Letter : A

accounting equation: The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).

accounting period: The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.

accounts payable: This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note

accounts receivable: An account that records the amounts that customers owe to a business.

adjusting entry: A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.

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.

allowance for doubtful accounts: Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable. When the credit balance of the Allowance for Doubtful Accounts is subtracted from the debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts Receivable. The credit balance in this account comes from the entry wherein Bad Debts Expense is debited. The amount in this entry may be a percentage of sales or it might be based on an aging analysis of the accounts receivables (also referred to as a percentage of receivables).

allocation: The assigning or dividing up of amounts. For example, depreciation is an allocation process because it assigns an asset's cost to expense in each of the years the asset is expected to be used. There is also an allocation process when the cost of goods available for sale is divided up between ending inventory and cost of goods sold. Manufacturers allocate (or assign) fixed overhead such as factory rent to the units of products produced in the factory.

Letter: B

bad debts expense: This is an operating expense resulting from making sales on credit and not collecting the customers' entire accounts receivable balances.

balance sheet: One of the main financial statements. The balance sheet reports the assets, liabilities, and owner's (stockholders') equity at a specific point in time, such as December 31. The balance sheet is also referred to as the Statement of Financial Position.

bank errors : Errors made by the bank on a company's bank account. These are usually infrequent but could include an incorrect amount of a check or deposit or a check or deposit recorded in the wrong account.

bank reconciliation: 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 be certain that there is consistency between the amounts and that the company's amounts are accurate and complete.

bonds payable : Generally a long term liability account containing the face amount, par amount, or maturity amount of the bonds issued by a company that are outstanding as of the balance sheet date.

bookkeeping : The recording of a company's transactions into the accounts contained in the general ledger. It is usually associated with the accounting tasks prior to the preparation of the trial balance.

budget : A detailed plan with dollar amounts. Examples of budgets used in business include the cash budget, sales budget, production budget, department budgets, the master budget, and the capital expenditures budget. Some budgets are designed to be flexible budgets, while others are static budgets.

Letter: C

cash flows: Used to describe the source or sources of cash or how cash is used.

Chart of Accounts: A list of all the accounts used by a business, including what types of transactions go into each account.

cleared : A term used to describe checks written by a company that have been received and paid by the bank on which they were drawn or written. The check number and amount will appear on the company's checking account statement.

clearing account : A general ledger account which serves to summarize similar transactions. For example, all of the closing entries involving operating expenses might be posted to an operating expense clearing (or summary) account.

cost of goods sold: Cost of goods sold is usually the largest expense on the income statement of a company selling products or goods. Cost of Goods Sold is a general ledger account under the perpetual inventory system.

Under the periodic inventory system there will not be an account entitled Cost of Goods Sold. Instead, the cost of goods sold is computed as follows: cost of beginning inventory + cost of goods purchased (net of any returns or allowances) + freight-in - cost of ending inventory.

This account balance or this calculated amount will be matched with the sales amount on the income statement.

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.)

current value: The present fair market value.

Letter: D

debit: An accounting entry that increases an asset or expense account, and decreases a liability or income account.

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

deferral: In accounting this means to defer or to delay recognizing certain revenues or expenses on the income statement until a later, more appropriate time. Revenues are deferred to a balance sheet liability account until they are earned in a later period. When the revenues are earned they will be moved from the balance sheet account to revenues on the income statement. Expenses are deferred to a balance sheet asset account until the expenses are used up, expired, or matched with revenues. At that time they will be moved to an expense on the income statement.

deferred expense : A 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 a later accounting period.

deferred revenues : A balance sheet liability account that reports amounts received in advance of being earned. For example, if a company receives $10,000 today to perform services in the next accounting period, the $10,000 is unearned in this accounting period. It is deferred to the next accounting period by crediting a liability account such as Unearned Revenues. Next period (when it is earned) a journal entry will be made to debit the liability account and to credit a revenue account.

deposits: A liability account in a bank's general ledger that indicates the amounts owed to bank customers for the balances in the customers' individual checking, savings, and certificate of deposit accounts.

depreciation: The systematic allocation of the cost of an asset from the balance sheet to Depreciation Expense on the income statement over the useful life of the asset. (The depreciation journal entry includes a debit to Depreciation Expense and a credit to Accumulated Depreciation, a contra asset account). The purpose is to allocate the cost to expense in order to comply with the matching principle. It is not intended to be a valuation process. In other words, the amount allocated to expense is not indicative of the economic value being consumed. Similarly, the amount not yet allocated is not an indication of its current market value.

depreciated: An asset's cost that has been assigned to Depreciation Expense.

depreciation expense : The income statement account which contains a portion of the cost of plant and equipment that is being matched to the time interval shown in the heading of the income statement. (There is no depreciation expense for land.)

depreciation expense: equipment: The income statement account which contains a portion of the cost of equipment that is being expensed during the time interval shown in the heading of the income statement.

direct allocation method: A method used in allocating the costs of manufacturing service departments (factory administration, maintenance, etc.) directly to the producing departments in the factory. Under this method, no service department cost will be allocated to another service department.

direct cost : A cost that can be traced to a cost object. For example, the flour used in baking bread is a direct cost of a bakery's bread. The wages and salaries of the employees working exclusively in a manufacturer's maintenance department are direct costs of the maintenance department. (However, these costs are indirect product costs, since they will need to be allocated to the products manufactured.)

direct costing: A method where only the variable manufacturing costs are assigned to inventory and the cost of goods sold. Fixed manufacturing costs are viewed as expenses of the period in which they are incurred. This method is not allowed for external financial statements, but can be used internally. External financial statements must have fixed manufacturing costs allocated to the products.

direct materials : Raw materials that are a traceable component of a manufactured product. For example, the direct material of a baseball bat is the wood. Flour, sugar, and vegetable oil are direct materials of a company that manufactures dessert products.

direct method : The direct method could refer to the method of preparing the statement of cash flows. The direct method could also refer to the method of allocating a manufacturing facility's service departments to its production departments.

direct write-off method : A method for recognizing bad debts expense arising from credit sales. Under this method there is no allowance account. Rather, an account receivable is written-off directly to expense only after the account is determined to be uncollectible. This method is required for income tax purposes.

discontinued operations : Operations of an entire division, subsidiary, or segment of a company where a formal plan exists to eliminate it from the company. (It involves more than pruning a product line of certain models of products.) The revenues, gains, expenses, and losses pertaining to the business segment are removed from the company's continuing operations and are reported separately on the company's income statement. The amounts that pertain to discontinued operations are reported near the end of the income statement but before the amounts for extraordinary items and the cumulative effect of a change in an accounting principle. The amounts will be shown on a per share basis, if the company's stock is publicly traded.

discount rate : In accounting this is the rate used to discount future cash flows in order to determine their present value.

dividends: A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.

dividends declared: A temporary account that is debited when cash dividends have been declared (instead of debiting the Retained Earnings account. At the end of the accounting year, the balance in this account is transferred to the Retained Earnings account.

dividends payable: A current liability account that reports the amounts of cash dividends that have been declared by the board of directors but not yet distributed to the stockholders.

dividends in arrears: Past omitted dividends on cumulative preferred stock. Generally these omitted dividends were not declared and, therefore, do not appear on the corporation's balance sheet as a liability. However, they must be disclosed in the notes to the balance sheet.

draw : The withdrawal of business cash or other assets by the owner for the personal use of the owner. Withdrawals of cash by the owner are recorded with a debit to the owner's drawing account and a credit to the cash account.

drawing account : The contra owner's equity account that reports the amount of withdrawals of business cash or other assets by the owner for personal use during the current accounting year. At the end of the accounting year, the balance in the drawing account is transferred (closed) to the owner's capital account.

Letter: E

earned: Under accrual accounting an item has been ”earned” and is reported as revenue when a service has been performed or the ownership to a product has been transferred from the seller to the buyer (not when cash is received).

economic entity assumption : An accounting principle/guideline that allows the accountant to keep the sole proprietor's business transactions separate from the owner's personal transactions even though a sole proprietorship is not legally separate from the owner.

economic life: Also referred to as the useful life. This differs from the physical life of an asset. For example, a computer may have a physical life of 50 years, but its economic or useful life might be five years.

earned: Under accrual accounting an item has been ”earned” and is reported as revenue when a service has been performed or the ownership to a product has been transferred from the seller to the buyer (not when cash is received).

equipment : Equipment is a noncurrent or long-term asset account which reports the cost of the equipment. Equipment will be depreciated over its useful life by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation (a contra asset account).

equipment rental expense: The expense incurred during the time interval indicated on the income statement for using rented equipment.

equity : The difference between assets and liabilities, such as stockholders' equity, owner's equity, or a nonprofit organization's net assets. Also used to indicate an owner's interest in a personal asset. For example, the owner of a $300,000 house with a $145,000 mortgage loan is said to have equity of $155,000.

estimates : Approximate amounts. Accountants use estimates for depreciation expense, warranty expense, bad debts expense, monthly accruals for utilities, bonuses, income taxes, etc. Also see change in accounting estimate.

expenditure: A payment. The expenditure might be for a significant long term asset (capital expenditure), a short term asset (prepaid insurance), a reduction in a liability, or for an immediate expense such as rent.

expenses: Costs that are matched with revenues on the income statement. For example, Cost of Goods Sold is an expense caused by Sales. Insurance Expense, Wages Expense, Advertising Expense, Interest Expense are expenses matched with the period of time in the heading of the income statement. Under the accrual basis of accounting, the matching is NOT based on the date that the expenses are paid. Expenses associated with the main activity of the business are referred to as operating expenses. Expenses associated with a peripheral activity are nonoperating or other expenses. For example, a retailer's interest expense is a nonoperating expense. A bank's interest expense is an operating expense. Generally, expenses are debited to a specific expense account and the normal balance of an expense account is a debit balance. When an expense account is debited, the account credited might be Cash (if cash was paid at the time of the expense), Accounts Payable (if cash will be paid after the expense is recorded), or Prepaid Expense (if cash was paid before the expense was recorded.)

extraordinary items: These are income statement items that are unusual in nature and infrequent in occurrence. Examples include a loss from an earthquake in Wisconsin and a loss from a country taking over a company's oil refinery.

The amounts shown on the income statement will include the gross amount and the net amount after deducting the income tax expense or savings associated with the item. Extraordinary items will appear on the income statement near the end of the income statement after discontinued operations and before the cumulative effect from a change in an accounting principle. Extraordinary items will also be shown on a per share basis, if the company's stock is publicly traded.

extraordinary item - gain : A gain that is unusual in nature and infrequent in occurrence. This item is reported in a separate section of the income statement. The amount reported is net of (reduced by) the associated income tax expense.

extraordinary loss : A loss that is unusual in nature and infrequent in occurrence. This item is reported in a separate section of the income statement and is reported at an amount that is net of (reduced by) the associated reduction in income tax expense.

extraordinary repair: A major repair such as an engine overhaul, which will extend the useful life of the asset. The amount should be recorded in the asset account and then depreciated over the remaining life of the asset. This should not be confused with an extraordinary item.

Letter: F

fair market value: Refers to the accounting associated with the preparation of the main financial statements: income statement, balance sheet, statement of cash flows, statement of retained earnings, statement of stockholders' equity.

FIFO: First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.

financial accounting: Refers to the accounting associated with the preparation of the main financial statements: income statement, balance sheet, statement of cash flows, statement of retained earnings, statement of stockholders' equity.

financial statementss: Usually financial statements refer to the balance sheet, income statement, statement of cash flows, statement of retained earnings, and statement of stockholders' equity. The balance sheet reports information as of a date (a point in time). The income statement, statement of cash flows, statement of retained earnings, and the statement of stockholders' equity report information for a period of time (or time interval) such as a year, quarter, or month.

fixed assets : A term used when referring to property, plant, and equipment. Fixed assets other than land are depreciated.

fixed expenses : Expenses which do not change in response to reasonable changes in sales or other activity.

free cash flow: The cash flow from operating activities minus the amount of capital expenditures. Other variations are also used.

fringe benefits: Compensation for employees that is in addition to salaries and wages.

fungible: Describes a product that is interchangeable and virtually indistinguishable from another pGoduct.

Letter: G

gain on sale of assets : This is a non-operating or ”other” item resulting from the sale of an asset (other than inventory) for more than the amount shown in the company's accounting records. The gain is the difference between the proceeds from the sale and the carrying amount shown on the company's books.

gain on sale of equipment: The amount by which the proceeds from the sale of equipment (that had been used in the business) exceeded its carrying amount at the time it is sold.

gain on sale of investments : The amount by which the proceeds from the sale of investments exceeded the carrying amount of the investments that were sold. It is reported as a non-operating or ”other” item on a multiple-step income statement.

gain on sale of land : The amount by which the proceeds from the sale of land exceeded the carrying amount of the land sold. It is reported as a non-operating or ”other” item on a multiple-step income statement.

gain or loss on the sale of a long-term asset : A non-operating item that results from the sale of a long-term asset for more (gain) or less (loss) than its carrying amount or book value.

gains: Gains result from the sale of an asset (other than inventory). A gain is measured by the proceeds from the sale minus the amount shown on the company's books. Since the gain is outside of the main activity of a business, it is reported as a nonoperating or other revenue on the company's income statement.

general Ledger: A summary of all of a business’s accounts and transactions.

general ledger account: An account in the general ledger, such as Cash, Accounts Payable, Sales, Advertising Expense, etc

generally accepted accounting principles (GAAP): The general guidelines and principles, standards and detailed rules, plus industry practices that exist for financial reporting. Often referred to by its acronymn GAAP.

going concern assumption : An accounting guideline which allows the readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments. In other words, the accountants believe that the company will not liquidate in the near future. This assumption also provides some justification for accountants to follow the cost principle.

goodwill : Goodwill is a long-term asset categorized as an intangible asset. Goodwill arises when a company acquires another entire business. The amount of goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets that can be identified, and the liabilities obtained in the purchase. The amount in the Goodwill account will be adjusted to a smaller amount if there is an impairment in the value of the acquired company as of a balance sheet date.

gross margin : A term that is sometimes used interchangeably with gross profit. Others use the term to mean the percentage of gross profit dollars divided by net sales dollars.

gross profit: Net sales revenues minus the cost of goods sold.

Letter: H

historical cost:The original cost incurred to acquire an asset (as opposed to replacement cost, current cost, or cost adjusted by a general price index). If a company purchased land in 1940 for $1,000 and continues to hold that land, the company's balance sheet in the year 2012 will report the land at $1,000 (even if the land is now worth $400,000).

holding costs : In the EOQ model, the holding costs are the incremental costs of storing or holding an item in inventory for one year.

holding gain : A gain that occurs by holding an asset. For example, if a company bought land for $20,000 many years ago and today the company continues to hold the land and its value is now $175,000, the company has a holding gain of $155,000. However, the company cannot record the holding gain on its financial statements because of the cost principle and the revenue recognition principle. On the other hand, if the company sells the land for $175,000 a holding gain of $155,000 will appear on its income statement as the company also records the $175,000 on its balance sheet and removes the land's original cost of $20,000.

holding loss : A loss that occurs by holding an asset. Holding losses might be recorded on the income statement or they might not be recorded depending on the asset and the amounts.

Letter: I

impairment: A decrease in the value of a long term asset to an amount that is less than the amount shown under the cost principle.

income : This term is used in several ways. Some use the word interchangeably with revenues. Others use the word to signify a net amount, such as income from operations (revenues minus expenses in the company's main operating activities). Still others use it when referring to nonoperating revenues, such as interest income.

income summary account: A temporary account to which the income statement accounts are closed. This account is then closed to the owner's capital account or a corporation's retained earnings account. This and other summary accounts can be thought of as a clearing account.

income tax expense: The amount of income tax that is associated with (matches) the net income reported on the company's income statement. This amount will likely be different than the income taxes actually payable, since some of the revenues and expenses reported on the tax return will be different from the amounts on the income statement. For example, a corporation is likely to use straight-line depreciation on its income statement, but will use accelerated depreciation on its income tax return.

incurred: A word used by accountants to communicate that an expense has occurred and needs to be recognized on the income statement even though no payment was made. The second part of the necessary entry will be a credit to a liability account.

indirect cost: A cost or expense that is not directly traceable to a department, product, activity, customer, etc. As a result indirect costs and expenses are often allocated to the department, product, etc. For example, a manufacturing department that molds plastic has some costs that are directly traceable to it, such as the wages and fringe benefits of the direct labor working exclusively in that department. However, the heat for the entire building appears only on one utility bill. The heating bill is an indirect cost to the molding department. Generally it will be assigned to all departments based on the number of square feet each department occupies.

indirect labor: Usually this refers to manufacturing employees who are not classified as direct labor. Material handlers, mechanics, setup workers, clean up workers are a few examples of indirect labor.

indirect materials: For a manufacturer these would include factory supplies and other materials considered to be manufacturing overhead.

industry practices : Industries that are regulated by the government often have prescribed reporting requirements that carry over to the generally accepted reporting formats for financial reporting. For example, utilities' balance sheets present the utility plant as the first asset instead of current assets. Insurance and securities firms will have financial reports that differ from the formats used by manufacturers.

insolvent: The inability to pay liabilities as they become due. Some consider a company to be insolvent when its current liabilities exceed its current assets.

insurance : A contract to provide coverage or protection in exchange for a payment or ”premium”. Examples of insurance protection include liability, property, business interruption, life, disability, etc. The company paying the premiums for the protection will have insurance expense and possibly an asset, Prepaid Insurance (if the premiums are paid in advance). The insurance company would have insurance premium revenues and possibly a liability, Unearned Insurance Premiums (if the premiums were paid in advance).

insurance expense : The amount of insurance that was incurred/used up/expired during the period of time appearing in the heading of the income statement. The amount of insurance premiums that have not yet expired should be reported in the current asset account Prepaid Insurance.

intangible assets: Some examples of intangible assets include copyrights, patents, goodwill, trade names, trademarks, mail lists, etc. These assets will be reported at cost (or lower) on the balance sheet after property, plant and equipment. Trade names and trademarks that were developed by a company (as opposed to buying them from another company at a significant cost) may not appear on the balance sheet, even though they might be a company's most valuable asset.

interest earned: An amount earned by a company on its interest bearing bank accounts or other investments. The amount should be reported as Interest Revenues, Interest Income, or Investment Revenues in the accounting period in which the interest is earned.

interest expense : This account is a non-operating or ”other” expense for the cost of borrowed money or other credit. The amount of interest expense appearing on the income statement is the cost of the money that was used during the time interval shown in the heading of the income statement, not the amount of interest paid during that period of time.

interest payable : This current liability account reports the amount of interest the company owes as of the date of the balance sheet. (Future interest is not recorded as a liability.)

interest receivable : The current asset that represents the amount of interest revenue that was reported as earned, but has not yet been received.

interest revenues: Under the accrual basis of accounting, the Interest Revenues account reports the interest earned by a company during the time period indicated in the heading of the income statement. Interest Revenues account includes interest earned whether or not the interest was received or billed. Interest Revenues are nonoperating revenues or income for companies not in the business of lending money. For companies in the business of lending money, Interest Revenues are reported in the operating section of the multiple-step income statement.

inventory: A current asset whose ending balance should report the cost of a merchandiser's products awaiting to be sold. The inventory of a manufacturer should report the cost of its raw materials, work-in-process, and finished goods. The cost of inventory should include all costs necessary to acquire the items and to get them ready for sale. When inventory items are acquired or produced at varying costs, the company will need to make an assumption on how to flow the changing costs. If the cost to replace inventory is less than the actual cost of the inventory, it may be necessary to reduce the inventory amount.

inventory carrying costs: The cost to hold an item in inventory. Includes the cost of capital tied up in inventory, the cost of space and insurance, and the cost of items becoming obsolete while being held in inventory. This is an important component of the economic order quantity model.

inventory valuation : The dollar amount associated with the goods in a company's inventory. Initially the cost per unit is the cost to get the inventory items in place and ready for use. However, under certain circumstances the cost could be replaced by a lower amount. Since inventory items are constantly being purchased and sold and since the cost of the items purchased often changes, a company must select a cost flow assumption. The inventory valuation is critical because it also affects the cost of goods sold amount that is matched with sales on the income statement.

investments : The long term asset category of a classified balance sheet which appears immediately after the current assets. Listed in this category would be a bond sinking fund, funds held for construction, the cash surrender value of a life insurance policy owned by the company, and long term investments in stocks and bonds.

Letter: J

journal: The record of journal entries appearing in order by date. Some refer to the journal as the book of original entry, since the entries are first recorded in a journal. From the journal the entries will be posted to the designated accounts in the general ledger. With manual systems there are likely to be a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and the general journal. With computerized accounting systems, it is likely that the general journal will be used sparingly. The software is likely to record the other transactions automatically as invoices are entered, checks are prepared, receipts processed, etc.

Journals:The location in which bookkeepers keep records (in chronological order) of daily company transactions.

journal entry: The entry made in a journal. It will contain the date, the account name and amount to be debited, and the account name and amount to be credited. Each journal entry must have the dollars of debits equal to the dollars of credits.

journalize : To record accounting entries into a journal.

just-in-time (JIT) : An effort to have materials delivered by suppliers just as the materials are needed, thereby eliminating the need for the buyer to store inventories of component parts. Obviously, the buyer is relying on the dependability of the supplier.

Letter: K

kiting: This activity, which involves playing the float, is sometimes used when a company is facing an overdrawn checking account. Assume that a company has a checking account at NY Bank that is about to overdraw. To prevent the NY Bank checking account from overdrawing, the company deposits one of its checks drawn on its PA Bank. However, its PA Bank checking account does not have sufficient funds to cover the check that the company deposited in the NY Bank. To avoid its PA Bank checking account from overdrawing, the company deposits into its PA Bank checking account a check drawn on its NY Bank checking account. Of course there are not sufficient funds in the NY Bank account, so the company deposits into its NY Bank account a check drawn on its PA Bank account. This pattern will require the writing and depositing of many checks until the company gets some money or until the scheme is detected. Banks have reduced the opportunity for kiting by clearing checks more quickly and by not paying checks until deposited checks have been in an account for several days.

Letter: L

land: A long-term asset account that reports the cost of real property exclusive of the cost of any constructed assets on the property. Land usually appears as the first item under the balance sheet heading of Property, Plant and Equipment. Generally, land is not depreciated.

LIFO: Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.

lease: A legal agreement to pay rent to the lessor for a stated period of time. Sometimes the lease is in substance a purchase of an asset and a financing arrangement. For example, if a company agrees to lease a forklift truck for 60 months and the agreement cannot be canceled without purchasing the asset, it is possible the arrangement is more than a mere rental of equipment.

leasehold improvements : Additions or changes to a rented building that are made by the tenant rather than by the landlord. The tenant will record the cost of these changes in the long term asset account Leasehold Improvements. The cost of these additions or changes should be depreciated over the remaining life of the lease.

ledger : A ”book” containing accounts. For example, there is the general ledger that contains the balance sheet and income statement accounts. There is a subsidiary ledger that contains the detailed, customer account balances for the general ledger account Accounts Receivable.

letter of credit: This is granted by banks only to very creditworthy customers. It states that the bank will guarantee amounts that its customer incurred when purchasing goods.

leverage: Using debt in order to control more assets. Also known as financial leverage.

liabilities: Obligations of a company or organization. Amounts owed to lenders and suppliers. Liabilities often have the word ”payable” in the account title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed.

liquidity : The ability to generate cash.

loss : The result of the sale of an asset for less than its carrying amount; the write-down of assets; the net result of expenses exceeding revenues.

losses : Losses result from the sale of an asset (other than inventory) for less than the amount shown on the company's books. Since the loss is outside of the main activity of a business, it is reported as a nonoperating or other loss. To learn more, see Explanation of Income Statement. The term losses is also used to report the writedown of asset amounts to amounts less than cost. It is also used to refer to several periods of net losses caused by expenses exceeding revenues.

lower of cost or market: In the context of inventory this means that the inventory should be reported at the lower of its cost or its replacement cost. The rule is associated with the conservatism guideline or principle.

Letter: M

managerial accounting : The field of study within accounting that is devoted to information needed by the management of the company (as opposed to financial accounting to external parties). Topics covered in managerial accounting include cost behavior, product costing for manufacturers, budgeting, amounts needed for decision making, transfer pricing, capital budgeting, etc.

manufacturing overhead : Manufacturing costs other than direct materials and direct labor.

marginal cost : The cost of the next unit.

marginal revenue: The revenue from the next unit.

matching principle: The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense.

materiality : The accounting guideline that permits the violation of another accounting guideline if the amount is insignificant. For example, a profitable company with several million dollars of sales is likely to expense immediately a $200 printer instead of depreciating the printer over its useful life. The justification is that no lender or investor will be misled by a one-time expense of $200 instead of say $40 per year for five years. Another example is a large company's reporting of financial statement amounts in thousands of dollars instead of amounts to the penny.

miscellaneous expense : An income statement account for expense items that are too insignificant to have their own separate general ledger accounts.

mixed costs : Costs that have both a fixed and variable component. For example, the cost of operating an automobile includes some fixed costs that do not change with the number of miles driven (e.g., operating license, insurance, parking, some of the depreciation, etc.) Other costs vary with the number of miles driven (e.g., gasoline, oil changes, tire wear, etc.).

mixed expenses : Used in conjunction with cost or expense behavior. Mixed expenses consist of a constant or fixed portion and a variable portion. For example, sales salaries would be a mixed expense if each sales person's compensation is $2,000 per month plus 3% of the sales generated by the employee. Automobile expense is a mixed expense in relationship to miles driven. The automobile insurance, licensing, and parking are fixed expenses in that they do not vary with the miles driven. Gasoline and maintenance are considered variable because they will vary with miles driven.

monetary asset : An asset such as cash, accounts receivable, or a note receivable where the amount is a fixed, stated amount. Holding these assets during periods of inflation will result in a loss of purchasing power

monetary unit assumption : An accounting guideline where dollar is assumed to be constant (no change in purchasing power) over time. This allows an accountant to add one dollar from a transaction in 1946 to one dollar in 2012 and to show the result as two dollars. It also means that items that cannot be expressed in dollars do not appear in the financial statements. For example, how would you express on a company's balance sheet the value of loyal customers or a brilliant, aggressive management team?

mortgage : A lien on real estate to protect a lender. The loan made with such security is referred to as a mortgage loan.

mortgage loan: A loan having the security of a lien on the borrower's real estate.

mortgage loan payable : A liability account whose balance is the unpaid principal balance as of the balance sheet date. The amount of principal required to be paid within 12 months of the balance sheet date is reported as a current liability. The unpaid principal balance not due within one year of the balance sheet date is reported as a long term liability.

Letter: N

net : The result of two or more amounts being combined. For example, net sales is equal to gross sales minus sales returns, sales allowances, and sales discounts. The net realizable value of accounts receivable is the combination of the debit balance in accounts receivable and the credit balance in the allowance for doubtful accounts. The book value of equipment is also a net amount: the cost of the equipment minus the accumulated depreciation of the equipment.

net assets: The result of subtracting total liabilities from total assets. It is also the term used by not-for-profit organizations instead of owner's equity or stockholders' equity.

net carrying amount : This term might be used to express the combined balances of two accounts. For example, if Equipment has a debit balance of $300,000 and the account Accumulated Depreciation on Equipment has a credit balance of $130,000, we might say that the equipment has a net carrying amount of $170,000. Similarly, if Bonds Payable has a credit balance of $1,000,000 and Premium on Bonds Payable has a credit balance of $8,000, the net carrying amount is $1,008,000. This is similar to book value.

net current assets : Current assets minus current liabilities

net income : This is the bottom line of the income statement. It is the mathematical result of revenues and gains minus the cost of goods sold and all expenses and losses (including income tax expense if the company is a regular corporation) provided the result is a positive amount. If the net amount is a negative amount, it is referred to as a net loss.

net loss: The bottom line of the income statement when revenues and gains are less than the aggregate amount of cost of goods sold, operating expenses, losses, and income taxes (if the company is a regular corporation).

net realizable value : The amount you would likely receive if an item is sold in a typical transaction minus any cost incurred in order to get the item sold.

net present value : The net result of combining the discounted cash inflows and the discounted cash outflows of an investment, project, company, etc.

net sales :Net sales is the gross amount of Sales minus Sales Returns and Allowances, and Sales Discounts for the time interval indicated on the income statement.

nonmonetary asset : Assets other than cash, accounts receivables, and notes receivables. Holders of nonmonetary assets could avoid holding losses during periods of inflation.

nonoperating expense : An expense outside of a company's main operating activities of buying and selling merchandise or providing services. For example, interest expense is a nonoperating expense.

nonprofit organization : An organization without owners and with the main purpose of providing services needed by society. Nonprofit organization may be granted tax exempt status.

nontrade receivables : Receivables other than Accounts Receivable. Examples include amounts due from employees and income tax refunds receivable.

normal account balance: The debit or credit balance that would be expected in a specific account in the general ledger. For example, asset accounts and expense accounts normally have debit balances. Revenues, liabilities, and stockholders' equity accounts normally have credit balances.

normal costing : The actual cost of direct materials, the actual cost of direct labor, and manufacturing overhead applied by using a predetermined annual overhead rate.

normal operating activities : Retailers' normal operating activities would include the purchase and sale of merchandise and selling and administrative expenses. A retailer's investing of its idle cash is a nonoperating activity. However, a bank's normal operating activities would include investing and lending of the money.

notes payable: The amount of principal due on a formal written promise to pay. Loans from banks are included in this account.

notes receivable: An asset representing the right to receive the principal amount contained in a written promissory note. Principal that is to be received within one year of the balance sheet date is reported as a current asset. Any portion of the notes receivable that is not due within one year of the balance sheet date is reported as a long term asset.

notes to financial statements : Also referred to as footnotes. These provide additional information pertaining to a company's operations and financial position and are considered to be an integral part of the financial statements. The notes are required by the full disclosure principle.

Letter: O

objectivity : Fair, unbiased, and objective; not subjective.

obsolescence: The process of becoming outdated or no longer being economically feasible (often caused by technology advances). For example, personal computers and computer chips from 1990 are obsolete even though they can be operated. Holding inventory of electronic components will often result in losses because of obsolescence.

office equipment: A long-term asset account reported on the balance sheet under the heading of property, plant, and equipment. Included in this account would be copiers, computers, printers, fax machines, etc.

office equipment expense : The cost to operate office equipment during a specified time interval.

office supplies expense : The amount of office supplies used during a specified time interval.

on account : On credit; not for cash.

on credit: On account. Goods purchased with terms of net 10 days, net 30 days, or 2/10, net 30 are goods purchased on credit. Goods sold with similar terms are sales on credit.

operating activities : The activities involved in earning revenues. For example, the purchase or manufacturing of merchandise and the sale of the merchandise including marketing and administration. In the statement of cash flows the operating activities section identifies the cash flows involved with these activities by focusing on net income and the changes in the current assets and current liabilities.

operating cycle : The average time it takes for a retailer's or manufacturer's inventory to turn to cash. If a manufacturer turns its inventory six times per year (every two months) and allows customers to pay in 30 days, its operating cycle is approximately three months.

operating expenses : Operating expenses consist of selling and administrative expenses. Operating expenses are deducted from gross profit to arrive at income from operations.

operating income : A company's profit before nonoperating or other items. Other or nonoperating items include interest income, interest expense, and gains and losses on sale of assets used in the business, loss on lawsuit, etc.

operating lease : A rental agreement where ownership is not intended. An operating lease is not recorded in the general ledger accounts and therefore the asset and liability will not appear on the balance sheet. A lease that in substance is the purchase and financing of an asset is a capital lease.

operating loss : A company's loss before nonoperating or other items. Other or nonoperating items include interest income, interest expense, and gains and losses on sale of assets used in the business, loss on lawsuit, etc.

opportunity cost : The next best benefit foregone. The opportunity lost. Often measured as the contribution margin given up by not doing an activity. For example, if a sole proprietor is foregoing a salary and benefits of $50,000 at another job, the sole proprietor has an opportunity cost of $50,000. Accountants do not record opportunity costs in the general ledger or report them on the income statement, but they are costs that should be considered in making decisions.

ordinary repairs : Repairs that do not improve an asset or extend the asset's life. These repairs are charged to Repairs Expense or Maintenance Expense when incurred. Major repairs such as a complete engine overhaul that extends the useful life of the engine would be reported differently.

other accrued expenses payable: Obligations that a company has incurred, but have not yet been routinely recorded in Accounts Payable. For example, if the interest on a bank loan is paid on the 10th of each month, then on the last day of each month approximately 20 days of interest expense is an accrued expense payable

other assets: Long term assets that are not classified as investments, property, plant, equipment, or intangible assets. An example is bond issue costs that are amortized to expense over the life of the bonds.

other current assets: A balance sheet line to report short-term assets that are too insignificant to be identified separately.

other current liabilities : A balance sheet line to report short-term liabilities that are too insignificant to be identified separately.

outstanding checks : Checks which have been written, but have not yet cleared the bank on which they were drawn. In the bank reconciliation, outstanding checks are deducted from the balance per bank.

overabsorbed : The term used by manufacturers to indicate that the manufacturing overhead applied or assigned to its production is greater than the amount actually incurred.

overdraws : A term that refers to a negative checking account balance. It arises when a company writes checks in excess of the amount it has on deposit in its checking account.

overhead costs : Usually refers to manufacturing overhead costs such as factory supplies, factory depreciation, indirect factory labor, etc.

owner's capital account: The account in which the owner's investment is recorded plus the net income earned by the company minus the draws made by the owner. Current year net income and draws will be in temporary accounts until the end of the year.

owner's drawing account: The contra owner's equity account used to record the current year's withdrawals of business assets by the sole proprietor for personal use. This is a temporary account with a debit balance. It will be closed at the end of the year to the owner's capital account.

owner's equity accounts: The owner's equity accounts are the owner's capital account and the owner's drawing account. During the year the income statement accounts (revenues, expenses, gains, losses), the owner's drawing account, and the income summary accounts are considered to be temporary owner's equity accounts, because at the end of the year the balances in these temporary accounts will be transferred to the owner's capital account.

Letter: P

P & L: The abbreviation for profit and loss statement. Also known as the income statement.

paid-in capital : The amount paid or contributed by stockholders in exchange for shares of a corporation's stock.

payable: In accounting this word is often included in the title of liability accounts. It means the amount owed by a company as of the balance sheet date, even if the company did not yet receive an invoice from the supplier. For example, the electric utility furnishes electricity for the month of January, but does not read the meter until February 1 and sends the invoice or bill on February 4. The company pays the bill on March 1. The electricity used in January is a payable or obligation on January 31

payback: In business decision-making, payback means the number of years before the cash invested in a project is returned. It involves the cash flows from the project but generally the cash flows are not discounted to reflect the time value of money.

payback period: The number of years needed to recover the cash amount invested in a project. The calculation uses cash flows rather than accounting income flows. Generally the cash flows are not discounted to reflect the time value of money.

payee : The person or organization to whom a check is written.

periodic FIFO: One of the cost flow assumptions associated with the periodic inventory system. The first (oldest) costs are removed from inventory first and are charged to the income statement as cost of goods sold. The recent costs remain in inventory

periodic LIFO: One of the cost flow assumptions associated with the periodic inventory system. The latest (recent) costs of goods purchased are removed from inventory first and are charged to the income statement as cost of goods sold. The oldest costs remain in inventory

perpetual average : The moving average cost of inventory items under the perpetual inventory system. A new average cost per unit is developed after each purchase of an inventory item.

perpetual FIFO: The first-in, first-out cost flow assumumption under the perpetual inventory system. The first (oldest) costs are the first costs removed from inventory at the time that goods are sold. The most recent costs will remain in inventory. The results are the same as periodic FIFO.

perpetual LIFO : The last-in, first-out cost flow assumption under the perpetual inventory system. The last (most recent) costs as of the time that goods are sold are the first costs removed from inventory. The oldest costs as of the time of the sale will remain in inventory. The results will be different from periodic LIFO.

perpetual system of inventory: The inventory system where purchases are debited to the inventory account and the inventory account is credited at the time of each sale for the cost of the goods sold. Hence, the balance in the inventory account is constantly or perpetually changing. Under this system there is a general ledger account Cost of Goods Sold

petty cash: A cash account that businesses keep on hand for unexpected expenses.

posting: Recording an entry in an account in the general ledger or in a subsidiary ledger.

prepaid advertising : A current asset that reports the amount paid for advertising that has not yet taken place. When the advertising occurs the prepaid advertising is reduced and advertising expense is recorded.

prepaid dues : A current asset that reports the amount paid for dues that have not yet expired. As the prepaid dues expire, the account Prepaid Dues is reduced and dues expense is increased.

prepaid expense: A current asset representing amounts paid in advance for future expenses. As the expenses are used or expire, expense is increased and prepaid expense is decreased.

prepaid insurance: A current asset which indicates the cost of the insurance contract (premiums) that have been paid in advance. It represents the amount that has been paid but has not yet expired as of the balance sheet date. A related account is Insurance Expense, which appears on the income statement. The amount in the Insurance Expense account should report the amount of insurance expense expiring during the period indicated in the heading of the income statement

prepaid rent: A current asset account that reports the amount of future rent expense that was paid in advance of the rental period. The amount reported on the balance sheet is the amount that has not yet been used or expired as of the balance sheet date.

present value : Future amounts that have been discounted to the present.

price variance : In standard costing the difference between the actual cost and the standard cost of direct materials or direct labor. The price variance of direct labor is usually referred to as the labor rate variance.

principal: In financial accounting this term refers to the amount of debt excluding interest. Payments on mortgage loans usually require monthly payments of principal and interest.

principal payment : A payment toward the amount of principal owed. Generally when a loan payment consists of only a principal and interest payment, the amount owed for interest is processed first and the remaining amount of the payment is applied to the principal balance.

prime costs: The combination of direct materials and direct labor.

proceeds : The amount received from the sale of an asset, from the issuance of bonds or stock, or from a bank loan.

product cost : In manufacturing, the product cost includes direct materials, direct labor, and manufacturing overhead. A retailer's product cost is the net cost from suppliers plus costs to get the product in place and ready for use (e.g. freight-in

promissory note : A formal, written promise to pay interest and to repay the principal amount.

prorate: To assign or allocate on a logical basis. For example, the materials price variance in a standard costing system is prorated to the following categories: materials inventory, work-in-process inventory, finished goods inventory, and the cost of goods sold. The proration is based on each categories' amount of standard materials cost from the period of the variances.

purchases : A temporary account used in the periodic inventory system to record the purchases of merchandise for resale. (Purchases of equipment or supplies are not recorded in the purchases account.) This account reports the gross amount of purchases of merchandise. Net purchases is the amount of purchases minus purchases returns, purchases allowances, and purchases discounts.

purchases discounts: The temporary contra purchases account used in a periodic inventory system which represents the discounts allowed by paying within prescribed credit terms such as 1/10 (1% can be deducted from the amount owed if paid within 10 days). When the credit balance of this account is combined with the other purchases accounts, the result is the amount of net purchases.

purchases returns and allowances : The temporary contra purchases account used in a periodic inventory system which represents the amounts of merchandise that were returned to suppliers and the amounts allowed as deductions by suppliers for goods not returned. When the credit balance of this account is combined with the other purchases accounts, the result is the amount of net purchases.

Letter: Q

quality of earnings : Earnings are said to be of a high quality if the accounting policies are conservative. One indication is that the cash flows from operating activities shown on the statement of cash flows consistently exceed the amount of net income shown on the income statement.

quick assets: Assets such as Cash, Temporary Investments, and Accounts Receivable.

Letter: R

real account : Also known as a permanent account. Includes the balance sheet accounts (assets, liabilities, and owner's or stockholders' equity accounts) but excludes the owner's drawing account, which is a temporary account.

receipts: Cash received. Receipts are different from revenues

relevance : A qualitative characteristic in accounting. Relevance is associated with information that is timely, useful, has predictive value, and is going to make a difference to a decision maker.

relevant cost: A current or future cost that will differ among alternatives. For example, if a company is deciding whether to expand its sales territory, the real estate tax and depreciation on the company's headquarters building is not relevant. The additional travel expenses to the new territory and the additional sales from the new territory are relevant to the decision.

relevant range : Usually used in describing fixed costs. We often state that fixed costs will not change as volume changes. However, if volume were to triple, there would likely be more fixed costs as the company will need more space and managers. Accordingly, we state that costs are fixed only in a relevant or reasonable range of activity.

reliability : A qualitative characteristic in accounting. It is achieved when information is verifiable, objective (not subjective) and you can depend on it.

reliable: Verifiable, objective (not subjective), and you can depend on it.

rent expense: Under the accrual basis of accounting, the account Rent Expense will report the cost of occupying space during the time interval indicated in the heading of the income statement, whether or not the rent was paid within that period. (Rent that has been paid in advance is shown on the balance sheet in the current asset account Prepaid Rent.) Depending upon the use of the space, Rent Expense could appear on the income statement as part of administrative expenses or selling expenses. If the rented space was used to manufacture goods, the rent would be part of the cost of the products produced

rent revenue/income: Under accrual accounting it is the rent earned during the period indicated in the heading of the income statement, regardless of when the money is received from the tenant.

reorder point : The quantity on hand that will trigger an order to buy more items. A company's reorder point for Product X might be 60 units. When the quantity on hand gets down to 60, a purchase order is prepared to obtain more of these items.

repairs: Operating expenses made to return an asset to its previous condition (rather than to make the asset more than it was originally). The amount is charged to an account such as Repairs and Maintenance Expense in the period when the repair is made.

repairs and maintenance expense: The costs incurred to bring an asset back to an earlier condition or to keep the asset operating at its present condition (as opposed to improving the asset). For example, if a company truck is damaged, the cost to repair the damage is immediately debited to repairs and maintenance expense. Routine maintenance such as engine tune-ups, oil changes, radiator flushing, etc. is also debited to repairs and maintenance expense. (If an expenditure is made to improve the truck, such as adding a hydraulic lift to the truck or if an expenditure is a major repair that extends an asset's useful life, the amount is not expensed immediately; rather, the amount is recorded as an asset and is then depreciated over the truck's remaining useful life.)

replacement cost: The amount needed to replace an asset such as inventory, equipment, buildings, etc. Because of the cost principle, replacement cost is not acceptable in the financial statements distributed by a company. However, economists and others believe that replacement cost is more relevant than the historical cost.

research and development costs: R & D costs. These are costs incurred to develop new products or processes that may or may not result in commercially viable items. The general rule is that research and development costs are to be expensed immediately when the costs are incurred.

residual : An amount remaining after another amount is subtracted. In the accounting equation, owner's equity is the residual of assets minus liabilities.

restricted cash : Cash that can be used only for the purpose intended.

retained earnings : A stockholders' equity account that generally reports the net income of a corporation from its inception until the balance sheet date less the dividends declared from its inception to the date of the balance sheet.

retained earnings statement: A financial statement that reports the current year information contained in the general ledger account Retained Earnings. The statement will include the beginning balance, prior period adjustments, net income for the current period, dividends declared in the current period, and the ending balance.

revenue: Monies that are collected in the process of selling a company’s goods and services.

revenue expenditure : An amount that is expensed immediately. For example, routine repair costs on equipment are revenue expenditures because they are charged directly to an income statement account such as Repairs and Maintenance Expense

revenues: Fees earned from providing services and the amounts of merchandise sold. Under the accrual basis of accounting, revenues are recorded at the time of delivering the service or the merchandise, even if cash is not received at the time of delivery. Often the term income is used instead of revenues. Examples of revenue accounts include: Sales, Service Revenues, Fees Earned, Interest Revenue, Interest Income. Revenue accounts are credited when services are performed/billed and therefore will usually have credit balances. At the time that a revenue account is credited, the account debited might be Cash, Accounts Receivable, or Unearned Revenue depending if cash was received at the time of the service, if the customer was billed at the time of the service and will pay later, or if the customer had paid in advance of the service being performed. If the revenues earned are a main activity of the business, they are considered to be operating revenues. If the revenues come from a secondary activity, they are considered to be nonoperating revenues. For example, interest earned by a manufacturer on its investments is a nonoperating revenue. Interest earned by a bank is considered to be part of operating revenues

revenues and gains : This is the classification shown on a single-step income statement which reports the operating revenues, nonoperating revenues, and gains in one section of the income statement. Revenues and gains enhance the owner's equity

revenues from service charges : An income statement account at a financial institution used to record and report the amounts earned from fees charged to customers.

Letter: S

salaries expense : Under the accrual method of accounting, the account Salaries Expense reports the salaries that employees have earned during the period indicated in the heading of the income statement, whether or not the company has yet paid the employees. Salaries Expense will usually be an operating expense (as opposed to a nonoperating expense). Depending on the function performed by the salaried employee, Salaries Expense could be classified as an administrative expense or as a selling expense. If the employee was part of the manufacturing process, the salary would end up being part of the cost of the products that were manufactured.

sales allowance : An allowance granted to a customer who had purchased merchandise with a pricing error or other problem not involving the return of goods. If the customer purchased on credit, a sales allowance will involve a debit to Sales Allowances and a credit to Accounts Receivable.

sales commissions expense: A selling expense account shown on the income statement in order to match this expense to the related sales

sales discounts : A contra revenue account that reports the discounts allowed by the seller if the customer pays the amount owed within a specified time period. For example, terms of ” 1/10, n/30” indicates that the buyer can deduct 1% of the amount owed if the customer pays the amount owed within 10 days. As a contra revenue account, sales discount will have a debit balance and is subtracted from sales (along with sales returns and allowances) to arrive at net sales.

sales forecast : A projection or estimate of the future quantities and selling prices of products and/or services.

sales journal: A special or specialized journal to record sales of merchandise to customers. In a manual system this saves a significant amount of recording time. In today's computerized environment, sales are recorded automatically when the sales invoice is generated.

sales returns : Merchandise that was returned to the seller by a customer. This account is a contra sales account. When merchandise sold on credit is returned, this account is debited and Accounts Receivable is credited

salvage value of fixed assets : The estimated scrap value at the end of the useful life of an asset used in the business. It is also referred to as residual value.

self insurance : No insurance. If a company chooses to self insure for fire damage, it does not have insurance for fire damage. Companies with a chain of stores in various cities may decide not to have insurance, since their risk is spread over many stores in many locations.

selling and administrative expense : Also referred to as operating expenses. These expenses are reported in the period in which they were incurred, not the period in which they were paid.

selling expenses: Selling expenses are part of the operating expenses (along with administrative expenses). Selling expenses include sales commissions, advertising, promotional materials distributed, rent of the sales showroom, rent of the sales offices, salaries and fringe benefits of sales personnel, utilities and telephone usage in the sales department, etc. Under the accrual basis of accounting, selling expenses appear on the income statement in the period in which they occurred (not the period in which they were paid).

service revenues : Under the accrual basis of accounting, the Service Revenues account reports the fees earned by a company during the time period indicated in the heading of the income statement. Service Revenues include work completed whether or not it was billed. Service Revenues is an operating revenue account and will appear at the beginning of the company's income statement.

simple journal entry : An accounting entry with only one account being debited and only one account being credited.

source document: An original record containing the details to substantiate a transaction entered in an accounting system. For example, the source document for a purchase of merchandise is the supplier's invoice supported by the company's purchase order and a receiving ticket.

special journals: Journals other than the general journal. Special or specialized journals include the cash receipts journal, the cash disbursements journal, the purchases journal, and the sales journal.

spoilage : Waste, scrap, evaporation, etc. in the manufacturing of products. Normal spoilage is considered unavoidable and is part of the cost of producing the good output. Abnormal spoilage is considered avoidable and is not part of the cost of producing good output. The cost of abnormal spoilage should be expensed when it occurs.

standard cost: The planned or expected costs. Often used in manufacturing for accounting for inventories and production. When actual costs differ from the standard costs, variances are reported.

statement of cash flows : One of the main financial statements (along with the income statement and balance sheet). The statement of cash flows reports the sources and uses of cash by operating activities, investing activities, financing activities, and certain supplemental information for the period specified in the heading of the statement. The statement of cash flows is also known as the cash flow statement.

stockholders' equity : Also referred to as shareholders' equity. At a corporation it is the residual or difference of assets minus liabilities.

stop payment order : A directive to a company's bank to not honor (pay) a specific check that the company had written. The company making the request will be charged a fee by the bank for this service.

subsidiary accounts : The accounts outside of the general ledger which provide the detail for the balance reported in a general ledger account. (The account in the general ledger is known as the control account.) For example, each credit customer's account balance is contained in a subsidiary account or record. The total of the subsidiary accounts or records must agree to the balance in Accounts Receivable, the general ledger control account.

sunk cost: A past, historical cost. They are called sunk because a past cost cannot be changed and decisions involve only the present and the future.

supplies : A current asset representing the cost of supplies on hand at a point in time. The account is usually listed on the balance sheet after the Inventory account. A related account is Supplies Expense, which appears on the income statement. The amount in the Supplies Expense account reports the amounts of supplies that were used during the time interval indicated in the heading of the income statement.

supplies expense : Under the accrual basis of accounting the account Supplies Expense reports the amount of supplies that were used during the time interval indicated in the heading of the income statement. Supplies that are on hand (unused) at the balance sheet date are reported in the current asset account Supplies or Supplies on Hand.

supporting services expenses: One of two broad functional categories for sorting and reporting a nonprofit organization's expenses. (The other is program expenses.) Supporting services expenses consists of 1) management and general expenses, and 2) fundraising expenses.

suspense account: A temporary holding place for amounts that need further analysis.

Letter: T

T-account : A visual aid used by accountants to illustrate a journal entry's effect on the general ledger accounts. Debit amounts are entered on the left side of the ” T” and credit amounts are entered on the right side.

temporary accounts: Accounts that are closed at the end of each accounting year. Included are the income statement accounts (revenues, expenses, gains, losses), summary accounts (such as income summary), and a sole proprietor's drawing account.

term bonds : Bonds with one maturity date (as opposed to serial bond).

time deposits : Savings accounts and certificates of deposits at a bank.

time value of money : The recognition that a dollar in the present is more valuable than a dollar in the future. Present-value calculators and present-value tables assist in converting future dollars to the present value in order to make a prudent decision

times interest earned : A financial ratio that compares a company's interest expense to the company's income before interest expense and income taxes. It is an indicator of the likelihood that interest payments will be made in the future

timing differences: Temporary differences between the reporting of a revenue or expense for financial statements (books) and the reporting of the item for income tax purposes. For example, it is common for companies to depreciate equipment on the financial statements over a ten-year period using the straight-line method. However, for income tax purposes the company uses the IRS's seven-year, accelerated depreciation method. Eventually, the total depreciation will be the same; however, each year for ten years there will be differences due to the timing of the depreciation.

trade discount: A discount that often varies by customer. For example, a company may sell its products to a variety of resellers. Some of the resellers might buy $1 million of products each year, other resellers might purchase $100,000, and still others buy less than $10,000 per year. The company would probably have lower selling prices for the large-volume resellers and have higher selling prices for the low-volume resellers. One way to achieve this is to have a catalog showing just one selling price for each item, but to offer discounts that vary with the volume purchased. That discount is known as a trade discount.

trademark: An intangible asset that is reported at cost (or lower) on the balance sheet. It might consist of a name or a logo

trade payables : Payables arising from the purchase of merchandise inventory and outside services.

trade receivables: Receivables due from customers

transfer price : The price at which one division or subsidiary of a company transfers products to another division or subsidiary of the company.

transactions: Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.

treasury stock: A corporation's own stock that has been repurchased from stockholders. Also a stockholders' equity account that usually reports the cost of the stock that has been repurchased.

trial balance: A listing of the accounts in the general ledger along with each account's balance in the appropriate debit or credit column. The total of the amounts in the debit column should equal the total of the amounts in the credit column.

turnover: In some countries turnover refers to sales. Turnover is also associated with some financial ratios such as the inventory turnover ratio, the accounts receivable turnover ratio, and asset turnover ratio.

Letter: U

unappropriated retained earnings : The regular retained earnings. Retained earnings that have not been restricted.

uncollected funds : The amounts in a company's bank account that are not yet accessible because the checks deposited into the account have not yet cleared the bank on which they were drawn.

undeposited checks : Checks received from customers and others that are not yet deposited into a bank account. Undeposited checks which are not postdated are reported as part of a company's cash.

understates : Reports too little. If an error understates the inventory and the company's net income, the amount of inventory and the amount of net income being reported are less than the correct amounts.

unearned revenue(s) : A liability account that reports amounts received in advance of providing goods or services. When the goods or services are provided, this account balance is decreased and a revenue account is increased.

unfavorable variance: The amount by which actual costs exceed the standard costs or budgeted costs. Also, the amount by which actual revenues are less than the budgeted revenues.

unpaid principal balance : The amount of principal owed on a loan. On the typical mortgage loan, a portion of the monthly payment is applied to interest and principal. The amount of principal that remains after the principal payment is the unpaid principal balance. The following month's interest is based upon this amount.

unqualified opinion : A ” clean” auditor's report. That is, the auditor has concluded that the financial statements present fairly the results of the company's operations and its financial position according to generally accepted accounting principles.

unrealized holding gain: A gain from holding an asset and the gain has not yet been reported in the financial statements. As an example, assume that a company purchased land many years ago and continues to hold the land. The land was purchased at a cost of $20,000 but is now appraised at $300,000. Because of the cost principle and the revenue recognition principle, the land will be reported at its cost of $20,000. The holding gain of $280,000 is not realized or reported until the company sells the land.

unrealized holding loss : A loss from holding an asset and the loss has not yet been reported in the financial statements

unrestricted contribution : A contribution by a donor that does not specify any restrictions. This type of contribution can be used by the nonprofit organization for anything within its exempt purpose.

useful life: This is the period of time that it will be economically feasible to use an asset. Useful life is used in computing depreciation on an asset, instead of using the physical life. For example, a computer might physically last for 100 years; however, the computer might be useful for only three years due to technology enhancements that are occurring. As a consequence, for financial statement purposes the computer will be depreciated over three years.

utilities expense: Under the accrual basis of accounting, this account reports the cost of the electricity, heat, sewer, and water used during the period indicated in the heading of the income statement. Because utility companies deliver the service and then later measure the amounts used and then prepare the billing, a company's Utilities Expense amount should be based on the amount of utilities used during the period (as opposed to the amount paid during the accounting period). The amount of Utilities Expense for the sales function is classified as a selling expense and the amount used for administration is classified as an administrative expense. Utilities used in the manufacturing process will be part of the cost of the products manufactured.

utilities payable : A current liability account that reports the amounts owed to the utility companies for electricity, gas, water, phone as of the date of the balance sheet. If a utility bill has not been received, the company will have to estimate the amount owed for the service it has used up to the balance sheet date. Instead of using a separate account for utilities payable, the amounts owed are often included in Accounts Payable

Letter: V

valuation account : An account used in combination with another account. For example, the account Allowance for Doubtful Accounts is used with Accounts Receivable in order to present the net amount of the accounts receivable. The account Accumulated Depreciation is used with property, plant and equipment to indicate how much of an asset's cost has been allocated to Depreciation Expense. Here the account Accumulated Depreciation is used to report the assets' book value (not the assets' market value).

value billing : Billing a client based on the value of the information or service provided rather than billing based on time spent.

variable cost : A cost or expense where the total changes in proportion to changes in volume or activity. For example, if a company pays a sales commission on all of its sales, commission expense is a variable expense because commissions increase in total as sales increase and decrease in total as sales decrease. The cost of flour is a variable cost for the baker of artisan breads.

variable expenses : Expenses that vary with some activity. For example, sales commissions expense and cost of goods sold will be greater when sales are greater; electricity expense will decrease when machine hours are reduced.

variance: A term used with standard costs to report a difference between actual costs and standard costs.

vehicles : A long-term asset account that reports a company's cost of automobiles, trucks, etc. The account is reported under the balance sheet classification property, plant, and equipment. Vehicles are depreciated over their useful lives.

vendors: Suppliers. Companies that provide goods or services.

volume: Sometimes referred to in the context of cost or expense behavior such as ” variable expenses increase as volume increases.” In this context volume might be an activity such as the number of machine hours, the number of units produced, the number of pounds processed, the number of units sold, or the dollars of goods sold.

Letter: W

worker’s compensation insurance: A type of insurance carried by employers that covers its employees in case they are injured on the job.

wages : The compensation earned by employees who are paid on an hourly basis. It is common for production workers to earn wages, since they are usually paid via an hourly rate.

wages expense: The compensation earned by hourly-paid employees during the interval of time indicated in the heading of the income statement. Under the accrual basis of accounting, the date that wages are paid does not determine when the wages are reported as an expense

warranties : A promise to repair, replace, refund, etc. a product during a specified period. The company making the promise has a contingent liability and a warranty expense that should be recorded at the time the product is sold.

warranty expense: The expense associated with a commitment to repair or replace a product for a specified period of time. The expense should be reported on the income statement at the time that the sale of the product is reported in order to comply with the matching principle. A related account, Warranty Payable or Warranty Liability is also established at the time of the sale.

warranty liability : A liability account that reports the estimated amount that a company will have to spend to repair or replace a product during its warranty period. The liability amount is recorded at the time of the sale. (It is also the time when the expense is reported.) The liability will be reduced by the actual expenditures to repair or replace the product. Warranty Payable or Warranty Liability is considered to be a contingent liability that is both probable and capable of being estimated.

withdrawals by owner : Also referred to as draws. These are a reduction of owner's equity, but are not a business expense and they do not appear on the sole proprietorship's income statement.

withholdings : The term associated with payroll deductions from an employee's gross wages or gross salary.

work-in-progress : Work-in-progress is the long-term asset account that is used to report the amounts spent on the construction of buildings and equipment until the asset is completed and put into service.

working capital : Current assets minus current liabilities.

write-down : The reduction to the carrying amount of an asset. For example, we often reduce or write down inventory from its cost to its market value when market value is lower.

write-off : The reduction or removal of an asset amount. For example, an account receivable will be removed or written off if the customer is not able to pay the amount owed to the company

write-up : The increase in a carrying amount.

write-up work : The preparation of financial statements from a client's information and without any review or audit of the amounts.

Letter: X

There are no definitions for words starting with the letter ” X” . :

Letter: Y

yield : Market interest rate, current return, effective interest rate. Also see yield to maturity.

yield to maturity : The total annual return on a bond investment if held to maturity. For example, if a bond is purchased at less than its maturity value, the yield to maturity includes the annual interest plus the gain as the bond increases from the investment amount to the maturity value. If the bond is purchased at more than its maturity value, the yield to maturity includes the annual interest minus the loss as the bond decreases from the investment amount to the maturity value.

Letter: Z

zero-based budgeting : Rather than the previous year's budget being the starting point for the next budget, a zero-based budget assumes no activities: everything in the budget must be justified.

zero coupon bonds : A bond without a stated interest rate. Because no interest is paid, the bond will sell for a discount from its maturity value. Rather than receiving interest, an investor's compensation will be the difference between the discounted price at which the bond was purchased and the price the investor receives when selling the bond. If the investor holds the bond to maturity, the investor will earn the difference between its discounted cost and its maturity value