freight In
A transportation charges on merchandise purchased for resale; transportation in. Back to the top

Future Value
The amount that an investment will be worth at a future date if invested at compound interest. Back to the top

Generally Accepted Account Principles (GAAP)

The conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. Back to the top

Goodwill
The excess of the cost of a group of assets (usually a business) over the market value of the assets individually. Back to the top

Gross Income
Income from all sources, less allowable exclusions. Back to the top

Gross Profit
The difference between revenue from sales and cost of goods sold; also called gross profit from sales. Back to the top

Gross Sales
The total sales for cash and on credit for a given accounting period. Back to the top

Horizontal Analysis
The computation of dollar amount changes and percentage changes from year to year. Back to the top

Income Statement
A financial statement that shows the amount of income earned by a business over an accounting period. Back to the top

Income Summary
A nominal account used during the closing process in which are summarized all revenues and expenses before the net amount is transferred to the capital account or retained earnings. Back to the top

Intangible Assets

Long-term assets that have no physical substance but have a value based on rights or privileges accruing to the owner. Back to the top

Interest
The cost associated with the use of money for a specific period of time. Back to the top

Inventory Turnover
A ratio that measures the relative size of inventory. Back to the top

Journalizing
The process of recording transactions in a journal. Back to the top

Last-In, First-Out (LIFO)

An inventory costing method under which the costs of the last items purchased are assigned to the first items sold and the cost of the inventory is composed of the cost of items from the oldest purchase. Back to the top

Leasehold Improvement
An improvement to leased property that becomes the property of the lessor at the end of the lease. Back to the top

Leverage
The use of debt financing. Back to the top

Liability
A debt of the business; an amount owed to creditors, employees, government bodies, or others; a claim against assets. Back to the top

Liquidation
The process of ending a business; entails selling assets, paying liabilities, and distributing any remaining assets to the partners. Back to the top

Long-Term Liabilities
The debts of a business that fall due more than one year ahead, beyond the normal operating cycle, or are to be paid out of non-current assets. Back to the top

Lower-of-Cost-or-Market
A method of inventory pricing under which the inventory is priced at cost or market, whichever is lower. Back to the top

Marketable Securities
An investment in securities which are readily marketable; temporary investments. Back to the top

Market Value
The price investors are willing to pay for a share of stock on the open market. Back to the top

Merchandise Inventory
The goods on hand and available for sale to customers. Back to the top

Net Income
The net increase in owners' equity resulting from the profit seeking operations of a company; net income = revenue - expenses. Back to the top

Operating Expenses
The expenses other than cost of goods sold incurred in the operation of a business; especially selling and administrative expenses. Back to the top

Owner's Equity
The resources invested by the owner of the business; asset - liabilities = owner's equity; also called residual equity. Back to the top

Par Value
The amount printed on each share of stock, which must be recorded in the capital stock accounts; used in determining the legal capital of a corporation. Back to the top

Percentage of Net Sales

A method of estimating uncollectible accounts expense based on the assumption that a certain percentage of total net sales will not be collectible. Back to the top

Post-Closing Trial Balance

A trial balance prepared after all adjusting and closing entries have been posted and immediately before the beginning of the next period as a final check on the balance of the ledger. Back to the top

Posting
The process of transferring journal entry information from the journal to the ledger. Back to the top

Preferred Stock
A type of stock that has some preference over common stock, usually including dividends. Back to the top

Prepaid Expenses
The expenses paid in advance that do not expire during the current accounting period; an asset account. Back to the top

Present Value

The amount that must be invested now at a given rate of interest to produce a given future value. Back to the top

Price/Earnings (P/E) Ratio

A ratio that measures the relationship of the current market price of a stock to the earnings per share. Back to the top

Profit Margin
A measure of profitability; the percentage of each sales dollar that results in net income; net income divided by sales. Back to the top

Purchase Order
A document prepared by the accounting department authorizing a supplier to ship specified goods or provide specified services. Back to the top

Purchases Journal
A type of special-purchase journal in which are recorded credit purchases of merchandise (if it is a singlecolumn journal) or credit purchases in general (if it is a multi-column journal). Back to the top

Purchases Returns and Allowances

An account used to accumulate cash refunds and other allowances made by suppliers on merchandise originally purchased for resale; a contra purchases account. Back to the top

Quick Ratio
A ratio that measures the relationship of the more liquid current assets (cash, marketable securities, and accounts receivable) to current liabilities. Back to the top

Receivable Turnover
A ratio that measures the relative size of accounts receivable. Back to the top

Residual Value
The estimated net scrap, salvage, or trade-in value of a tangible asset at the estimated date of disposal; also called salvage value or disposal value. Back to the top

Retained Earnings
The stockholders' equity that has arisen from retaining assets from earnings in the business; the accumulated earnings of a corporation from its inception minus any losses, dividends, or transfers to contributed capital. Back to the top

Retained Earnings Statement

A statement that provides a summary of the changes in retained earnings during the accounting period. Back to the top

Return on Assets
A measure of profitability that shows how efficiently a company is using all its assets. Back to the top

Reversing Entries
The entries made after the closing of records for one accounting period that reverse certain adjusting entries; designed to aid in routine bookkeeping the next accounting period. Usually used to accrue expenses that will be paid next period. Back to the top

Sales Discounts
The discounts given to customers for early payment for sales made on credit; a contra sales account. Back to the top

Sales Journal
A type of special-purpose journal used to record credit sales. Back to the top

Sales Returns and Allowances

An account used to accumulate amount of cash refund granted to customers or other allowances related to prior sales; a contra sales account. Back to the top

Simple Interest
The interest cost for one or more periods, if one assumes that the amount on which the interest is computed stays the same from period to period. Back to the top

Statement of Owner's Equity

A financial statement that shows the changes in the owner's capital investment during the year. Back to the top

Stockholder's Equity
The owners' equity section of a corporation's balance sheet. Back to the top

Straight-Line Method
A method of depreciation that assumes that depreciation is dependent on the passage of time and that allocates an equal amount of depreciation to each period of time. Back to the top

Subchapter S Corporation
A corporation established by the owners of small businesses to gain some of the legal benefits of incorporation while still being taxed as a partnership. Back to the top

Subsidiary
A company whose stock is more than 50% owned by another company. Back to the top

Subsidiary Ledger

A ledger separate from the general ledger; contains a group of related accounts the total of whose balances equal the balance of a controlling account in the general ledger. Back to the top

T Account
A form of an account which has a physical resemblance to the letter T; used to analyze transactions. Back to the top

Tangible Assets
Long-term assets that have physical substance (e.g. equipment, automobiles). Back to the top

Tax Liability
The amount of tax that must be paid based on taxable income and the applicable tax table. Back to the top

Trial Balance
A listing of accounts in the general ledger with their debit or credit balances in respective columns and a totaling of the columns; used to test the equality of debit and credit balances in the ledger. Back to the top

Uncollectible Accounts
The accounts received from customers who cannot or will not pay. Back to the top

Unearned Revenue
A revenue received in advance for which the goods will not be delivered or the services performed during the current accounting period; a liability account. Back to the top

Vertical Analysis
The calculation of percentages to show the relationship of the component parts of a financial statement to the total in the statement. Back to the top

Voucher
A written authorization prepared for each expenditure in a voucher system Back to the top

Working Capital
The amount by which the total current assets exceed total current liabilities. Back to the top

Work in Process Inventory

An inventory account unique to the manufacturing or production area to which all manufacturing costs incurred and assigned to products are charged. The balance at a period-end represents all costs assigned to goods partially completed at that particular time. Back to the top