Financial Accounting Glossary A - M

A

Account a place or location within an accounting system in which the increases and decreases in a specific asset, liability, equity, revenue, or expense are recorded and stored. (p.92W)

Account payable a liability created by buying goods or services on credit. (p.94W)

Account receivable an asset created by selling products or services on credit.
Accounting an information and measurement system that identifies, records, and communicates relevant information about a company's economic activities to people to help them make better decisions. (p.92W)

Accounting equation the equality where Assets + Liabilities = Owner's Equity; also called the balance sheet equation. (p.99W)

Accounting period the length of time covered by financial statements and other reports. (p.136W)

Accrual basis accounting the approach to preparing financial statements that uses the adjusting process to recognize revenues when earned and expenses when incurred; the basis for generally accepted accounting principles. (p.139W)

Accrued expenses/accruals costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing (debiting) expenses and increasing (crediting) liabilities. (p.146W)

Accrued revenues revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing (debiting) assets and increasing (crediting) revenues. (p.148W)

Acid-test ratio a ratio used to assess the company's ability to settle its current debts with its most liquid assets; it is the ratio between a company's quick assets (cash, short-term investments, and current receivables) and its current liabilities. Also known as the quick ratio.

Adjusting entry a journal entry at the end of an accounting period to bring an asset or liability account balance to its proper amount while also updating the related expense or revenue account. (p.140W)

Allowance for Doubtful Debts the estimated amount of accounts receivable that will be uncollectible (lots of detail at p.356 - 363W - focus on p.362)

Amortization a process of systematically allocating the cost of an intangible asset to expense over its estimated useful life. (p.419)

Assets economic resources that are expected to produce future benefits. (p.47W)

Audit a check of an organization's accounting systems and records using various tests.

B

Bad debts the accounts of customers who do not pay what they have promised to pay; the amount is an expense of selling on credit. (lots of detail at p.356 - 363W focus on p.357)

Balance sheet a financial statement providing information that helps users understand a company's financial position at a point in time; lists the types and values of assets, liabilities, and equity as of a specific date.(p.46W)

Bank reconciliation an analysis that explains any difference between the balance of a checking account shown in the cash book and the balance reported on the bank statement.

Bookkeeping the part of accounting that involves recording economic transactions and events, either electronically or manually (also known as recordkeeping) (p.7W)

Book Value/Carrying value the net amount at which assets are reflected on the balance sheet (p.402)

Budget a formal statement of future plans, usually expressed in monetary terms.

Business entity principle every business is accounted for separately from its owner's personal activities. (p.54W)

Business transaction an economic event that changes the financial position of an organization; often takes the form of an exchange of economic consideration (such as goods, services, money, or rights to collect money) between two parties. (p.56W)

C

Capital expenditure additional costs of tangible fixed assets that provides material benefits extending beyond the current period; also called balance sheet expenditure. (p.409W)

Capital lease a lease that gives the lessee the risks and benefits normally associated with ownership. (p.464W) - outside the syllabus

Capital stock/ Share Cpaital - the general term referring to a corporation's stock used in obtaining its capital (owner financing) (p.547W)

Cash based accounting revenues are recognized when cash is received and expenses are recorded when cash is paid. (p.139W)

Cash discount a reduction in the price of merchandise that is granted by a seller to a purchaser in exchange for the purchaser's making payment within a specified period of time called the discount period. (p.217W)

Cash includes currency, coins, and amounts on deposit in bank checking or savings accounts.

Cash flow A cash flow statement shows a firm's cash receipts and expenses during a specific period. (p.49W) - outside the syllabus but useful to know.

Chart of accounts a list of all accounts used by a company; includes the identification number assigned to each account. (p. 96W)

Comparative financial statement a statement with data for two or more successive periods placed in side-by-side columns, often with changes shown in dollar amounts and percents. (p.665W)

Conservatism principle one of the basic accounting concepts whereby prepares of accounts should take a less optimistic view if doubt exists. An example would be a legal case. Even if it was thought likely that you would win, application of the conservatism principle means that you would not recognise the resulting asset until it becomes certain. (p.280W)

Contingent liability an obligation to make a future payment if, and only if, an uncertain future event actually occurs - where that event has a less than 50% chance of occurring. These are not usually included in financial statements, but are disclosed if they are material. (p.371W) - outside syllabus

Copyright a right granted by the federal government or by international agreement giving the owner the exclusive privilege to publish and sell musical, literary, or artistic work. (p.420W)

Corporation a business that is a separate legal entity under state or federal laws with owners that are called shareholders or stockholders. (p.12W)

Cost of goods sold the cost of merchandise sold to customers during a period. (p214W)

Cost principle the accounting principle that requires financial statement information to be based on actual costs incurred in business transactions; it requires assets and services to be recorded initially at the cash or cash equivalent amount given in exchange. (p.55W)

Credit an entry that decreases asset and expense accounts or increases liability, equity, and revenue accounts; recorded on the right side of a T-account. (p.98W)

Credit period the time period that can pass before a customer's payment is due. (p.217W)

Credit terms the description of the amounts and timing of payments that a buyer agrees to make in the future. (p.217W)

Creditors individuals or organizations entitled to receive payments from a company. (p. 48W)

Current assets cash or other assets that are expected to be sold, collected, or used within the longer of one year or the company's operating cycle. (p. 164W)

Current liabilities obligations due to be paid or settled within one year. (p.166W)

D

Debit an entry that increases asset and expense accounts or decreases liability, equity, and revenue accounts; recorded on the left side of a T-account. (p.98W)

Debtors individuals or organizations that owe money to a business. (p.47W)

Deficit a debit balance in Retained Earnings; occurs when a company's cumulative losses and dividends are greater than cumulative income. (p.559W)

Depreciation the expense created by allocating the cost of plant and equipment to the periods in which they are used; represents the expense of using the assets. (p.143W)

Dividends distributions of assets by a corporation to its owners. (p.50W)

Double-entry accounting an accounting system where every transaction affects at least two accounts and has at least one debit and one credit; the sum of the debits for each entry must equal the sum of the credits for each entry. (p.99W)

E

Earnings the amount a business earns after subtracting all expenses necessary for its sales; also called net income or profit. (p.5W)

Equity the ownership interest of shareholders in a business. (p.48W)

Estimated liability obligation of an uncertain amount that can be reasonably estimated. (p.457W)

Ethics codes of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest. (p.21W)

Events happenings that both affect an organization's financial position and can be reliably measured. (p.90-91W)

Expenses the costs incurred to earn sales. (p.5 & p.46W)

External users persons using accounting information who are not directly involved in the running of the organization; examples include shareholders, customers, regulators, and suppliers. (p.90W)

F

Financial Accounting Standards Board (FASB) an independent group of seven full-time members who are currently responsible for setting accounting rules in the US. (p.8W)

Financial accounting the area of accounting aimed at serving external users. (p.18W)

Financial reporting the process of communicating information that is relevant to investors, creditors, and others in making investment, credit, and other decisions. (p.274W)

Financial statement analysis the application of analytical tools to general-purpose financial statements and related data for making business decisions. (p.662W)

Financial statements the most important products of accounting; include the balance sheet, income statement, statement of changes in owner's equity, and the statement of cash flows. (p.44W)

Finished goods inventory products that have completed the manufacturing process and are ready for sale.

First-in, first-out (FIFO) the method of assigning cost to inventory under the assumption that inventory items are sold in the order acquired; the first items received are the first items sold. (p.268W)

Fixed asset an asset from which the economic benefit derived is expected to accrue over more than one year. (p.166W)

G

Generally accepted accounting principles (GAAP) the rules that indicate acceptable accounting practice. (p.7W) - outside syllabus but useful background.

Going-concern principle rule that requires financial statements to reflect the assumption that the business will continue operating, unless evidence shows it will not continue; also called continuing-concern principle. (p. 55W)

Goodwill the amount by which the value of a company exceeds the fair market value of the company's net assets if purchased separately. (p.421W) - outside syllabus, but was mentioned in class. This is a type of intangible fixed asset.

Gross profit/Gross margin the difference between net sales and the cost of goods sold. (p.213W)

I

Income statement a financial statement in which expenses are subtracted from revenues to show whether the business earned a profit; it lists the types and amounts of revenues earned and expenses incurred by a business over a period of time; also called profit and loss statement. (p.45W)

Interest the charge for holding money. (p.147W)

Internal control system all the policies and procedures managers use to protect assets, ensure reliable accounting, promote efficient operations, and ensure adherence to company policies. (Chapter 7W) - outside syllabus but very useful for better understanding of how an accounting department works.

Inventory products a company owns and expects to sell in its normal operations. (p.214W)

Investments ownership stakes in other companies. Can be classified as short-term or long term depending on intentions and circumstances. (p.165W)

Invoice an itemized statement of goods prepared by the vendor that lists the customer's name, the items sold, the sales prices, and the terms of sale. (p.338W)

J

Journal a record where transactions are recorded before they are recorded in accounts; amounts are posted from the journal to the ledger; also called the book of original entry. (p.106W)

L

Last-in, first-out (LIFO) the method of assigning cost to inventory under the assumption that costs for the most recent items purchased are sold first and charged to cost of goods sold.
Lease a contract allowing property rental. (p.268W)

Ledger a record containing all accounts used by a business. (p.92W)

Liabilities creditors' claims on an organization's assets. (p.15 and p.48W)

Liquid asset an asset such as cash that is easily converted into other types of assets or used to buy services or pay liabilities. (p.315W)

Long-term investments Assets such as notes receivable or investments in stocks and bonds that are held for more than one year or the operating cycle. (p.165W)

Long-term liabilities obligations that are due to be paid in more than one year. (p.166W)

Loss arises when expenses are more than sales, or revenues. (p.5W)

M

Market price the price that an asset would attract in a sale.

Matching principle the principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses. (p.138-9W)

Materiality principle states that an amount may be ignored if its effect on the financial statements is unimportant to their users. (p.358W)

Maturity date The date on which a loan and any interest are due and payable.

Monetary unit principle the expression of transactions and events in money units; examples include units such as the dollar, peso, and pound sterling. (p.56W)

Mortgage a legal agreement that protects a lender by giving the lender the right to be paid out of the cash proceeds from the sale of a borrower's assets identified in the mortgage. (p.519W)

Financial Accounting Glossary N - Z

N

Net assets equals total assets less total liabilities. Also describes total equity. (p.48W)

Net income the amount a business earns after subtracting all expenses necessary for its sales; also called profits or earnings. (p.45W)

Net loss the excess of expenses over revenues for a period. (p.45W)

Net realizable value the expected sale price of an item minus the cost of making the sale. (p.272W)

O

Objectivity principle accounting guideline that requires financial statement information to be supported by independent, unbiased evidence rather than someone's opinion; objectivity adds to the reliability, verifiability, and usefulness of information. (p.55W)

Obsolescence a condition in which, because of new inventions and improvements, a plant asset can no longer be used to produce goods or services with a competitive advantage. (p.400W)

Operating activities the use of assets to carry out an organization's plans in the areas of research, development, purchasing, production, distribution, and marketing. (p.15W)

Operating lease a lease that is not a capital lease; costs of operating leases are reported as rent expense. (p.464W) - this is beyond the syllabus, but is useful additional information.

P

Paid-in capital is shareholder's financial investment into a company. (p.50W)

Par value an arbitrary value assigned to capital stock when the stock is authorized. (p.548W)

Plant and equipment tangible fixed assets used to produce goods or services. (p.396W)

Posting the process of transferring journal entry information to the ledger. (p.106W)

Prepaid expenses items paid for in advance of receiving their benefits; classified as assets. (p.93 & P.141W)

Principal the value of a loan repayable, not including the interest. (P.366)

Prior period adjustment a correction of a material error in a previous year that is reported in the statement of retained earnings (or statement of changes in stockholders' equity) net of any income tax effects. (p.576W) - this is beyond the syllabus, but is useful additional information.

Profit and loss account a financial statement in which expenses are subtracted from revenues to show whether the business earned a profit; it lists the types and amounts of revenues earned and expenses incurred by a business over a period of time; also called income statement (p.45W)

Profitability refers to a company's ability to generate an adequate return on invested capital. (p.663W)

Purchase discount a term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period. (p.217W)

Purchase order a business document used by the purchasing department to place an order authorising the seller to ship the ordered merchandise at the stated price and terms. (p.338W)

Purchase requisition a business document listing merchandise needed by a department and requesting it be purchased. (p.337W)

R

Raw materials inventory goods a company acquires to use in making products. Realisable value the expected proceeds from converting assets into cash. (p.359W)

Receiving note/report a form used within a company to notify the appropriate persons that ordered goods are received and to describe the quantities and condition of the goods. (p.338W)

Retained earnings shareholders' equity that results from a corporation's cumulative profits that have not been distributed to shareholders. (p.50W)

Return derives from the idea of getting something back from an investment in a business. (p.6W)

Revenues the amounts earned from selling products or services; also called sales - also called income. (p.45W)

S

Sales the amounts earned from selling products or services; also called revenues - also called income. (p.45W)

Sales discount a term used by a seller to describe a cash discount granted to customers for paying within the discount period (p.217W)

Scrap/salvage value management's estimate of the amount that will be recovered at the end of a plant asset's useful life through a sale or as a trade-in allowance on the purchase of a new asset; also called residual value. (p.400W)

Securities and Exchange Commission (SEC) the US federal agency that sets reporting rules for organizations that sell ownership shares to the public. (p.7W)

Segment of a business a component of a company's operations that serves a particular line of business or class of customers and that has assets, activities, and financial results of operations that can be distinguished from other parts of the business. (p.569W) - this is beyond the syllabus.

Share Premium (UK) /Contibuted Capital In Excess Of Par Value (US) Stock sold at a price greater than the par value of staock (p.548W)

Shareholders (UK) /Stockholders (US) the owners of a corporation. (p.13W)

Shareholders' Funds (UK) / Stockholders’ Equity (US) is a term used to describe total equity in a company owned by shareholders. (p.549W)

Short-term investments current assets that serve a similar purpose to cash equivalents; generally mature between 3 and 12 months at which time management expects to convert them into cash; can be either debt or equity securities also called temporary investments. (p.373W)

Short-term loan (UK) notes (US) payable obligation to repay loans within one year. (p.447W)

Solvency a company's long-run financial viability and its ability to cover long-term obligations. (p.663W)

Source documents another name for business papers; these documents are the source of information recorded with accounting entries and can be in either paper or electronic form. (p.91W)

Specific identification costing method is when each item of stock is individually costed. This is usually the case in a business that has low unit sales and high unit costs. A car dealership would use this methodology. (p.268W)

Standard costs the costs that should be incurred under normal conditions to produce a specific product or component or to perform a specific service. – outside syllabus

Statement of cash flows a financial statement that describes a company's cash receipts and payments in a period. Cash flows are arranged by an organisation's activities: operating, investing, and financing. (p.608W)

Statement of changes in shareholders' equity a financial statement that lists the beginning and ending balances of each equity account and describes all the changes that occurred during the period.

Stock (1) – a British term for inventory. (p.214W)

Stock (2) - A US term for shares. (p.13W)

Straight-line depreciation method allocates equal amounts of an asset's net cost to depreciation expense during its useful life. (p.401W)

Subsidiary a corporation that is controlled by another corporation (the parent) because the parent owns more than 50% of the subsidiary's voting stock. (pC-11W)

T

T-account a simple account form used as a helpful tool in showing the effects of transactions and events on specific accounts. A cashbook can be presented in T-account format. (p.97W)

Tangible fixed assets - assets used in the company operations that have a useful life of more than one accounting period. (p.396W)

Trade discount a reduction below a list or catalog price that may vary in amount for wholesalers, retailers, and final consumers. (p.217W)

Trademark or trade name symbol, name, phrase, or jingle identified with a company or service. When it has a measurable value it is classified as an intangible asset on a company balance sheet. (p.422W)

Trial balance a list of accounts and their balances at a point in time; the total debit balances should equal the total credit balances. (p.111W)

U

Unearned revenues liabilities created when customers pay in advance for products or services; created when cash is received before revenues are earned; satisfied by delivering the products or services in the future. Also known as deferred revenue/income. (p.94W)

Useful economic life the length of time a fixed asset will be productively used in the operations of a business. (p.400W)

W

Warranty an agreement that obligates the seller or manufacturer to repair or replace a product when it breaks or otherwise fails to perform properly within a specified period. (p.457W)

Weighted average the method of assigning cost to inventory in which the unit prices of the items making up the current inventory are weighted by the number of units of each in the current inventory. The total of these amounts is then divided by the total number of units available for sale to find the unit cost of the inventory balance and of the units that were sold. (p.268W)