Accounting Terms

There are literally thousands of terms that are used in accounting. Many of these terms are used on a daily basis by everyone, while some of the accounting terms are only used and understood by accountants and accounting professors.

In order to understand what your tax accountant, business accountant, financial manger, and even your family members or friends are talking about, we have provided you with definitions for some of the more commonly used accounting concepts and acounting terms.

Basic Accounting Overview

Basic accounting groups all finance related items into five basic accounts. All of the things that accounting deals with can be placed into one of these five accounts. These basic accounts are:

1. Assets - These are things that you own (money in your bank account).

2. Liabilities - These are things that you owe (car loan and mortgage).

3. Equity - Your overall worth.

4. Income - Increases the value of your accounts (your paycheck).

5. Expenses - Decreases the value of you accounts (cost of food).

As you can see, it is easy to place your finances into these 5 types of accounts. With these five accounts defined, they are related to each other through the Accounting Equation.

The Accounting Equation is used to show the relationship between these accounts. The first thing to know is that Equity is defined by assets and liabilities. In other words, your equity (net worth) is calculated by subtracting your liabilities from your assets (Assets - Liabilities = Equity).

Also, you can increase your Equity by your Income and you can decrease your Equity through Expenses. This concept can be expressed by the Accounting Equation (Assets - Liabilities = Equity + (Income - Expenses).

The Accounting Equation must always be balanced and this can only occur if you enter the values to multiple accounts. Therefore, if you receive money in the form of  Income, you must also see an increase in your Assets.

The Accounting Equation is fundamental to the Double Entry accounting system.

Double Entry Accounting

The Double Entry accounting system has been around since the late 15th century. The traditional double entry system involved recording every transaction into a ledger, then each part of the transaction was copied into a journal. This method is still used today as a way to avoid errors and to track errors. Fortunately, computers and accounting software programs have been developed to simply this task. These accounting programs will flag transactions that are not balanced and alert you to account names that are missing.

Basic Accounting Terms

Abatement is the complete removal of an amount due, (usually referring to a tax abatement, a penalty abatement or an interest abatement within a governing agency).

Accelerated Depreciation is a method that records greater depreciation than straightline depreciation in the early years and less depreciation than straightline in the later years of an assets's holding period.

Account is a formal record that represents, in words, money or other unit of measurement, certain resources, claims to such resources, transactions or other events that result in changes to those resources and claims.

Account Payable is the amount that is owed to a creditor for delivered goods or completed services.

Account Receivable is a claim against a debtor for an uncollected amount, generally from a completed transaction of sales or services rendered.

Accountant is a person that is skilled in the recording and reporting of financial transactions. (See Certified Public Accountant).

Accountants' Report is a formal document that communicates an independent accountant's:

1) expression of limited assurance on financial statements as a result of performing inquiry and analytic procedures (Review Report).

2) results of procedures performed (Agreed Upon Procedures Report).

3) nonexpression of opinion or any form of assurance on a presentation in the form of financial statements information that is the representation of management (Compilation Report).

4) an opinion on an assertion made by management in accordance with the Statements on Standards for Attestation Engagements (Attestation Report). An accountants' report does not result from the performance of an audit. (See Auditor's Report).

Accounting is the recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the financial statments.

Adjusted Gross Income Is the gross income reduced by business and other specified expenses of individual taxpayers. The amount of adjusted gross income affects the extent to which medical expenses, non business casualty and theft losses and charitable contributions may be deductible. It is also an important figure in the basis of many other individual planning issues as well as a key line item on the IRS form 1040 and required state forms.

American Institute of Certified Public Accountants (AICPA) is the National professional membership organization that represents practicing Certified Public Accountants (CPAs). The AICPA establishes ethical and auditing standards as well as standards for other services performed by its members. Through committees, it develops guidance for specialized industries. It participates with the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB) in establishing accounting principles.

Amortization is the gradual and periodic reduction of any amount, such as the periodic writedown of a bond premium, the cost of an intangible asset or periodic payment of mortgages or other debt.

Annual Report is a report that is given to the stockholders of a company which includes the company's annual, audited balance sheet and related statements of earnings, stockholders' or owners' equity and cash flows, as well as other financial and business information.

Annuity is a series of payments, usually payable at specified time intervals.

Asset is something that you own.

Auditor is a person that audits financial accounts and records kept by others. Includes both public accounting firms registered with the PCAOB and associated persons.

Auditors' Report is a written communication issued by an independent Certifited Public Accountant (CPA) describing the character of his or her work and the degree of responsibility taken. An auditors' report includes a statement that the audit was conducted in accordance with Generally Accepted Auditing Standards (GAAS), which require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, as well as a statement that the auditor believes the audit provides a reasonable basis for his or her opinion. (See Accountants' Report).

Bad Debt is an account, loan, or note receivable that is considered to be uncollectible.

Balance is the sum of debit entries minus the sum of credit entries in an account. If positive, the difference is called a debit balance ; if negative, a credit balance.

Balance Sheet  is a basic financial statement, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity's assets, liabilities and the equity of its owners. Also known as a Statement of Financial Condition.

Bankruptcy is a legal process that is governed by federal statute, whereby the debts of an insolvent person are liquidated after being satisfied to the greatest extent possible by the debtor's assets. During bankruptcy, the debtor's assets are held and managed by a court appointed trustee

Board of Directors are individuals that are responsible for overseeing the affairs of an entity, including the election of its officers. The board of a Corporation that issues stock is elected by stockholders.

Bond A type of longterm promissory note, frequently issued to the public as a security regulated under federal securities laws or state Blue Sky Laws. Bonds can either be registered in the owner's name or are issued as bearer instruments.

Budget is a financial plan that serves as an estimate of future cost, revenues or both.

Bylaws are a collection of formal, written rules governing the conduct of a Corporation's affairs (such as what officers it will have, what their responsibilities are, and how they are to be chosen). Bylaws are approved by a corporation's stockholders, if a stock corporation, or other owners, if a nonstock
corporation.