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.