ACCOUNTING TERMS AND THEIR MEANINGS

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Accounting as a discipline and profession has its own set of unique terminologies, which will be looked at in this post.

Accounting

An information system that measures, classifies, processes, summarizes and communicates financial information about an identifiable economic entity. 

More accounting information can be found here.

Accounting equation

This states that the assets of a business are equal to the sum of its liabilities and owner's equities.

In other words, the accounting equation states that, at all times and without exception, the assets of a company will be financed through debts (liability) or the owner's equity of the business

Accounting period issue

The accounting period issue is the difficulty of assigning revenue and expenses to a short period.

Accounts

Accounts are labels used by accountants to accumulate the amounts produced from similar transactions.

An account can also be thought of as a storage unit for accounting data.

Accrual accounting

In the Accrual system, revenue is recognized when it is earned, even if it has not yet been received, and expenses are recognized when they are incurred, even if they have not yet been paid.

Accrual accounting allows a company to recognise revenue even if payment has not been received. It also allows a company to incur expenses if payment has not been made.

Accrued expenses

These are expenses that have been incurred but for which no payment has been made. 

Accrued expenses are future payments that a corporation is obligated to make for products and services that have already been delivered.

Accrued expenses are also known as accrued liabilities or unrecorded expenses

Accrued revenue

Revenue that has been earned but for which payment has not been received is called accrued revenue.

An example of accrued revenue is accrued rent income

Accrued revenue is also known as accrued assets or unrecorded revenues

Accumulated depreciation

Accumulated depreciation is a contra-entry account that is used to accumulate the depreciation expense for a long-lived asset.

It's the account that keeps track of an asset's entire depreciation up to a given point in time.

Account receivables

This is the total receivables of a company. 

It is the part of a firm's current asset, as shown in the balance sheets, consisting of all bills sent to a customer on which payment is due but has not yet actually been received.

Account payable

The total payables of a company are called account payable.

It is the part of a firm's current liabilities, as shown in the balance sheets, consisting of all bills received from suppliers on which payment is due but has not been made.

Account receivable and account payable are interrelated but have marked differences which have been explained in this post

Adjusted trial balance

Adjusted trial balance is the trial balance prepared after all adjusting entries have been posted to the accounts.

It is used to show the updated balances after adjusting entries have been made.

Adjusting entries

These are entries that are used to account for transactions that span more than one accounting period.

In other words, adjusting entries are entries made at the end of the accounting period to match revenue and expenses to the accounting period in which they occurred.

Assets

These are economic resources owned by a business as a result of past transactions or events which are expected to provide future economic benefits to the business.

Assets can be divided into current and non-current assets. Assets can be divided into tangible and non-tangible assets.

Bad debts

Sometimes, It is unlikely that a debt will be collected. This is known as bad debt.

More appropriately, bad debts are debts whose repayments are deemed to be impossible or unlikely.

It is a debt for which repayment is due but is known to be impossible due to the debtors' insolvency.

Balance sheet

The balance sheet is a financial statement that shows the money values assets, liabilities, and owner's equity of a business at a point in time.

It is the financial statement that shows the financial position of a business. For this reason, it is also known as the statement of financial position

Bookkeeping

The process of recording financial transactions and keeping financial records is called bookkeeping.

The main purpose of the objective is to record financial transactions in a systematic, organized and orderly manner

Business transactions

Economic events that affect the financial position of a business entity are called business transactions.

A business transaction is usually expressed in terms of money.

Carrying value

Carrying value is the unexpired or unconsumed portion of the cost of an asset. It's also referred to as net book value.

It is calculated as the cost of the asset minus accumulated depreciation.

Cash basis of accounting

Cash basis of accounting is an accounting system in which revenue is recorded only when cash is received and expenses are recorded only when they are paid.

To put it in another way, the cash basis of accounting only recognizes revenue/expenses only when cash is received/cash is paid out.

Cash discount

A discount offered by the seller to a buyer to encourage prompt payment is called a cash discount 

Sellers usually offered cash discounts to encourage immediate payment for goods and services.

A cash discount is different from a trade discount, which is a discount given by the seller to the buyer in the form of a price reduction.

Classification of account

Classification of accounts is the process of assigning transactions to the appropriate account.

It has now become a popular thing to use the American classification of accounts for classification purposes.

Classification issue

The difficulty of assigning the business transactions to their appropriate categories or accounts is referred to as a classification issue

Compound Journal entry

This is a journal entry that has more than one debit or credit entry. In other words, they affect three or more accounts.

Conceptual framework

The basic objectives, principles and assumptions guiding the presentation and preparation of a general-purpose financial statement are referred to as a conceptual framework.

Contingent asset

Page 915 of IAS 37 defined contingent asset as "a possible asset that arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity".

An example of a contingent asset is a lawsuit. When a company file a patent infringement lawsuit against a competitor, it may expect to receive compensation and as such, will treat the compensation as contingent assets barring the judgement of the law court.

Contingent liability

IAS 37 defined contingent liability as " a possible obligation that arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity".

Continuity issue

This is the difficulty of not knowing how long a business entity will last; closely related to the going concern

Contra account

This is an account whose balance is subtracted from an associated account in the financial statements.

The normal balance of a contra account is usually the opposite of the account to which it is related

The normal balance of the trade receivables (debtors) account, for example, is debit. Provision of bad debt is the contra account related to trade receivable. As a result, the provision of bad debt has a normal credit balance.

Cost

In accounting, the cost is the exchange price associated with a business transaction at the point of recognition. 

In other words, It refers to the monetary value of an expense as recognized in the accounting records of a business.

Cost accounting

Cost accounting, as defined by the Chartered Institute of management accountants (CIMA) as " the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units"

Credit

This is the right side of an account. Credit is the normal balance of revenue, liability and owner's equity accounts.

Current asset

An asset that is expected to be consumed during the next 12 months. 

Examples are cash, inventory, prepaid expenses, and accrued revenue

Current liability

A debt or obligation that is expected to be settled within one year is called current liability.

Among the better-known current liability is trade payable, bill payable, and accrued expenses.

Debit

Debit is the left side of an account. It can also be referred to as the normal balance of the expense, dividend and asset account

Deferral

The postponement of the recording of an expense that already has been paid or incurred or of revenue that has already been received.

To record such deferrals, deferral accounts such as prepaid rent are commonly used.

Depreciation

The process of allocating the cost of a tangible long-term asset over its expected useful life is known as depreciation.

Depreciation is commonly recorded in the books as depreciation expense or depreciation charges.

In accounting, there are several methods of depreciating assets, including the straight-line methodreducing balance methodsum-of-the-years' digit methoddouble-declining method, and units of production method.

It's worth noting that the depreciation charges on the assets' usable years are normally aggregated into a contra-asset known as the accumulated depreciation account.

Double-entry system

A double entry system is the accounting system in which each transaction is recorded with at least one debit and one credit so that the total debits equal the total credits.

The double-entry system requires that every debit entry corresponds to a credit entry.

Expense

Expense is the costs of goods and services utilized to generate income. It represents any outflow of money to suppliers as payments for its raw materials or intermediate service.

Expenses constitute a decrease in owner's equity that result from operating a business.

Financial accounting

Financial accounting is the process of generating accounting information that is communicated in the form of financial statements to those within and outside the organization. Read more about financial accounting

Financial position

The economic resources that a business owns and the claim against these resources at a point in time.

It represents the current balances of the assets, liabilities and equities of a business.

Financial statements

Financial statements are financial reports about the performance, position, and cash flows of a business

It is the primary means of communicating important accounting information to users.

There are four major types of financial statements, namely; income statement, statement of cash flow, statement of financial position and statement of changes in equity.

All of these financial statements have been explained here

Fiscal year

This is any twelve-month accounting period by an economic entity for financial reporting.

Generally accepted accounting principles (GAAP)

Generally accepted accounting principles are the conventions, rules, and procedures that define accounting practice at a particular time.

Going concern

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

Gross profit

The profit of a business when indirect expenses are excluded is called gross profit 

It is computed as the difference between net revenue and the cost of goods sold.

Income statement

This is a summary report of the revenues and expenses of a business over a period, ending with net income or loss for the period.

It is a financial statement that records all expenses and revenue of a business entity.

Journal

A complete and chronological record of all transactions of a business. Business transactions are first documented in the journal before being moved to the ledger. 

For this reason, it is commonly called the book of prime entry or the book of original entry.

Journalizing

The process of recording transactions in a journal 

Liabilities

These Obligations or debts owed by a business as a result of past transactions or events that are expected to be paid shortly.

Liabilities can be divided into current and non-current liabilities. 

Management accounting

The process of producing accounting information for the internal use of a company. 

Management accounting information is mainly used in the management, control, and directing of the business.

Matching concept

This says that revenues must be matched with expenses incurred to earn these revenues at a particular accounting period.

To put it another way, the matching concepts state that, for financial reporting purposes, revenue must be assigned to the accounting period in which the goods are sold or the services are rendered, and expenses must be assigned to the accounting period in which they are used to generate revenue.

Net income

Net income is the net increase in owner's equity that results when revenue exceeds expenses.

It is also called net profit. It is calculated as the difference between revenue and expenses where revenue exceeds expenses.

Net loss

The net decrease in owner's equity that results when expenses exceed revenues is known as Net loss.

It is calculated as the difference between revenue and expenses when expenses exceed revenue.

The normal balance of an account

The usual balance of an account or the side (debit or credit) of an account that increases the account is known as the normal balance of the account.

For example, assets generally have a debit normal balance because all assets are increased with a debit entry.

Owner's equity

This is the owner's claim against the assets of the business. It is also called residual equity.

The owner's equity is computed as the difference between asset and liability

Owner's investments

What the owner put into the business. For example, money brought in as capital

Owner's withdrawals

What the owner takes out of the business is known as the owner's withdrawals. For example, money is taken out from the business as drawings.

Paid-in capital

Paid-in capital is the amount of capital that shareholders have contributed to a corporation during common or preferred stock issuance.

It is the amount received from investors in exchange for a company's stock.

Permanent accounts

These are accounts whose balances are not closed at the end of an accounting year. That is, their balances are carried over from one accounting period to the next.

Another name for a permanent account is balance sheet accounts. They are so named because only permanent accounts are entered into the balance sheet.

Permanent accounts include asset accounts, liability accounts, and owner's equity accounts,

Just to be clear, permanent accounts are what are commonly known as real accounts.

Posting

In accounting, posting is the process of transferring journal entry information to the ledger.

Prepaid expenses

These are expenses paid in advance that do not expire during the current accounting period.

Prepaid expenses are an asset to the business because they provide future benefits

How?

They saved the company money that would have been spent on those expenses. 😁

Provision for bad debts

This refers to the estimates of bad debt that a company is expected to write off.

An increase in provision for bad debt is considered an expense, and is, therefore, recorded on the debit side of the profit and loss account

A decrease in provision for bad debt is treated as income and therefore appears on the credit side of the profit and loss account.

Revenue recognition

In accrual accounting, revenue recognition is the process of determining whether a sale takes place.

Revenue

The total amount of money earned through the sale of goods and the provision of services over a given period.

Revenue constitutes an increase in owner's equity.

Recognition

In accounting, recognition is the determination of when and how a business transaction should be recorded.

Recognition point

This is the predetermined time at which a transaction should be recorded, usually, the point at which the title passes to the buyer.

Rent payable

A rent payable records the company's total rent owing to its landlord.

Because it indicates the amount of rent expense that has not been paid as of the time of reporting, rent payable is also known as accrued rents.

Recognition issue

The recognition issue is the difficulty of deciding when a business transaction should be recorded.

Retained earnings

Retained earnings are the percentage of a company's net profit that is retained by the company for reinvestment or debt payment.

Salvage value

This is the expected market value or selling price of an asset at the end of its useful life. It is also referred to as scrap value or residual value.

Statement of owner's equity

A summary report about changes in the owner's capital over some time.

To put it in another way, it shows how a company's capital balance has changed over time.

Suspense account

A suspense account is a temporary account prepared to record discrepancies in the trial balance barring the time the error will be located and corrected.

It should be noted that only entries which cause disagreement in the trial balance are recorded in the suspense account.

Temporary accounts

Temporary accounts are accounts that relate to profit, loss, expenses and revenue.

They show the total amount of revenues and expenses for an accounting period.

At the end of the accounting period, the balances of temporary accounts are closed and the total balances of temporary accounts are transferred to the owner's equity as net profit( or loss).

Essentially, every account found in the statement of profit or loss is called a temporary account.

Trial balance

A trial balance is a comparison of the total debit and credit balances in the ledger account of a business. It is used to check the equality of total debits and credits.

Please note that the equality of the trial balance does not mean that there is no error in the posting of transactions in the ledger, Trial balance is also meant to test the equality of the debits and credit posting in the ledger.

Unearned revenue

This is revenue received in advance for goods that will not be delivered or services that will not be provided during the current accounting period.

It is money received by a business as payment for goods that have not been delivered or services that is yet to be performed.

It is considered a liability account because the business is owing (services or goods) to another business. Or, is the business not owing? 🤔

Valuation issue

This is the difficulty in assigning monetary value to a business transaction. 

Working capital

This is the amount by which the total monetary value of current assets is more than the total monetary value of current liabilities.

Stated simply,  Working capital is the difference between current assets and current liabilities.

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