Accounting Terms - Basic Definitions

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Basic Accounting terms Accounts Payable: Accounts of money you owe. A liability that is usually created when you've made a purchase on credit. Accounts Receivable: Accounts of money owed to you for the sale of goods or services. Accrual basis: A method of accounting where transactions are recorded as they occur regardless of when payment for that transaction is made or received Accrued Assets: Assets from revenues earned but not yet received. Accrued Expenses: A liability incurred during the acc
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  Basic Accounting terms Accounts Payable: Accounts of money you owe. A liability that is usuallycreated when you've made a purchase on credit. Accounts Receivable: Accounts of money owed to you for the sale of goods or services. Accrual basis: A method of accounting where transactions are recordedas they occur regardless of when payment for that transaction is made orreceived Accrued Assets: Assets from revenues earned but not yet received. Accrued Expenses: A liability incurred during the accounting period forwhich payment has not been made. Accumulated Depreciation:  The running balance of the depreciationtaken on an asset. Accounts Receivable: Accounts of money owed to you for the saleof goods or services.Aging:  The grouping of like transactions by date. Example - sorting invoicesby due date. Adjusting Entries: Special accounting entries that are made when youclose the books at the end of an accounting period to bring the ledger up todate. Asset: Items that a business or individual owns or are owed. Audit: The scrutinizing of accounting records and supporting documents foraccuracy and completeness. Audit trail:  The information within the accounting system that reveals theeffects of a transaction. Bad Debt: An account or receivable that has been deemed unrecoverableand written-off. Badwill (Negative Goodwill):  The excess amount of fair value of an assetor assets over the purchase price.  Balance Sheet: A statement listing the total assets, liabilities, and owners'equity; indicating the net worth of the company for the given time period. Bonds Payable: A long-term liability that represents a promise to pay asum of money plus interest at a maturity date (a designated date in thefuture). Book Value of an Asset: Cost of the asset (the amount that was paid forit) minus accumulated depreciation. Capital:  The owner's or owners' rights to assets of a business. Cash basis: An accounting method where transactions are recorded whenthe actual change of payment occurs, regardless of when the goods orservices are delivered. Cash equivalents: Highly liquid short-term investments. Examples includemoney-market funds and treasury bills. Certified Financial Statements: Financial statements that have beenaudited and certified by a CPA. Chart of accounts: A numerical listing of a business’s accounts. Closing Entries:  Journal entries made at the end of the period to return thebalance in all accounts to zero and ready the account for the next reportingperiod.. Contra account: An account that follows another account and has abalance opposite of it. For example accumulated depreciation is a contraasset account; it would have a credit balance and be subtracted from theasset's debit balance to obtain the book value or carrying amount of theasset. Credit: An entry on the right side of an account - decreases assets orincreases liabilities. Debit: An entry on the left side of an account - increases assets ordecreases liabilities. Depreciation:  The allocation of the cost of a tangible, long-term asset overits useful life.  Dividends: Distributions by a corporation to its shareholders. Dividendsdecrease both the assets and retained earnings of the corporation. Expenses:  The daily costs incurred in running a business. Extraordinary Gain or Loss: A gain or loss that is both unusual andinfrequent. Finished Goods Inventory: Completed goods held in inventory that havenot yet been sold. Fiscal: A 12 month accounting period. Not necessarily a calendar year. General Ledger:  The master record of all the balance sheet and incomestatement account balances. General partnership: A partnership form of business where each partneris a part owner and shares in the privileges and risks of ownership. Gross profit: The amount of net sales minus the amount of cost of goodssold (also called cost of sales). Income statement: A statement that summarizes revenues and expenses. Intangibles: Assets that have no physical form but that have value.Examples are copyrights and patents. Invoice: A form, sent from the seller to the buyer, listing the items bought,price, terms etc.  Journal: A chronological record of transactions, also known as the book of srcinal entry.  Just-in-Time: A system where items are produced or received just in timeto be used or sold. Ledger: A book containing accounts to which debits and credits are postedfrom books of srcinal entry. Liability: A debt or obligation. Net sales:  The amount left when returns, discounts, and allowances arededucted from sales revenue. Note payable: A written promise to pay a determined amount in thefuture.  Operating Expenses:  The expenses that are incurred from the dailyoperation of the business. Owners' equity: The owners' right to the assets of an entity. Prepaid Expenses: Amounts that are paid in advance for product is notused up during the accounting period. Post:  The process of transferring amounts from a journal to the appropriateledger accounts. Purchase order: Written instructions to a vendor to ship and bill for thelisted items. Retained earnings: Capital earned operations of the corporation. Reversing Entry: An entry made to reverse a prior entry. Revenue: Amounts earned by delivering goods or services to customers. Trial Balance: A work sheet showing the balances in each account; used toprove the equality of debits and credits. Basic Terms and Concepts There are a few things you need to understand in order to make setting up your accounting system easier. They're basic andthey will probably clear up any confusion you may have had in the past when talking with technical accounting persons. Debits and Credits These are the backbone of any accounting system. Understand how debits and credits work and you'll understand the wholesystem. Every accounting entry in the general ledger contains both a debit and a credit. Further, all debits must equal allcredits. If they don't, the entry is out of balance. That's not good. Out-of-balance entries throw your balance sheet out of balance.Therefore, the accounting system must have a mechanism to ensure that all entries balance. Indeed, most automatedaccounting systems won't let you enter an out-of-balance entry-they'll just beep at you until you fix your error.Depending on what type of account you are dealing with, a debit or credit will either increase or decrease the accountbalance. (Here comes the hardest part of accounting for most beginners, so pay attention.) Figure 1 illustrates the entriesthat increase or decrease each type of account. Figure 1Debits and Credits vs. Account Types   Account Type Debit Credit  Assets Increases DecreasesLiabilities Decreases IncreasesIncome Decreases IncreasesExpenses Increases DecreasesNotice that for every increase in one account, there is an opposite (and equal) decrease in another. That's what keeps theentry in balance. Also notice that debits always go on the left and credits on the right.
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