Account - Each separate category of asset, liability, equity, revenue or expense for which transactions are recorded separately. An account can have a debit or credit balance. Account records are usually kept as separate pages in a book called a ledger. Accounts are sometimes called ledger accounts.
Accounting Equation - The basis for the entire accounting process:
Assets = Liabilities + Equity.
Accounting Period - The period of time over which a company’s business transactions are recorded and at the end of which the company’s financial statements are printed. Most accounting systems have an accounting period of one month.
Accounts Payable - Money owed by the company for goods and services provided by its suppliers.
Accrual Method - A method of stating income whereby revenues are recognized in the accounting period in which they are earned, not when the payment is received. Most businesses are required by law to use the accrual method of accounting.
Accrued Expenses - Expenses which have been incurred but have not yet been paid and recorded in the books because no invoice has been received.
Adjustments - Journal entries to record accrued expenses, depreciation, accrued revenues, bad debts, and other items which must be recorded at the end of the accounting period in order to state income accurately. The journal entries to record adjustments are called adjusting entries.
Assets - All the physical things and other items of value owned by a company. They are listed on the left side of the balance sheet. Assets include finished and unfinished inventory, land, buildings, cash, and money owed to the company by customers.
Bad Debts - The amounts not paid when a customer fails to pay all or part of what is owed. You make an adjusting entry to record it as an expense.
Balance Sheet - A summary of what a company owns and owes on a particular day. It has three main categories: assets, liabilities, and equity.
Chart of Accounts - A list of the accounts in a ledger, arranged by account number.
Classified Statements - Financial statements that group accounts into sets that give similar information. For example, typical classifications on a balance sheet would be current assets, long-term investments, plant and equipment, current liabilities, and long-term liabilities.
Closing the Books - The process of posting closing entries to clear the revenue and expense accounts and to transfer the net income to the Retained Earnings account at the end of an accounting year. It is done to ensure that the books are ready to record the next accounting year’s transactions. When you close the books, the balance of the Current Earnings account is transferred to the Retained Earnings account.
Common Shares - Shares that have no preference as to dividends and no fixed rate of return. This is the most common type of share, and normally has voting rights attached to it. The shareholders who control the majority of the common shares usually control the company.
Corporation - A form of business organization which is legally separate from its owners, and in which the owners (called shareholders) have limited liability. Owners can only lose what they have invested in the corporation. A corporation has the right to sue and be sued by others. A corporation is also called a limited company.
Cost Accounting - A system of allocating costs or expenses to a specific job, department, or project so that a company’s management can quickly find out whether the project is meeting its budget or earning the company any profits.
Cost of Goods Manufactured - The cost of the raw materials, direct labour, and factory overhead incurred in producing all the goods manufactured during a period.
Cost of Goods Sold - The cost of the raw materials, direct labour, and factory overhead incurred in producing all the goods sold during a period.
Current Assets - Assets which can be converted to cash or realized in the ordinary course of business, usually within one year.
Current Earnings - The net difference between the revenue account totals and the expense account totals. There is only one Current Earnings account on the balance sheet. Every time a journal entry is made that affects revenue or expense accounts, the balance in the Current Earnings account is recalculated. Its balance is printed on the right side of the balance sheet. When you close the books at year end, the balance in the Current Earnings account is transferred to the Retained Earnings account.
Current Liabilities - Debts that are payable within one year of the balance sheet date,and which will require the use of a current asset.
Credit - A positive balance on the right-hand side of an account. Increasing the balance of an account with a normal credit balance is called crediting, as is decreasing the balance of an account which normally has a debit balance.
Debit - A positive balance on the left-hand side of an account. Increasing the balance of an account which normally has a debit balance is called debiting, as is decreasing the balance of an account which normally has a credit balance.
Depreciation - Allocation of the cost of a physical asset (such as a piece of equipment) over its useful life. Depreciation transactions debit the depreciation expense account and credit (reduce) the value of the asset.
Direct Labour Costs - Wages paid to employees who work directly on the product being manufactured.
Dividend - A payment made to shareholders by a corporation, usually out of after-tax profits. The directors of the company make the decision for the company to declare and pay dividends.
Equity - The worth of a business to its owner. It is shown on the right side of the balance sheet. To calculate the owner’s equity, subtract the liabilities from the assets.
Expenses - The amounts that a company spends to provide goods or services to its customers or to carry on its business, excluding amounts spent to acquire assets.
Factory Overhead - All costs incurred in the factory, other than the costs of raw materials and direct labour. Included are costs such as management wages, janitorial wages, and the costs of using and maintaining buildings, machinery, and equipment.
Financial Statements - The balance sheet and income statement.
Fiscal Year - The twelve-month period which a company chooses for accounting purposes. It is not necessarily the same as a calendar year.
Fixed Assets - Assets such as land, buildings, equipment, and trucks that are used in operating the business and which have a long life.
Gross Profit on Sales - The profit made on selling inventory before the selling and general and administrative expenses are taken into account. It is the value of Sales less the Cost of Goods Sold.
Income - See: Net Income.
Income Statement - A statement which shows the revenues, expenses, and net income
for a particular period.
Inventory - The goods a business has for sale to its customers. For retailers or wholesalers, the goods themselves are not modified in any major way from the time they are received to the time they are sold. A manufacturing company’s inventory consists of raw materials, work in process, and finished products manufactured but not yet sold.
Journal - A company’s primary record of business transactions. All transactions recorded by a business are recorded first in a journal. See also: Journal Entry.
Journal Entry - The record of a transaction in a journal.
Ledger - A book in which each page contains the records of one account. See also: Account.
Liabilities - All the debts and money owed to others by a company. They are listed on the right side of the balance sheet. Liabilities include loans from banks, loans from shareholders, and unpaid amounts owed to suppliers and others.
Long Term Liabilities - Liabilities that are not due to be paid within the year following the balance sheet date.
Matching Concept - A method of matching expenses with the revenues that they help generate, and recording them at the time that revenues are recorded.
Net Income - The amount residual after all the revenues for a period are accounted for, and all costs and expenses for the same period are deducted. Net income is also called income, profit, or net loss if the income amount is negative.
Net Sales - See: Revenues.
Opening the Books - The process of setting up a new set of books with the correct balance sheet account balances, and zero balances in the revenue and expense accounts. The new books are ready to record the upcoming accounting year’s transactions.
Owner Equity - The interest or investment the owners have in a company. It is the owners’ original investment plus the accumulation of all profits that have been retained in the company since its conception. To calculate owner equity, subtract the liabilities from the assets. See also: Shareholders’ Equity.
Partnership - A form of proprietorship in which there is more than one owner. The owners have unlimited liability, and any one of them could be sued separately for the entire debts of the partnership. The partners usually agree to share the profits and losses of the firm on an equitable basis. See also: Proprietorship.
Posting - The process of transferring information from the journal to the applicable ledger account.
Preferred Shares - Shares that may pay their owners a dividend, which is usually fixed in amount or percent. Preferred shareholders receive their dividends before the common shareholders are entitled to any dividends. See also: Dividends.
Prepaid Expenses - Expenses which are paid for in advance, such as insurance and rent. Prepaid expenses are current assets.
Profit - The amount left over after all the revenues for a period are accounted for, and all costs and expenses for the same period are deducted. Profit is also called net profit, income, or net income.
Proprietorship - A form of business organization in which the owner and the company are not legally separate, but keep separate accounting records. The owner has unlimited liability. He can be sued personally for the debts of his company.
Realization - The recording of revenues or expenses. Revenue is realized when the title to goods or services passes to the customer. Expenses are realized when they are incurred, or, if they can be matched to a certain good or service provided, they are recorded at the time the revenue for that particular good or service is recorded. See also: Matching Concept.
Retained Earnings - The accumulated total of after-tax profits and losses over the life of a corporation. If a corporation had more losses than profits, the amount of retained earnings is negative. Any dividends paid are also subtracted from retained earnings. See also: Earnings.
Revenues - The money that a company receives from selling products or services.
Sales - See: Revenues.
Shareholders - Persons or other companies that own shares (stock) issued by a corporation. The shareholders own the corporation, but are legally separate from the Corporation. They have limited liability and can only lose what they originally invested in the corporation.
Shareholders’ Equity - The money originally invested in the company by the shareholders, plus the retained earnings. See also: Retained Earnings; Owner Equity.
Shares - Certificates that represent ownership of a portion of a firm. Shares are also called stock. See also: Preferred Shares; Common Shares.
Stock - See: Shares.
Source Document - An invoice or a bill on which the transaction recorded by a journal entry is based account. For example, the accounts receivable subsidiary ledger contains the details of all amounts owed to the company by its customers. The total of these amounts is summarized by the Accounts Receivable control account in the general ledger.
Subsidiary Ledger — A ledger which contains the details for a General Ledger control
Trial Balance - A list of all the debit and credit balances of all the accounts in the general ledger. Use it to ensure that there have been no posting or adding mistakes, and that the total debits equal the total credits.
Withdrawal - The money taken out of a company by a proprietor or partner.
Worksheet - A record of all the accounts in the ledger, used to work out the balance sheet and income statement in a manual accounting system. The worksheet is created directly from the trial balance.