Accounting Dictionary

A | B | C | D | E | F | G | H | I | J | L | M | N | O | P | Q | R | S | T | U | V | W |

A

Accelerated depreciation
A method of allocating the cost of a fixed asset over its useful life in a manner that allows more cost to be depreciated in the earlier years than later years. The rationale supporting this method is that a fixed asset is more productive in its earlier years than in its later years.

Account
1) A ledger that records the activity of increases and decreases of a particular nature. 2) One of the accounts that make up the general ledger accounts. 3) An account that is listed on the chart of accounts.

Account payable
A current liability owed by the company to a vendor for purchase of goods or services.

Account receivable
A current asset owed to the company by customers when they purchase goods and services.

Accounting
The function of gathering and recording financial information of a business entity for the purpose of preparing summary reports that can be analyzed and used to make managerial decisions.

Accounting environment
Refers to the community of accounting, such as types of business organizations, flexibility of accounting rules, who the accounting authorities are, who uses financial statements, who the accounting professionals are and what accounting systems are available.

Accounting equation for the balance sheet
Assets = Liabilities + Equity. Provides the underlying foundation for double-entry accounting.

Accounting equation for the statement of income
Revenue - Expenses = Net Income or Loss. Measures whether the company sustained a profit or a loss from their sales activity during an accounting period.

Accounting framework
Assets, liabilities, equity, revenue, expense.

Accounting model
A format that depicts the debits and credits and increases and decreases for each section in the accounting framework.

Accounting periods
One of the six basic assumptions of accounting information. The assumption that reports of activity are measured during specific time-intervals called "accounting periods". An accounting period is an interval between one point in time and another during which the financial activity of a business is measured. Usually by month or quarter but not longer than one year.

Accounts receivable turnover ratio
Total credit sales for the year divided by the total amount of accounts receivable outstanding. Provides a way to measure collection success.

Accrual basis
The method by which revenues are recorded when earned and expenses are recorded when they are incurred, as opposed to a cash-basis method of accounting that measures revenue when cash is received and measures expenses when they are paid. The accrual method must be used in order for financial statements to be considered prepared according to Generally Accepted Accounting Principles (GAAP).

Accumulated depreciation
The total depreciation that has been expensed since a fixed asset was originally acquired. The accumulated amount offsets the fixed assets and results in the net book value of the fixed assets.

Accumulated net income
An equity account of a sole proprietorship that reflects an accumulation of prior year profits and losses. It is the account that current year revenue and expense accounts are closed into at the end of each year.

Accurate
One of the three criteria of "Dependability" which is one of the two primary characteristics of accounting information. For financial statements of be considered reasonably accurate or valid, means that they say what they mean to say. They are not overstated or understated.

Acid-test ratio
The ratio of quick current assets to current liabilities. This ratio measures the ease in which the company can pay off its short-term liabilities, therefore a 1 to 1 ratio is deemed acceptable. Anything less is questionable. It is one of the ratios that tests the financial health of a business and is also known as the quick ratio.

Additional Paid-in-Capital
Capital paid in by stockholders in excess of the stated value of the stock that was issued to them.

Adjusting journal entry
Same as journal entry.

Agent
A person authorized to act on behalf of another person.

Allocate
To spread the cost of an item systematically among other items. For example, a check amount was written to replenish petty cash and can be allocated among several expense accounts such as postage, office expense, and meals and entertainment.

American Institute of Certified Public Accountants
The primary association of certified public accountants. Members are bound to follow the ethical and auditing standards prescribed by the AICPA and to financial accounting standards prescribed by the Financial Accounting Standards Board (FASB).

Amortization
Spreading the cost of intangible assets over a uniform period of time. Similar to the process of depreciation.

Analogical
Based on an analogy.

Analogy
Correspondence in some respects between otherwise dissimilar things.

Asset
An economic resource a company has possession and control over that will provide a future benefit.

Audit
The process of examining a company's financial records by either external or internal auditors for the purpose of rendering an opinion as to the quality of the financial records.

Audit trail
The ability to follow a summary number back to its original source.

Auditors
See audit.

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B

Bad debt
An account receivable amount from a customer that will never be collected.

Balance
1) The amount remaining in a general ledger account. Or 2), whether the two sides of a ledger are "in" balance or "out" of balance, i.e., the debits either equal or don't equal the credits.

Balance Sheet
One of the three primary financial statements, the balance sheet reflects the measurement of the company's assets, liabilities and equity position at a given point in time.

Bank charge
Service fees and other charges a bank levies on its customers.

Bank reconciliation
A process by which to compare an entity's book cash balance with the bank's cash balance as of a given period to note any discrepancies.

Bankrupt
When a company's liabilities exceed their assets to such an extent they seek protection under the law from creditors.

Beginning inventory
The amount of inventory on hand or recorded as of the beginning of the accounting period. Also, the beginning inventory figure is the ending inventory figure from the previous accounting period.

Big picture
Accounting jargon for knowing how all the general ledger accounts function in an accounting system.

Billings
Invoices sent to customers or clients that reflect the amount due for goods sold or services rendered.

Book inventory
The amount of inventory recorded in the general ledger as opposed to the actual amount of inventory on hand.

Book value
The difference between the original cost of an asset and its accumulated depreciation.

Books
A general reference to all of the financial journals and ledgers associated with a set of financial statements.

Bottom line
A popular way of referring to Net Profit or Loss.

Budget
An itemized summary of probable expenses and revenue for a given accounting period.

By-product
Something produced in the making of something else.

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C

Calendar year
The period between January 1, and December 31, of a year. It can be the fiscal year for a business entity.

Capital
The amount of the owner's equity in a business.

Capital asset
An asset with a life longer than one year. Usually refers to a tangible fixed asset.

Capital lease
A lease agreement that is in fact a contract of sale, causing the lease to be set up similar to a long-term notes payable. Also called a "lease obligation".

Capital stock
A general ledger account found in the equity section of a balance sheet. The account shows the amounts stockholders paid to acquire their shares of stock.

Capitalize
To record an expenditure as an asset rather than as an expense. Also, it can refer to the process of contributing cash or property to the business by the owners.

Cash
Money on-hand or in the bank.

Cash Basis
Measures revenue when cash is received and measures expenses when they are paid.

Cash discount
An offer to reduce the sales price if prompt payment is made.

Cash flow
The difference between cash in and cash out of a business. The amount of cash remaining is referred to as cash flow.

Cash flows statement
One of the three primary financial statements. It is a report that shows where the cash came from (sources) and where the cash went (uses). A cash flow statement shows the inflows and outflows of cash in three classifications; operating activities, financing activities and investing activities.

Caveat Emptor
Latin for "Let the Buyer Beware". An admonition that the buyer should be cautious when buying goods and services in the market place.

Certified Public Accountant
A person who has been licensed by their state board of accountancy to practice public accounting.

Charge
Used as a verb meaning to debit a general ledger account.

Charge off
To record as an expense an amount that was recorded as an asset. For instance, when an account receivable is considered to have no more future value as an asset, it can be "charged off" to bad debt expense.

Chart of accounts
A list of all the names and numbers of the accounts found in the general ledger.

Closing entries
Journal entries that close the ending balances of the revenue and expense accounts and transfer them into the appropriate equity account in the balance sheet, i.e., retained earnings, owner's equity or partner's equity, etc.

Collateral
Assets that are pledged to be used in case a borrower defaults on a loan.

Common stock
Stock, held by shareholders of a corporation, that has no preferential treatment associated with it.

Comparability
One of the four secondary characteristics of accounting information. If accounting methods have been consistent from period to period then financial statement information can be compared to other financial statement information. For instance, information that is compared from a prior accounting period to a current accounting period or to a projected accounting period can determine if there are any similarities or differences. If apples are compared to apples then the information can be depended on.

Compound interest
Interest calculated on the principal plus the amount of previously accumulated interest.

Conservatism rule
One of the five rules of operation of financial statements. Takes into consideration the uncertainty and risks inherent in business situations. Stresses prudence when recording transactions. Revenue is recorded when it is "reasonably certain" the transaction will actually happen, i.e., when goods and services are delivered. Losses are recorded when "reasonably possible" which means they are likely to occur. Expenses are recorded when assets are consumed or used under the matching rule.

Consistency
One of the four secondary characteristics of accounting information. A company's method of accounting should remain the same from accounting period to accounting period in order for the user of the financial statements to be able to depend on them. For instance, switching from accrual to cash, straight-line depreciation to double-declining depreciation, the retail inventory method to the perpetual inventory method every once in a while would only cause confusion and prove that the financial statements were not to be trusted.

Continuity
1) Refers to making sure that the beginning balance of the equity accounts of an entity are the same as the ending balance of the equity accounts in the previous accounting period or year. See Consistency 2) Also refers to the concept of a "going concern" assumption that the entity will still be in business tomorrow.

Contra account
An account that accumulates amounts that are actually subtractions from another account. For instance, Accumulated Depreciation is subtracted from Fixed Assets because depreciation represents a fraction of the cost of fixed assets as they are being used.

Contributed capital
The amount of money or property that an owner personally puts into a business in return for an equity position.

Control account
A general ledger account that consists of a summary of detailed information coming from a subsidiary ledger. For example accounts receivable is the control account for the individual accounts receivable subsidiary ledgers.

Controller
A person who is in charge of the accounting system of a business.

Corporation
A body of persons granted a charter legally recognizing it as a separate entity having its own rights, privileges, and liabilities distinct from its individual owners.

Cost
A monetary measure of the amount of resources used for some purpose.

Cost of capital
Amount of interest paid for the use of capital.

Cost of goods sold
The cost of goods that have been removed from inventory and delivered to customers (sold) during an accounting period.

Cost of sales
Direct costs associated with sales revenue during an accounting period.

Covenants
A binding agreement made by two or more persons or parties.

Credit
1) (Noun) The right-hand side of a ledger page, an amount entered on the right-hand side of a ledger page. 2) (Verb) To record a credit entry to the right hand side of a ledger page. 3) Can also be when a vendor extends the privilege of paying an invoice at a later date.

Credit sales
Sales that result in an accounts receivable balance.

Creditor
A party to whom money is owed.

Current assets
Assets that are expected to be used up within one year.

Current liabilities
Obligations that will be paid within one year.

Current ratio
The total of current assets divided by the total of current liabilities.

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D

Debit
1) (Noun) The left-hand side of a ledger page, or an amount entered on the left-hand side of a ledger page. 2) (Verb) To record a debit entry to the left-hand side of a ledger page.

Debt
An amount that is owed.

Debt to equity ratio
1) A comparison of a business entity's total debt to its total equity. 2) Measures how dependent a business has become on borrowed money. A rule of thumb is that lenders don't like to see a ratio higher than 2 to 1 or twice the debt to equity.

Debtor
A person or entity who has an obligation to pay.

Deduction method
A method of deducing the cost of goods sold by adding beginning inventory to merchandise purchases and subtracting ending inventory.

Default
Failure to pay a debt when due.

Deferred income
See Deferred revenue.

Deferred revenue
Refers to advances from customers and is recorded as a liability until it is actually earned.

Deficit
An amount of money that falls short of an expected amount. Used in non-profit financial statements instead of the word "loss".

Dependability
One of the two primary characteristics of accounting information that make financial statements useful. To depend on a financial statement means that the information contained in them must be reliable or trustworthy.

Depreciation
A portion of the cost that reflects the use of a fixed asset during an accounting period. Cost recovery.

Dialogue
A conversation between two or more people.

Direct cost
Cost that can be directly associated with the production of revenue, such as direct labor or direct materials.

Direct expense
Direct cost.

Disbursement
Payment of cash.

Disclosure
Reporting information about conditions that pertain to the financial statements.

Discount
Any deduction from a gross amount.

Disposition of assets
When assets of an entity are removed either by sale, trade or discard.

Dividend
Funds distributed to shareholders of a corporation that are based on profitable operations.

Double-Entry Method
One of the six basic assumptions of accounting information. The assumption that financial statements are prepared using the "double-entry" method. It is a method of accounting that uses two sides of a ledger page to keep track of transactions. The accounting equation Assets = Liabilities + Equity is the foundation for this system. All entries on the left (debit) side must equal all entries on the right (credit) side of the ledger.

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E

Earnings
The same as net income or net profit.

Economic life
Same as service life or useful life. The period of time that an asset is expected to provide benefits.

Economic resource
A good or service that is acquired by an entity that is expected to provide future benefits.

Elements
In accounting, the elements refer to the general ledger accounts.

Employee
A person who works for another in exchange for financial compensation.

Ending inventory
The amount of inventory on hand at the end of an accounting period.

Entity
In business, it is referred to as a separate organization unto itself. In accounting, it is an organization for which a set of accounts is kept.

Entrepreneur
One who organizes, operates, and assumes the risk in a business venture in expectation of gaining the profit.

Entry
A transaction that is recorded in the books.

Equity
The value of assets above any liabilities.

Expenditure
The purchase of goods or services by cash or credit that have not expired or been used yet.

Expense
1) All goods and services or any resources that are acquired are considered to be an asset of an entity. When an asset is used or consumed it is considered to be an expense resulting in a decrease in equity. 2) An expenditure made to acquire an asset is an unexpired cost. An expired cost is an expense. 3) Revenue increases equity, expenses decrease equity.

Expense rule
One of the five rules of operation of financial statements. When an asset is "used" it becomes an expense that must be Recognized (recorded) within the accounting period in which it was consumed.

Expensing
The process of charging the cost of an asset to expense resulting in a debit to the general ledger accounts.

Expired cost
Same as expense.

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F

Fair market value
The price that would be paid in an arm's length exchange between two parties, both of whom have all available information about the item being exchanged.

FASB
Financial Accounting Standards Board. A body of experts who sets the standards for financial accounting for non-governmental entities.

Feedback
One of the three criteria of “Practicality” which is one of the two primary characteristics of accounting information. Decisions are made based on available information, however, it is valuable to confirm or correct those decisions with new available information.

FICA
Federal Insurance Contributions Act - Refers to the amount of employee and employer contributions for Social Security.

FIFO
First-In, First-Out method of determining cost of sales. The cost of inventory purchased first is assumed to have been used first.

Financial accounting
The process of collecting, summarizing and reporting financial information of an entity according to established standards and principles.

Financial statements
A balance sheet, statement of income & expense and statement of cash flow.

Finished goods inventory
Goods that have been completely manufactured but not yet shipped.

Fiscal year
A 12-month accounting period that a business entity designates based on the natural cycle of their activity, i.e, a school could end its year on June 30 when students have left for the summer.

Fixed asset
Tangible, non-current assets that have a useful life of one year or more. Usually is property, plant, and equipment.

Formula
An established form of words for use in a procedure.

Fraud
A deliberate deception practiced so as to secure unfair or unlawful gain.

Full Disclosure Rule
One of the five rules of operation of financial statements. This rule is only applicable in accrual basis accounting. The concept of full disclosure is that a user of financial statements should be made aware of any and all significant accounting procedures and policies or other relevant information that might have an impact on the interpretation of the financial statements.

Fund accounting
A method of accounting used in non-profit organizations. For small organizations, it is used to keep track of funds restricted to specific purposes.

Funds
Most often referred to as cash, however, can be used in other contexts, such as working capital.

FUTA
Federal Unemployment Tax Act - Refers to the amount of employer contributions for federal unemployment tax.

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G

Gain
When the sales price of a fixed asset exceeds the fixed asset's book value.

General expenses
Indirect expenses as opposed to direct expenses.

General journal
The primary journal or place to record transactions that do not fit in any other journal.

General ledger
All the primary accounts contained in a full set of financial statements.

Generally Accepted Accounting Principles
A document put forth by FASB that outlines the standards and principles required by full accrual accounting.

Going concern
One of the six basic assumptions of accounting information. The assumption that the business has continuity and is not likely to stop tomorrow.

Goods
Tangible products either purchased or produced by an entity.

Goods in process
1) In manufacturing, it is raw materials inventory that are being worked on. 2) The stage of progress before finished goods inventory.

Goodwill
An identifiable tangible asset, the superior earnings of an entity. The excess value of a company over its net assets, goodwill is recorded as an asset only if it was purchased.

Gross
An amount before any deductions.

Gross profit
The amount remaining after cost of sales is subtracted from sales revenue.

Gross sales
Revenue before any deductible expenses.

Grunt work
Slang for low paying, mindless or tedious work.

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H

Half year convention
The practice of taking one-half year's depreciation in the year a fixed asset was acquired. The other one-half year's depreciation is taken in the year of disposition.

Historical cost
One of the six basic assumptions of accounting information. The assumption that assets are recording at their actual cost not at their fair market value.

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I

Improvements
An expenditure that extends the useful life of an asset for longer than one year.

Income
The difference between revenue and expense. Traditionally used synonymously with revenue even though technically incorrect. Profit

Income statement
Formally called a statement of income & expense. It is a report that measures the flow of business operations during an accounting period.

Increment
A small increase in quantity.

Independent contractor
An individual who contracts with an entity to perform a service independent of the entity's management and control. The contractor is not considered an employee and therefore is responsible for his own taxes.

Indirect cost
Usually referred to as general and administrative overhead costs or expenses. Any cost that is not a direct cost.

Indirect expense
Indirect cost.

Intangible asset
An asset that has no physical substance, such as goodwill. Usually found in the other assets section of the balance sheet.

Interest
The cost incurred for the use of money.

Interim statements
Financial statements prepared for a period shorter than one year, i.e., a month or quarter.

Internal audit
An audit performed on a company by its own employees. Usually is more comprehensive but less objective than an external audit conducted by outside, independent auditors.

Internal controls
Management techniques and tools for insuring that financial policies and procedures are being adhered to according to pre-established standards.

Inventory
Goods being held for resale. In manufacturing, can be raw materials, goods in process or finished goods.

Inventory turnover ratio
Cost of merchandise sold divided by average inventory. Indicator of how many times inventory was totally replaced during the year.

Invoice
A document prepared by the seller describing the items sold and the amount the buyer owes.

Issue
To exchange stock for cash or other valuable property.

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J

Journal
A record of transactions that show the accounts and amounts of both the debit side and credit side of the entry.

Journal entry
A single entry of a transaction in the general journal that records the account and amount for both debit side and credit side to be recorded in the general ledger. Also includes a short description of the transaction.

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L

Labor
Services provided by an entity's employees or contracted by outside parties.

Land
Real property that is considered to have an indefinite life impossible to consume or use up. Therefore, it is not depreciable.

Lease
An agreement under which the owner of property permits someone else to use it for a specified term and amount, after which the property is returned to the owner. The owner is called the lessor; the user is called the lessee.

Leasehold improvement
Long-term improvements made to property that is held under a lease agreement. Usually thought of as expenditures that cannot be removed easily from the leased property when the lessee vacates.

Ledger
A book for recording the monetary transactions of a business entity in the form of debits and credits. Entries recorded in the subsidiary journals are posted (recorded) to the general ledger as final entries.

Leverage
Using debt capital (borrowed funds) in addition to equity capital (funds available from prior earnings of the business) for use in the business.

Liability
An amount owed to a creditor.

LIFO
Last-In, First-Out method of determining cost of sales. The cost of inventory purchased last is assumed to have been used first.

Limited Liability Company
A corporation that has the pass-through features of a partnership.

Line-of-credit
When a lender extends credit to an entity on demand up to specific amount. Generally, these funds are used to solve short-term cash shortages, such as when accounts receivable collections are slow. The payback schedule is based on cash-flow not an amortized term.

Liquid asset
Cash or an asset that can be quickly turned into cash.

Liquidation value
The value of assets that can be sold for cash.

Liquidity
The ability of an entity to pay off its current liabilities.

Long term liability
An obligation that will take longer than one year to satisfy.

Loss
When the sales price of a fixed asset is lower than the fixed asset's book value.

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M

Maintenance
Expenditures incurred to maintain plant assets in good condition. Since these costs are used in an accounting period they become expired and are expensed. Contrast maintenance costs, which are expensed, with improvement costs which are capitalized.

Management accounting
Includes the analysis and manipulation of information summarized in the accounting systems to help plan and make business decisions.

Margin
The difference between cost and selling price.

Market Value
Often referred to as Fair Market Value (FMV); the amount for which an asset can be sold between a willing seller and a willing buyer.

Matching rule
One of the five rules of operation of financial statements. The rule states that revenue that has expenses associated with it in a given accounting period should be reported in the same period. Matching the expense element to the revenue element makes it possible to accurately assess whether a profit or a loss occurred in that period.

Materiality
One of the four secondary characteristics of accounting information. Another word for size. Is there any practical value spending hours searching for a one cent error? If an amount listed on a financial statement will make a significant difference to the user it is considered to be "material".

Merchandise
Goods that have been purchased for resale. Inventory.

Monetary assets
Consists of cash and cash equivalents (marketable securities, etc.), notes receivable and accounts receivable.

Monetary liabilities
Liabilities for a specific amount of money, such as notes payable and capital leases.

Money person
Refers to a person who understands finance and accounting.

Mortgage
A pledge of real estate as collateral for a loan.Net

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N

Net assets
Assets minus liabilities (same as equity).

Net assets accounting
The GAAP required method of organizing the equity section of a non-profit organization into three classes of net assets (a) unrestricted, (b) temporarily restricted, and (c) permanently restricted. This method of accounting is more effective in meeting the Statement of Financial Accounting Standards (SFAS) No. 117 goal of informing the reader about donor restrictions than the fund accounting method.

Net book value
See Book value

Net income
The amount by which total revenues exceed total expenses, often called the "bottom line". Net Income and Net Profit are synonymous.

Net loss
What remains when total expenses exceed total revenues.

Net Profit
The amount by which total revenues exceed total expenses, often called the "bottom line". Net Income and Net Profit are synonymous.

Net sales revenue
Gross sales revenue less cash discounts, returns, and allowances.

Non current asset
An asset that is expected to be of service to an entity for more than one year.

Non current liability
A liability that is expected to be outstanding longer than one year. Long-term liability.

Non profit organization
An incorporation that has no owners and is granted exempt status from income taxes by the federal and state governments. Usually granted for charitable, educational, scientific, religious or governmental organizations.

Normalized earnings
Earnings (net profit) that have been adjusted to take into consideration true depreciation, management salaries, etc., in order to gain a more accurate picture of net profit. Used in valuation formulas to determine the selling price of a business.

Note
A written obligation to pay a specific sum of money, within a specific time period, at a certain rate of interest.

Note payable
A written obligation to pay a specific sum of money that is entered into by an entity and set up as a short or long-term liability.

Note receivable
An amount owed to an entity that is supported by a written obligation to pay and set up as a current asset.

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O

Obsolescence
When an asset becomes no longer useful or productive.

Operating expenses
Expenses incurred during the operational activities of a business.

Operating income
The difference between gross profit and operating expenses. Referred to as net operating income; the subtotal before net profit.

Operating lease
A lease that is considered to be a "true" lease. Usually the item leased must be returned at the end of the lease or a residual amount of at least 10% must be paid to own the item. The lease payment amount is fully expensed each month. Contrast to a capital lease.

Operations
An entity's activities of buying and selling goods and services among other things.

Organization costs
Associated with the start-up phase of a business organization. Costs incurred before doors opened for business. Can be amortized over 60 months.

Other assets
Non-current assets excluding fixed assets. Usually intangible assets.

Out of pocket cost
Cash purchases of small items by owner's or employees. Usually reimbursable.

Outstanding stock
Shares of stock that have been issued to owners.

Owner equity
The portion of assets owned by the sole proprietor, stockholders, or partners of a business entity.

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P

Partner equity
The portion of the assets that the partners own.

Partnership
An unincorporated business with more than one owner.

Partnership agreement
An agreement among partners that spells out how they shall treat themselves from an organizational, tax, and legal point of view.

Pass-through entity
Business entities that pass-through the taxable income or losses directly to their owners, i.e, sole proprietorship, partnership, S-Corporation, Limited Liability Company.

Percent
One part in a 100. A percentage of a number is found by dividing it by the base figure. If the question is what percentage is 36 to 72, then 72 is the base and the divisor. 36 divided by 72 = 50 or 50%.

Period
See Accounting period.

Permanent account
A balance sheet account. Referred to as permanent because the account is not closed at the end of the year.

Perpetual inventory
A method of keeping track of each item of inventory, added when it is purchased and deducted when it is sold. Cost of goods sold is the total amount of deductions from inventory in an accounting period.

Physical inventory
The amount of inventory determined to be on hand after a physical count.

Plant assets
A way of referring to all tangible non-current assets except land.

Posting
Recording transactions from subsidiary journals to the general ledger.

Practicality
One of the two primary characteristics of accounting information that make financial statements useful. For a financial statement of have practical value means that the information contained in them must be relevant.

Predictable
One of the three criteria of "Practicality" which is one of the two primary characteristics of accounting information. By being able to use the information in financial statements to forecast or predict future events, management can make decisions that effect the well-being of the company.

Preferred stock
Stock that is deemed to have privileges not associated with common stock, such as, special dividends and claims on assets if liquidated.

Prepaid expense
An intangible asset usually associated with a prepayment for service not yet rendered. As the services are rendered, that portion of the asset is expensed.

Primary financial statements
The balance sheet, statement of income & expense and the statement of cash flow.

Principal
1) In relation to a loan, it is the actual amount borrowed on which interest is figured. 2) It also refers to one who holds high rank in an organization.

Prior period adjustment
A journal entry made directly to retained earnings to correct a mistake or error made in a prior period that was previously closed to retained earnings.

Product
Any tangible goods or intangible services produced by an entity.

Professional Service Corporation
A corporation that performs services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting.

Profit
Income

Profit margin percentage
Net income expressed as a percentage of net sales revenue.

Promissory note
A written document that lays out the terms of an agreement between a lender and a borrower. See Note Payable or Note Receivable.

Proprietorship
Sole Proprietorship

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Q

Quick current assets
Cash, or current assets that can be quickly converted to cash, accounts receivable is included but inventory is excluded.

Quick ratio
Acid-test ratio

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R

Ratio
The result of dividing one number by another in order to ascertain a numerical comparison.

Raw materials inventory
Inventory goods on hand that will be used to manufacture a product.

Realization
When something actually happens. In accounting, revenue is recognized when goods and services are delivered (realized). Expenditures are recognized when goods and services purchased are received (realized). Expenses are recognized when assets are consumed or used.

Receivable
An amount due from a customer.

Receivables turnover ratio
Total credit sales for the year divided by the amount of outstanding accounts receivable.

Recognition
When a revenue or expense item is recorded in an accounting period. Revenue recognition is governed by the concept of realization.

Reconcile
To compare one balance of an account with another. To reconcile the accounts receivable detail ledgers with the accounts receivable control account.

Report Accountants
An accountant who prepares a client's financial statements usually includes a report stating whether he compiled, reviewed or audited the financial statements. The report cites the scope and limitations of the accountant's performance.

Retail method
A method of determining what cost of goods sold were when ending inventory is not known. Divide sales revenue by average mark-up plus 1.00.

Retained earnings
An account in the equity section of a balance sheet for a corporation. The account contains accumulated net income from operations less dividends.

Return on assets ratio
Earnings before interest and taxes divided by net assets. A way to determine how much an owner is making on his investment.

Return on equity ratio
(later)

Return on investment ratio
(later)

Returns and allowances
A general ledger account that contains a record of customer returns of merchandise and/or allowances made on the sales price due to damaged goods, etc.

Revenue
The amount realized from the sale of goods and services during an accounting period resulting in an increase in equity.

Revenue rule
One of the five rules of operation of financial statements. Revenue is said to be realized in the period that the sold goods are delivered or the sold services are rendered (performed).

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S

S Corporation
A corporation that has made an election to be taxed under the rules found in Subchapter S in the Internal Revenue Code (IRC). Primarily a corporation entity whose taxes are "passed-through" to its stockholders.

Salary
A term used to describe compensation of management personnel for services rendered. Based on an agreed upon amount rather than by hourly wage.

Sales allowance
A reduction in the original sales price.

Sales discount
A reduction in the original sales price usually given as an incentive for prompt payment.

Sales income
A misnomer for sales revenue because income is the difference between revenue and expense.

Sales revenue
Revenue from the sale and delivery of goods and services.

Self employment tax
Social security tax imposed on the self-employed. Currently at 15.3% which constitutes both the employer and employee portions of the tax. (7.65% each). Often referred to as SE-tax.

Separate Entity
One of the six basic assumptions of accounting information. The assumption is that activity of a business should be kept separate from the personal activities of its owners.

Service life
The period of time that an asset is estimated to be useful to an entity.

Service revenue
Revenue from services rendered by an entity.

Services
Intangible products - products

Shareholders
The people who have been issued stock by a corporation in exchange for money or property. Same as stockholders.

Short term
Less than one year.

Simple interest
Interest calculated on the principal only.

Single entry
A method of accounting that does not use a two-sided ledger to capture financial data.

Social Security taxes
Federal tax levied on employers and employees for the purpose of providing future retirement, health, and disability benefits for employees. FICA.

Sole proprietorship
An unincorporated business with a single owner.

Solvency
The ability of an entity to meet its long-term debt obligations.

Specific identification
A method of determining cost of goods of sold by specifically identifying each item of inventory purchased and sold.

State Board of Accountancy
State regulatory authority that issues licenses to Certified Public Accountants and handles disciplinary issues.

Statement of Cash Flow
A report that shows the inflows and outflows of cash for given accounting period.

Statement of Income and Expense
A report that shows the revenues, expenses, and net income for a given accounting period.

Stockholders
Shareholders

Straight line depreciation
A method of calculating depreciation that results in an equal amount of the depreciable basis (cost) of a fixed asset over each year of its useful life.

Subsidiary journal
A journal in which transactions are summarized and eventually recorded in the general ledger.

Superior earnings
The excess earnings over and above normalized earnings. Goodwill.

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T

T account
A template or format shaped like a T that represents a ledger page where debits and credits are recorded. A tool for analyzing transactions.

Tangible asset
Assets that are physical in nature. Usually referred to as non-current fixed assets.

Taxable income
The amount of income subject to income tax by the IRS or state taxing authorities.

Techniques
A systematic procedure that has been developed to make it easier to find or follow something.

Temporary account
Refers to a revenue or expense account because those accounts are closed at the end of each accounting period.

Third party
Usually refers to a party that is more independent and objective than the first two;such as, an entity and its accountant is the first two and a bank is the third party.

Ties
Accounting jargon for correlates.

Timely
One of the three criteria of "Practicality" which is one of the two primary characteristics of accounting information. Accounting information contained in financial statements has to be available while it can still influence decisions. Timely information holds value, while "old" information loses its practical value.

Trade in
An asset that is given in partial payment for another asset.

Transaction
An economic event that occurs in the course of business that is recorded in the accounting records.

Turnover
The number of times inventory or accounts receivable are replaced during a year.

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U

Unbiased
One of the three criteria of "Dependability" which is one of the two primary characteristics of accounting information. For information to be unbiased means that it is neutral, not slanted toward some purpose. It is an objective reporting of only the facts.

Uncollectible account
An account receivable balance not likely to be paid. See Bad debt.

Under capitalized
When the process of contributing cash or property to the business by the owners is insufficient.

Under the table
Business transactions involving money that were not reported to the taxing authorities.

Unearned revenue
Advances or prepayments by customers for goods or services not yet delivered or rendered.

Unexpired cost
An expenditure or cost of an asset that has not yet been consumed or used.

Uniform partnership agreement
In the state of California, if partners fail to draft their own partnership agreement then a standardized agreement will take its place to settle legal issues.

Unit of Measure
One of the six basic assumptions of accounting information. The assumption that economic activity will be measured in terms of dollars; not board feet, pounds or some other form of measurement.

Useful life
Service life or economic life.

Utility
One of the four secondary characteristics of accounting information. Another word for practical need. Do the costs of preparing or supplying information outweigh the benefits of its use?

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V

Variance
The difference between an actual amount and a budgeted amount.

Vendor
A supplier of goods or services.

Verifiable
One of the three criteria of "Dependability" which is one of the two primary characteristics of accounting information. A financial statement can be verified independently because the method of measurement is widely accepted.

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W

Wage
Compensation for services rendered usually on an hourly basis and from which taxes are withheld.

Withholding
An amount deducted by an employer from an employee's gross wage earnings as mandated by federal and state taxing authorities.

Work in process inventory
The second stage of manufacturing whereby raw materials are being processed but are not completed yet.

Work papers
An accountant's documents that support the summary balances of the general ledger. Or, practice papers containing transactions that accounting students must work through in order to learn how to analyze and post.

Working capital
The difference between current assets and current liabilities. One of the ways used to measure the liquidity of a business entity.

Write off
To remove an asset from a permanent account and expense it to a temporary account. For example, to remove an uncollectible accounts receivable amount and expense it to a bad debt account.