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Accounting Terminology

Above The Line: This term can be applied to many aspects of accounting. It means transactions, assets, etc., that are associated with the everyday running of a business.

Account: An accounting record, grouped according to customer or purpose, in which the results of transactions are accumulated; shows increases, decreases, and a balance.

Accounting: Refers to the overall process of tracking your business's income and expenses. By using these numbers in various calculations and formulas to answer specific questions about the tax and financial status of your business.

Accounting Cycle: The procedures for analyzing, recording, classifying, summarizing, and reporting the transactions of a business from the start of the year to closing them at the end.

Accounting Equation: The formula used to prepare a balance sheet: Assets = Liability + Equity.

Accounting Model: The basic accounting assumptions, concepts, principles, and procedures that determine the manner of recording, measuring, and reporting an entity's transactions.

Accounting Period: A period of time for which records are maintained and at the end of which financial statements are prepared covering the period.

Accounting System: The set of manual and computerized procedures and controls that provide for identifying relevant transactions or events; preparing accurate source documents, entering data into the accounting records accurately, processing transactions accurately, updating master files properly, and generating accurate documents and reports.

Accounts Payable: An amount owed to a supplier or vendor for good or services purchased on credit; payment is due within a short time period, usually 30 days or less. Also called A/P.

Accounts Receivable: A current asset representing money due for services performed or merchandise sold on credit. Also called A/R.

Accounts Receivable Turnover: A measure used to determine a company's average collection period for receivables; computed by dividing net sales (or net credit sales) by average accounts receivable.

Accrual-Basis Accounting: A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid.

Accrued Expenses: Expenses that arise through adjusting entries when accounting for unrecorded expenses.

Accrued Liabilities: Liabilities that arise through adjusting entries when accounting for unrecorded liabilities.

Accrued Revenue: A revenue which has been earned during an accounting period but which has not been paid or recorded because payment is not due.

Accumulated Depreciation: The total depreciation recorded on an asset since its acquisition; a contra account deducted from the original cost of an asset on the balance sheet.

Acid-test Ratio (or quick ratio): A measure of a firm's ability to meet current liabilities; more restrictive than the current ratio, it is computed by dividing net quick assets (all current assets, except inventories and prepaid expenses) by current liabilities.

Active Periods: Allow for posting of financial entries to the sub-ledgers or General Ledger within the period specified.

Adjusted Gross Income: An individual taxpayer's total income minus deductions (adjustments) for individual retirement plan contributions and alimony paid.

Adjusting Entries: Entries required at the end of each accounting period to recognize, on an accrual basis, revenues and expenses for the period and to report proper amounts for asset, liability, and owners' equity accounts.

Adjustments to Gross Income: Amounts deducted from the gross income of an individual taxpayer in arriving at adjusted gross income; includes contributions to individual retirement plans and alimony paid.

Adverse Opinion: Audit report indicating the auditor believes the overall financial statements are so materially misstated or misleading that the statements do not fairly represent the financial position or results of the operations and cash flows.

Aged Payables: An analysis of Accounts Payable which have been classified according to the length of time that they have been outstanding or that they have been due and payable. The time may be measured (aged) by invoice date or by due date for each invoice (detailed) or by Supplier totals.

Aging Reports: In accounts receivable, it is a list of customers open balances and their due dates. In accounts payable, it will help you manage you outstanding bills.

Allowance for Bad Debits: It is an estimate of uncollectable customer accounts.

Allowance Method: The recording of estimated losses due to uncollectable accounts as expenses during the period in which the sales occurred.

Amortization: The process of cost allocation that assigns the original cost of an intangible asset to the periods benefited.

Annual Report: A document that summarizes the results of operations and financial status of a company for the past year and outlines plans for the future.

Annuity: A series of equal amounts to be received or paid at the end of equal time intervals.

Appropriation Account: An account in the nominal ledger which shows how the net profits of a business (usually a partnership, limited company or corporation) have been used.

Arm's-length Transactions: Business dealings between independent and rational parties who are looking out for their own interests.

Arrears: Bills which should have been paid. For example, if you have forgotten to pay your last 3 months rent, then you are said to be 3 months in arrears on your rent.

Articulation: The interrelationships among the financial statements.

Asset Turnover Ratio: An overall measure of how effectively assets are used during a period; computed by dividing net sales by average total assets.

Assets: Items of value held by the business. Examples: cash, accounts receivable, fixtures, furniture, equipment, vehicles, buildings, and money on hand or in the bank.

At Cost: The 'at cost' price usually refers to the price originally paid for something, as opposed to, say, the retail price.

Audit: The result of an independent accountant's review of the statements and footnotes to ensure compliance with generally accepted accounting principles and to render an opinion on the fairness of the financial statements.

Audit Committee: Members of a client's board of directors who are responsible for dealing with the external and internal auditors.

Audit Report: A report issued by an independent CPA that expresses an opinion about whether the financial statements present fairly a company's financial position, operating results, and cash flows in accordance with generally accepted accounting principles.

Audit Trail: Information in the accounting system that allows you to reconstruct how a transaction affected each account balance, who performed the processing, etc..

Authorized Stock: The amount and type of stock that may be issued by a company, as specified in its articles of incorporation.

Automatic Allocation: Pre-defined distributions ratios which apportion and assign debits and credits to the appropriate accounts. When an automatic allocation code is entered at the time a Supplier invoice is recorded, the automatic allocation program will distribute the invoice total to the pre-determined accounts and for the proper amounts.

Available-for-sale securities: Debt and equity securities not classified as trading, held-to-maturity, or equity method securities.