Key Accounting Terms

An account is a record made in the general ledger.

Assets (Current and Fixed)
Assets are items owned by a company having future economic value that can be measured and expressed in monitory terms i.e. dollars. Current assets are those that will be used within one year. Examples include cash, investments, accounts receivable, inventory, and supplies. Fixed assets (non current) are more long-term i.e. more than a year. Examples include building, machinery, land, equipment, and vehicles. Assets are reported on the balance sheet usually at cost or lower.
Assets = Liabilities + Owner’s (Stockholders’) Equity.

Accumulated Depreciation

The amount of a long-term asset’s cost that has been allocated to Depreciation Expense since the time that the asset was acquired. Accumulated Depreciation is a long-term contra asset account (an asset account with a credit balance) that is reported on the balance sheet under the heading Property, Plant, and Equipment.

Accounts Receivable
The amount of money owed by customers after goods or services have been delivered and/or used. It is a current asset. Invoice terms such as amount payable within 30 days signify that a sale was made on account and was not a cash sale.

Accounts Payable
The amount of money you owe creditors (suppliers, etc.) in return for good and/or services they have delivered. It is a current liability. This account is often referred to as trade payables (as opposed to notes payable, interest payable, etc.)

Accrued Expense
An expense that a company incurs but the transaction has not been entered in the accounting records.

Accrued revenue
Revenue that has been earned but not yet invoiced to the customer.

The systematic reduction of a loan’s principal balance through equal payment amounts which cover interest and principal repayment.

Amortization Expense
The allocation to expenses of the cost of an intangible asset such as a patent, goodwill, bond issue costs, etc.

Arrears are an unpaid overdue debt, or the state of being behind in payments, e.g. an account in arrears such as dividends in arrears.

Accrual is the recognition of revenue when earned or expenses when incurred regardless of when cash is received or disbursed.

Statement of Financial Position i.e. Balance Sheet
The balance sheet reports the assets, liabilities, and owner’s (stockholders’) equity at a specific point in time. The balance sheet is also referred to as the Statement of Financial Position.

Statement of Comprehensive Income i.e. Income Statement
The income statement reports the result for a period i.e. profit or loss by comparing all the revenue earned during that period to all the expenditures incurred. The income and expenditures reported in the income statement could be purely operational in natures or it could be comprehensive in nature which is due to movements in the fair values of the entity’s assets and liabilities.

Bank Reconciliation
Bank reconciliation is the process of comparing the amounts in the cash account in the general ledger to the amounts appearing on the bank statement. The objective is to ascertain amounts consistency and that a company’s amounts are accurate and complete.

Bad Debts Expense
This is an operating expense resulting from making sales on credit and not collecting the customers’ entire accounts receivable balances.

Book Value
The book value of an asset is the amount of cost in its asset account less the accumulated depreciation applicable to the asset. The book value of a company is the amount of owner’s or stockholders’ equity. The book value of bonds payable is the combination of the accounts Bonds Payable and Discount on Bonds Payable or the combination of Bonds Payable and Premium on Bonds Payable.

Bottom Line
Bottom line is a company’s net income, which is the bottom line of the income statement.

A financial asset and its value, such as cash or goods.

Cash Flow
The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time. Having a positive cash flow is essential in order for businesses to survive in the long run.

A current asset account which includes currency, coins, checking accounts, and undeposited checks received from customers. The amounts must be unrestricted. (Restricted cash should be recorded in a different account.)

Cash and cash equivalents
It is a grouping that includes both cash and those marketable assets that are very close to their maturity dates. It is a heading in the balance sheet.

Cost of Goods Sold
The direct expense related to producing the goods sold by a company. This may include the cost of raw materials, employee work hours used in production.

A creditor is someone who has granted credit. If a bank lends a company money, the bank is a creditor. If a supplier sold merchandise to a company on credit, the supplier is a creditor.

Credit Sales
It is non-cash sales made on account i.e. sales where the customer is allowed to pay at a later date.

Current Assets
Cash and other resources that are expected to turn to cash or to be used up within one year of the balance sheet date. (If a company’s operating cycle is longer than one year, an item is a current asset if it will turn to cash or be used up within the operating cycle.) Current assets are presented in the order of liquidity, i.e., cash, temporary investments, accounts receivable, inventory, supplies, prepaid insurance.

Current Liabilities
Obligations due within one year of the balance sheet date. (If a company’s operating cycle is longer than one year, an item is a current liability if it is due within the operating cycle.) Another condition is that the item will use cash or it will create another current liability. (This means that if a bond payable is due within one year of the balance sheet date, but the bond will be retired by a bond sinking fund (a long-term restricted asset) the bond will not be reported as a current liability.)

Deferred Expense
Deferred expense is an expenses or cost that has been recorded in the accounting records and reported on the balance sheet as an asset until matched with revenues on the income statement in another accounting period.

A debtor is a person that owes money. If a bank lent you money, you are the debtor and the bank is the creditor.

Deferred Revenue
Deferred revenue is revenue or income for which the cash has been collected by a company, but it is yet to be “earned”.

Depreciation is the systematic allocation of the cost of an asset and is the amount of expense charged against earnings by a company to write off the cost of a plant or machine over its useful live, giving consideration to wear and tear, obsolescence, and salvage value.

Direct Cost
Direct cost is a cost that can be traced to a cost object.

EBITDA is the acronym for earnings before interest, taxes, depreciation, and amortization. This measure is used by some companies as a supplementary disclosure, since EBITDA does not comply with U.S. GAAP (generally accepted accounting principles). Some people use EBITDA when attempting to estimate the value of a company.

Equity is stockholders’ equity, owner’s equity, or a nonprofit organization’s net assets.Equity = Assets – Liabilities.

Fixed Assets
Fixed assets are long-term tangible assets that are not expected to be converted into cash in the current or upcoming fiscal year, e.g., buildings, real estate, production equipment, and furniture. Fixed assets other than land are depreciated.

Fixed Expenses
Fixed expenses are expenses that do not change in response to reasonable changes in sales or other activity.

Gross Profit
Net sales revenues minus the cost of goods sold.

Net Income
Net Income is a company’s total earnings, also called net profit or the “bottom line.”

Net Income = Total Revenue – Total Expenses.
Owner’s Equity

An owner’s equity is typically explained in terms of the percentage amount of stock a person has ownership interest in the company. The owners of the stock are commonly referred to as the shareholders.

Working Capital
Working Capital = Current assets – current liabilities.

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