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Accounting Terminology

Calendar Year: An entity's reporting year, covering 12 months and ending on December 31.

Callable Bonds: Bonds for which the issuer reserves the right to pay the obligation before its maturity date.

Capital: The total amount of money or other resources owned or used to acquire future income of benefits.

Capital Account: An account in which a proprietor's or partner's interest in a firm is recorded; it is increased by owner investments and net income and decreased by withdrawals and net losses.

Capital Expenditure: An expenditure that is recorded as an asset because it is expected to benefit more than the current period.

Capital Gain: The excess of the selling price over the cost basis when assets, such as securities and other personal and investment assets, are sold.

Capital Lease: A leasing transaction that is recorded as a purchase by the lessee.

Capital Stock: The portion of a corporation's owners' equity contributed by investors (owners) in exchange for shares of stock.

Cash: Coins, currency, money orders, checks, and funds on deposit with financial institutions; the most liquid of assets.

Cash-Basis Accounting: A system of accounting in which transactions are recorded and revenues and expenses are recognized only when cash is received or paid.

Cash Budget: The amount of cash set aside each month to meet expected financial obligations of that month.

Cash Disbursements Journal: A special journal in which all cash paid out for supplies, merchandise, salaries, and other items is recorded.

Cash Dividend: A cash distribution of earnings to shareholders.

Cash Equivalents: Short-term, highly liquid investments that can be converted easily into cash.

Cash Flow: A report which shows the flow of money in and out of the business over a period of time.

Cash Inflows: Any current or expected revenues or savings directly associated with an investment.

Cash Management: The monthly assessment of expenses and revenues in the organization.

Cash Outflows: The initial cost and other expected outlays associated with an investment.

Cash (Over and Short): An account used to record overages and shortages in petty cash.

Cash Receipts Journal: A special journal in which all cash received, from sales, interest, rent, or other sources, is recorded.

Ceiling: The maximum market amount at which inventory can be carried on the books; equal to net realizable value.

Certified Public Accountant (CPA): A special designation given to an accountant who has met all the statutory and licensing requirements of a given state for use of that designation. All U.S. states require accountants, at a minimum, to complete successfully a uniform national examination before being allowed to designate themselves as CPAs. CPA certificates are issued and monitored by state boards of accountancy or similar agencies.

Chart of Accounts: A systematic listing of all accounts used by a company.

Charter (articles of incorporation): A document issued by a state that gives legal status to a corporation and details its specific rights, including the authority to issue a certain maximum number of shares of stock.

Check Reconciliation: The procedure that an outstanding check on the company's books has been paid and cleared by the bank.

Classified Balance Sheet: A balance sheet in which assets and liabilities are subdivided into current and noncurrent categories.

Closed Transaction: A transaction that is completed within the accounting period; both the purchase and payment or sale and receipt of payment occur within the same accounting period.

Closing Entries: Entries that reduce all nominal, or temporary, accounts to a zero balance at the end of each accounting period, transferring their preclosing balances to a permanent balance sheet account.

Closing the Books: A term used to describe the journal entries necessary to close the sales and expense accounts of a business at year end by posting their balances to the profit and loss account, and ultimately to close the profit and loss account also by posting its balance to a capital or other account. The net profit that results from the closing of the income and expense accounts is transferred to an equity account such as retained earnings.

Code of Professional Ethics: Rules set by the AICPA's Committee on Professional Ethics, which govern the conduct of CPAs.

Common Stock: The most frequently issued class of stock; usually it provides a voting right but is secondary to preferred stock in dividend and liquidation rights.

Company: A business separate and distinct from its owner or owners and every other business.

Comparative Financial Statements: Financial statements in which data for two or more years are shown together.

Compound Interest: Applied interest on the capital plus all interest accrued to date.

Compound Journal Entry: A journal entry that involves more than one debit or more than one credit or both.

Compounding Period: The period of time for which interest is computed.

Conduit Principle: The idea that all income earned by an entity must be passed through to the owners and reported on their individual tax returns; applicable to proprietorships, partnerships, and S corporations.

Consignee: A vendor who sells merchandise owned by another party, known as the consignor, usually on a commission basis.

Consignment: An arrangement whereby merchandise owned by one party (the consignor) is sold by another party (the consignee), usually on a commission basis.

Consignor: The owner of merchandise to be sold by someone else, known as the consignee.

Consolidated Financial Statements: Statements that report the combined operating results, financial position, and cash flows of two or more legally separate but affiliated companies as if they were one economic entity.

Consumption Liability: The method under which inventories are recorded as expenditures/expenses when used.

Contingent Liability: A potential obligation, dependent upon the occurrence of future events.

Contra Account: An account that is offset or deducted from another account.

Contributed Capital: The portion of owners' equity contributed by investors (the owners) in exchange for shares of stock.

Control Account: A summary account in the General Ledger that is supported by detailed individual accounts in a subsidiary ledger.

Control Activities: Policies and procedures used by management to meet its objectives; generally divided into adequate segregation of duties, proper authorization of transactions and activities, adequate documents and records, physical control over assets and records, and independent checks on performance.

Control Environment: The actions, policies, and procedures that reflect the overall attitudes of top management, the directors, and the owners about control and its importance to the entity.

Convertible Bonds: Bonds that can be traded for, or converted to, other securities after a specified period of time.

Convertible Preferred Stock: Preferred stock that can be converted to common stock at a specified conversion rate.

Corporation: A legal entity chartered by a state; ownership is represented by transferable shares of stock. A corporation is owned by one or more stockholders.

Cost: The amount of money or other consideration exchanged for goods or services.

Cost Method of Accounting for Investments in Stocks: Method used to account for an investment in the stock of another company when less than 20 percent of the outstanding voting stock is owned.

Cost of Finished Goods: The value (at cost) of newly manufactured goods shown in a business's manufacturing account. The valuation is based on the opening raw materials balance, less direct costs involved in manufacturing, less the closing raw materials balance, and less any other overheads.

Cost of Goods Sold (COGS): The expense incurred to purchase or manufacture the merchandise sold during a period. The result represents the gross profit. The formula is: Opening stock + purchases - closing stock.

Cost of Sales: A formula for working out the direct costs for your sales (including stock) over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases + direct expenses - closing stock.

Cost Principle: The idea that transactions are recorded at their historical costs or exchange prices at the transaction date.

Cost-based Pricing: Where a company bases its pricing policy solely on the costs of manufacturing rather than current market conditions.

Coupon Bonds: Unregistered bonds for which owners receive periodic interest payments by clipping a coupon from the bond and sending it to the issuer as evidence of ownership.

Credit: An entry on the right side of the account to record the "From" side of a transaction. (Example: if you purchased groceries using a check then the money is paid from the bank to the grocery store, you would therefore credit the bank when making the journal entry). Credit increase liabilities and equity and decreases assets.

Credit Card Draft: The part of the multiple-page credit form that is sent by the retailer to the credit card company for reimbursement of the stated amount.

Credit Memo: Writing off all or part of a customer's account balance. Example: If a customer returns merchandise, the vendor issues a credit memo.

Creditors: A list of vendors or suppliers to whom the business owes money.

Cumulative-Dividend Preference: The rights of preferred stockholders to receive current dividends plus all dividends in arrears before common stockholders receive any dividends. current assets: Cash and other assets that may reasonably be expected to be converted to cash within a year or during the normal operating cycle.

Current-Dividend Preference: The right of preferred shareholders to receive current dividends before common shareholders receive dividends.

Current: As applied to budgeting and accounting, designates the operations of the present fiscal period as opposed to past or future periods.

Current Assets: These include money in the bank, petty cash, money received but not yet banked, money owed to the business by its customers, raw materials for manufacturing, and stock bought for re-sale. They are termed 'current' because they are active accounts.

Current Liabilities: These include bank overdrafts, short term loans (less than a year), and what the business owes its vendors or suppliers. They are termed 'current' because they are active accounts.

Current (or working capital) Ratio: A measure of the liquidity of a business; equal to current assets divided by current liabilities.