PRINCIPLES OF ACCOUNTING GLOSSARY


Accounting An information system that measures, processes, and communicates financial information about an economic entity

Accounting cycle The sequence of steps followed in the accounting system to measure business transactions and transform them into financial statements; it includes analyzing and recording transactions, posting entries, adjusting the accounts, preparing the financial statement

Accounting equation Assets = Liabilities + Owner’s Equity

Accounts receivable Short-term financial assets that arise from sales on credit at the wholesale or retail level

Accrual The recognition of an expense or revenue that has arisen but has not yet been recorded

Accrued expenses Expenses incurred but not recognized in the accounts; unrecorded expenses

Additions Enlargements to the physical layout of a plant asset

Adjusted trial balance A trial balance prepared after all adjusting entries have been recorded and posted to the accounts

Balance sheet The financial statement that shows a business’s assets, liabilities, and owner’s equity as of a specific date. Also called the statement of financial position

Bill of activities A list of activities and related costs that are used to compute the costs assigned to activities and the product unit cost

Bond A security, usually long-term, representing money that a corporation or other entity borrows from the investing public

Book value A company’s total assets less its liabilities; stockholders’ equity or net assets

Brand name A registered name that can be used only by its owner to identify a product or service

Budgets Plans of action based on forecasted transactions, activities, and events

Cash budget A projection of the cash an organization will receive and the cash it will pay out in an accounting period

Capital expenditure An expenditure for the purchase or expansion of a long-term asset, which is recorded in an asset account

Cash equivalents Short-term investments that will revert to cash in 90 days or less from the time they are purchased

Cash flows The inflows and outflows of cash into and out of a business

Commercial paper Unsecured loans sold to the public, usually through professionally managed investment

Cost The exchange price associated with a business transaction at the point of recognition firms, as a means of borrowing short-term funds

Cost of capital The minimum desired rate of return on an investment, such as assets invested in an investment center

Cost principle The practice of recording transactions at the cost

Debit The left side of an account

Deficit A debit balance in the Retained Earnings account

Depreciation The portion of the cost of a long-term asset allocated to any one accounting period. Also called depreciation expense

Differential cost A cost that changes among alternatives. Also called incremental cost

Direct labor budget A detailed plan that estimates the direct labor hours needed in an accounting period and the associated costs

Double taxation Taxation of corporate earnings twice – once as income of the corporation and once as income to stockholders in the form of dividends

Discount The amount by which the face value of a bond exceeds the issue price, which occurs when the market

 Discounting A method of selling notes receivable to a bank in which the bank derives its profit by deducting the interest from the maturity value of the note

Dividend A distribution of a corporation’s assets (usually cash generated by past earnings) to its stockholders

Due care Competence and diligence in carrying out professional responsibilities

Effective interest method A method of amortizing bond discounts or premiums that applies a constant interest rate (the market rate at the time the bonds were issued) to the carrying value of the bonds at the beginning of each interest period

Ethics A code of conduct that addresses whether actions are right or wrong

Exchange gain or loss A gain or loss due to exchange rate fluctuation, which is reported on the income statement

Exchange price The price resulting from an agreement between the buyer and seller that can be verified by evidence created at the time of the transaction; the price at which a transaction is recorded

Exchange rate The value of one currency in terms of another

Ex-dividend A description of stock between the record date and the date of payment, during which the right to the dividend remains with the person who owned the stock on the record date

Expenditure A payment or an obligation to make future payment for an asset or a service

Expenses Decreases in owner’s equity that result from operating a business

Extraordinary items Events or transactions that are both unusual in nature and infrequent in occurrence

Face interest rate The rate of interest paid to bondholders based on the face value of the bonds

Facility-level activities Activities performed to support a facility’s general manufacturing process

Factor An entity that buys accounts receivable

Factoring The sale or transfer of accounts receivable

FIFO costing method A process costing method in which the cost flow follows the actual flow of production, so that the costs assigned to the first products processed are the first costs transferred out when those products flow to the next process, department, or work cell

Financial accounting The process of generating and communicating accounting information in the form of financial statements to those outside the organization

Financial Accounting Standards Board (FASB) The most important body for developing rules on accounting practice; it issues Statements of Financial Accounting Standards

Financial budgets Budget projections of the financial results for an accounting period

Financial leverage The ability to increase earnings for stockholders by earning more on assets than is paid in interest on debt incurred to finance the assets. Also called trading on the equity

Fiscal year Any 12-month accounting period

Fixed cost A cost that remains constant within a defined range of activity or time period

Fixed overhead budget variance The difference between budgeted and actual fixed overhead costs. Also called budgeted fixed overhead variance

Free cash flow The amount of cash that remains after deducting the funds a company must commit to continuing operating at its planned level; Net Cash Flows from Operating Activities – Dividends – Purchases of Plant Assets + Sales of Plant Assets

Future value The amount an investment will be worth at a future date if invested at compound interest

General journal The simplest and most flexible type of journal

General ledger A book or file that contains all of a company’s accounts arranged in the order of the chart of accounts. Also called the ledger

Generally accepted accounting principles (GAAP) The conventions, rules, and procedures that define accepted accounting practice at a particular time

Going concern The assumption that unless there is evidence to the contrary, a business will continue to operate indefinitely

Goods flow The actual physical movement of goods in the operations of a company

Goodwill The excess of the amount paid for a business over the fair market value of the business’s net assets

Governmental Accounting Standards Board (GASB) The board responsible for issuing accounting standards for state and local governments

Gross margin The difference between net sales and cost of goods sold. Also called gross profit

Gross profit method A method of inventory estimation based on the assumption that the ratio of gross margin for a business remains relatively stable from year to year. Also called gross margin method

High-low method A three-step approach to separating a mixed cost into its variable and fixed component

Income statement A financial statement that summarises the revenues earned and expenses incurred by a business over an accounting period

Income Summary account A temporary account used during the closing process that holds a summary of all revenues and expenses before the net income or net loss is transferred to the Owner’s Capital account

Income tax allocation The accounting method used to accrue income taxes expense on the basis of accounting income when accounting income and taxable income differ

Income taxes A category for the expense of federal, state, and local taxes that appears only on the income statements of corporations. Also called provision for income taxes

Incremental analysis A technique used in decision analysis that compares alternatives by focusing on the differences in their projected revenues and costs. Also called differential analysis

Independence The avoidance of all relationships that impair or appear to impair an accountant’s objectivity

Index number In trend analysis, a number that shows changes in related items over time and that is calculated by setting the base year equal to 100 percent

Indirect Interest The cost of borrowing money or the return on lending money, depending on whether one is the borrower or the lender

Interim financial statements Financial statements issued for a period of less than one year, usually a quarter or a month costs Costs that cannot be conveniently or economically traced to a cost object.

Inventory cost The invoice price of an asset less purchases discounts, plus freight in, plus applicable taxes and tariffs

Investing activities Activities are undertaken by management to spend capital in productive ways that will help a business achieve its objectives

Investments Assets, usually long-term, that is not used in the normal operation of a business and that management does not intend to convert to cash within the next year

Journal A chronological record of all transactions; the place where transactions first enter the accounting records. Also called a book of original entry

Journal entry A journal notation that records a single transaction

Journal form A way of recording a transaction in which the date, debit account, and debit amount appear on one line and the credit account and credit amount appear on the next line

Jou Legal capital The number of shares of stock issued times the par value; the minimum amount a corporation can report as contributed capital

Liabilities A business’s present obligations to pay cash, transfer assets, or provide services to other entities in the future

License The right to use a formula, technique, process, or design

LIFO liquidation The reduction of inventory below previous levels because sales of older, lower-priced units have exceeded the purchases of units for the current period

Line of credit An arrangement with a bank that allows a company to borrow funds as needed

Liquidating dividend A dividend that exceeds retained earnings and that a corporation usually pays only when it is going out of business or reducing its operations

Liquidation A special form of dissolution in which a partnership ends by selling assets, paying liabilities, and distributing any remaining assets to the partners

Liquidity Having enough cash available to pay debts when they are due

Long-term assets Assets that have a useful life of more than one year, are used in the operation of a business and are not intended for resale. Less commonly called fixed assets

Long-term liabilities Debts that fall due more than one year in the future or beyond the normal operating cycle

Lower-of-cost-or-market (LCM) rule A method of valuing inventory at an amount less than cost when the replacement cost falls below the historical cost

Manufacturing company A company that makes and sells products

Manufacturing cost flow The flow of manufacturing costs (direct materials, direct labor, and overhead) through the Materials Inventory, Work in Process Inventory, and Finished Goods Inventory accounts into the Cost of Goods Sold account

The margin of safety The number of sales units or amount of sales dollars by which actual sales can fall below planned sales without resulting in a loss

Market Current replacement cost of inventory

Market interest rate The rate of interest paid in the market on bonds of similar risk. Also called effective interest rate

Marketable securities Investments with a maturity of more than 90 days but that are intended to be held only until cash is needed to pay current obligations. Also called short-term investment.

Master budget A set of operating budgets and a set of financial budgets that detail an organization’s financial plans for a specific accounting period

The matching rule The principle that revenues must be assigned to the accounting period in which the goods are sold or the services performed, and expenses must be assigned to the accounting period in which they are used to produce revenue

Materiality The convention that refers to the relative importance of an item or event in a financial statement and its influence on the decisions of the users of financial statements.

Materials Inventory account An inventory account that shows the balance of the cost of unused materials

Maturity date The date on which a promissory note must be paid

Maturity value The total proceeds of a promissory note – face value plus interest – at the maturity date

Merchandise inventory The goods on hand at any one time that are available for sale to customers

Merchandising business A business that earns income by buying and selling goods

Merchandising company A company, either a wholesaler or retailer, that buys and sells products

Minority interest An amount recorded on a consolidated balance sheet that represents the holdings of owners of less than 50 percent of a subsidiary’s voting stock

Mission A statement of the fundamental way in which a business will achieve its goal of increasing the value of the owners’ interest in the business

Mixed costs Costs that have both variable and fixed components
Money measure The recording of all business transactions in terms of money

Monitoring Management’s regular assessment of the quality of internal control

Mortgage A long-term debt secured by real property

Moving time The time spent moving a product from one operation or department to another (LO6)
Natural resources Long-term assets purchased for the economic value that can be taken from the land and used up

Net assets Assets minus liabilities; owner’s equity or owners’ equity

Net cash inflows The balance of increases in projected cash receipts over increases in projected cash payments resulting from a proposed capital investment

The net cost of purchases Net purchases plus any freight charges on the purchases

Net income The difference between revenues and expenses when revenues exceed expenses

Net income The difference between revenues and expenses when revenues exceed expenses

Net loss The difference between expenses and revenues when expenses exceed revenues

Net of taxes A phrase indicating that taxes have been taken into account in reporting an item in the financial statements

Net present value method A method of evaluating capital investments in which all future cash flows for each proposed project are discounted to their present values, and the amount of the initial investment is subtracted from their sum. The projects with the highest positive net present value are selected for implementation

Net purchases Total purchases less any deductions, such as purchases returns and allowances and discounts on purchases

Net sales The gross proceeds from sales of merchandise (gross sales) less sales returns and allowances and any discounts allowed. Often called sales

Operating objectives Short-term goals that outline expectations for the performance of day-to-day operations

Opportunity costs The benefits forfeited or lost when one alternative is chosen over another

Ordinary annuity A series of equal payments made at the end of equal intervals of time, with compound interest on the payments

Ordinary annuity A series of equal payments made at the end of equal intervals of time, with compound interest on the payments

Organization chart A visual representation of an organization’s hierarchy of responsibility for the purposes of management control

Other assets A balance sheet category that some companies use to group all assets other than current assets Par value An arbitrary amount assigned to each share of stock; constitutes a corporation’s legal capital
Parent company A company that has a controlling interest in another firm

Participative budgeting A process in which personnel at all levels of an organization actively engage in making decisions about a budget

Partners’ equity The owner’s equity in a partnership

Partnership A business that is owned by two or more people and that is not incorporated

Partnership A business that is owned by two or more people and that is not incorporated

Partnership agreement The contractual relationship between partners that identifies the details of their partnership

Patent An exclusive right granted by the federal government for a period of 20 years to make a particular product or use a specific process or design and property, plant, and equipment

 

Profit The increase in owner’s equity that results from a business operation

Profit center A responsibility center whose manager is accountable for both revenue and costs and for the resulting operating income

Profit margin The percentage of each sales dollar that results in profit; Operating Income / Sales

Ratio analysis A technique of financial performance evaluation that identifies key relationships between components of the financial statements

Receiving report  A form on which an employee in a company’s receiving department notes the quantity, type of goods, and their condition upon delivery from the vendor

Recognition The determination of when a business transaction should be recorded

Recognition point The predetermined time at which a transaction should be recorded; usually, the point at which title passes to the buyer

Record date The date on which ownership of stock, and thus the right to receive a dividend, is determined

Registered bonds Bonds for which the names and addresses of bondholders are recorded with the issuing organization

Regression analysis A mathematical approach to separating a mixed cost into its variable and fixed components

Relevance The qualitative characteristic of information that has a direct effect on a decision

Relevant range The span of activity in which a company expects to operate

Reliability The qualitative characteristic of information that represents what it is supposed to represent and is verifiable and neutral

Revenues Increases in owner’s equity that result from
Salaries Compensation of employees at a monthly or yearly rate

Sales budget A detailed plan, expressed in both units and dollars, that identifies the product (or service) sales expected in an accounting period

Sales discount A discount given to a buyer for early payment of a sale made on credit; the Sales Discounts account is a contra-revenue account

Sales forecast A projection of sales demand based on an analysis of external and internal factors

Sales mix The proportion of each product’s unit sales relative to the organization’s total unit sales

Sales mix decision A decision to select the alternative that maximizes the contribution margin per constrained resource

Sales returns and allowances Refunds, credits, and discounts given to customers who have received defective goods

Sales Returns and Allowances account A contra-revenue account used to accumulate cash refunds, credits on account, and other allowances made to customers who have received defective or otherwise unsatisfactory products operating a business

Time value of money The effects of the passage of time on holding or not holding money

Total direct labor cost variance The difference between the standard direct labor cost for good units produced and actual direct labor costs

Total direct materials cost variance The difference between the standard cost and actual cost of direct materials

Total fixed overhead variance The difference between actual fixed overhead costs and the standard fixed overhead costs that are applied to good units produced using the standard fixed overhead rate

Total manufacturing costs The total costs of direct materials, direct labor, and overhead incurred and transferred to Work in Process Inventory during an accounting period. Also called current manufacturing costs

Total overhead variance The difference between actual overhead costs and standard overhead costs

Total quality management (TQM) A management tool that requires that all parts of a business work together to build quality into the business’s product or service

Total variable overhead variance The difference between actual variable overhead costs and the standard variable overhead costs that are applied to good units produced using the standard variable overhead rate

Trade credit Credit granted to customers by wholesalers or retailers

Trade discount A deduction (usually 30 percent or more) off a list or catalog price, which is not recorded in the accounting records

Trademark A registered symbol that can be used only by its owner to identify a product or service

Trial balance A comparison of the total of debit and credit balances in the accounts to check that they are equal

Valuation The process of assigning a monetary value to a business transaction

Value chain A way of defining a business as a set of primary processes and support services that link together to add value to a business’s products or services, thus fulfilling the business’s mission and objectives

Value-adding activities Activities that add value to a product or service as perceived by the customer

Value-adding activity An activity that adds value to a product or service as perceived by the customer

Value-adding cost The cost of an activity that increases the market value of a product or service

Variable cost A cost that changes in direct proportion to a change in productive output (or any other measure of volume)

Variable costing A method of preparing profit center performance reports that classify a manager’s controllable costs as either fixed or variable and produces a contribution income statement

Wages Compensation of employees at an hourly rate

Worksheet A type of working paper used as a preliminary step in recording adjusting and closing entries and in the preparation of financial statements


Contributor:  Susmita Sarker

From Mawlana Bhashani Science & Technology University