Account|ng G|ossary

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Account a record of flnanclal LransacLlons usually refers Lo a speclflc caLegory or Lype such as Lravel
expense accounL or purchase accounL
Accountant a person who Lralned Lo prepare and malnLaln flnanclal records
Account|ng a sysLem for keeplng score ln buslness uslng dollars
Account|ng per|od Lhe perlod of Llme over whlch proflLs are calculaLed normal accounLlng perlods are
monLhs quarLers and years (flscal or calendar)
Accounts payab|e amounLs owed by Lhe company for Lhe goods or servlces lL has purchased from ouLslde
suppllers
Accounts rece|vab|e amounLs owed Lo Lhe company by lLs cusLomers
Accrua| bas|s system or method an accounLlng sysLem LhaL records revenues and expenses aL Lhe Llme Lhe
LransacLlon occurs noL aL Lhe Llme cash changes hands lf you buy a coaL and charge lL Lhe sLore records or
accrues Lhe sale when you walk ouL wlLh Lhe coaL noL when you pay your blll Cash basls accounLlng ls used by
lndlvlduals Accrual basls accounLlng ls used by mosL buslnesses
Accrued expenses accrua|s an expense whlch has been lncurred buL noL yeL pald for Salarles are a good
example Lmployees earn or accrue salarles each hour Lhey work 1he salarles conLlnue Lo accrue unLll payday
when Lhe accrued expense of Lhe salarles ls ellmlnaLed
Ag|ng a process where accounLs recelvable are sorLed ouL by age (Lyplcally currenL 30 Lo 60 days old 60 Lo
120 days old and so on) Aglng permlLs collecLlon efforLs Lo focus on accounLs LhaL are long overdue
Amort|ze Lo charge a regular porLlon of expendlLure over a flxed perlod of Llme lor example lf someLhlng
cosL $100 and ls Lo be amorLlzed over Len years Lhe flnanclal reporLs wlll show an expense of $10 per year for
Len years lf Lhe cosL were noL amorLlzed Lhe enLlre $100 would show up on Lhe flnanclal reporL as an expense
ln Lhe year Lhe expendlLure was made (5ee eottles oo xpeoJltote ooJ xpeose)
Apprec|at|on an lncrease ln value lf a machlne cosL $1000 lasL year and ls now worLh $1200 lL has
appreclaLed ln value by $200 (1he opposlLe of depreclaLlon)
Assets Lhlngs of value owned by a buslness An asseL may be a physlcal properLy such as a bulldlng or an
ob[ecL such as a sLock cerLlflcaLe or lL may be a rlghL such as Lhe rlghL Lo use a paLenLed process
otteot Assets are Lhose asseLs LhaL can be expecLed Lo Lurn lnLo cash wlLhln a year or less CurrenL asseLs
lnclude cash markeLable securlLles accounLs recelvable and lnvenLory
llxeJ Assets cannoL be qulckly Lurned lnLo cash wlLhouL lnLerferlng wlLh buslness operaLlons llxed asseLs
lnclude land bulldlngs machlnery equlpmenL furnlLure and longLerm lnvesLmenLs
lotooqlble Assets are lLems such as paLenLs copyrlghLs Lrademarks llcenses franchlses and oLher klnds of
rlghLs or Lhlngs of value Lo a company whlch are noL physlcal ob[ecLs 1hese asseLs may be Lhe mosL lmporLanL
ones a company owns CfLen Lhey do noL appear on flnanclal reporLs
Aud|t a careful revlew of flnanclal records Lo verlfy Lhelr accuracy
8ad debts amounLs owed Lo a company LhaL ls noL golng Lo be pald An accounL recelvable becomes a bad
debL when lL ls recognlzed LhaL lL wonL be pald SomeLlmes bad debLs are wrlLLen off when recognlzed 1hls ls
an expense SomeLlmes a reserve ls seL up Lo provlde for posslble bad debLs CreaLlng or addlng Lo a reserve ls
also an expense
8a|ance sheet a sLaLemenL of Lhe flnanclal poslLlon of a company aL a slngle speclflc Llme (ofLen aL Lhe close
of buslness on Lhe lasL day of Lhe monLh quarLer or year) 1he balance sheeL normally llsLs all asseLs on Lhe
lefL slde or Lop whlle llablllLles and caplLal are llsLed on Lhe rlghL slde or boLLom 1he LoLal of all numbers on
Lhe lefL slde or Lop musL equal or balance Lhe LoLal of all numbers on Lhe rlghL slde or boLLom A balance sheeL
balances accordlng Lo Lhls equaLlon AsseLs LlablllLles + CaplLal
8ond a wrlLLen record of a debL payable more Lhan a year ln Lhe fuLure 1he bond shows amounL of Lhe
debL due daLe and lnLeresL raLe
8ook va|ue LoLal asseLs mlnus LoLal llablllLles (See also neL worLh) 8ook value also means Lhe value of an
asseL as recorded on Lhe companys books or flnanclal reporLs 8ook value ls ofLen dlfferenL Lhan Lrue value lL
may be more or less
8reakeven po|nt Lhe amounL of revenue from sales whlch exacLly equals Lhe amounL of expense 8reakeven
polnL ls ofLen expressed as Lhe number of unlLs LhaL musL be sold Lo produce revenues exacLly equal Lo
expenses Sales above Lhe breakeven polnL produce a proflL below produces a loss
Cap|ta| money lnvesLed ln a buslness by lLs owners (See equlLy) Cn Lhe boLLom or rlghL slde of a balance
sheeL CaplLal also refers Lo bulldlngs machlnery and oLher flxed asseLs ln a buslness A caplLal lnvesLmenL ls
an lnvesLmenL ln a flxed asseL wlLh a longLerm use
Cap|ta||ze Lo caplLallze means Lo record an expendlLure on Lhe balance sheeL as an asseL Lo be amorLlzed
over Lhe fuLure 1he opposlLe ls Lo expense lor example research expendlLures can be caplLallzed or
expensed lf expensed Lhey are charged agalnsL lncome when Lhe expendlLure occurs lf caplLallzed Lhe

Account|ng G|ossary

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expendlLure ls charged agalnsL lncome over a perlod of Llme usually relaLed Lo Lhe llfe of Lhe producLs or
servlces creaLed by Lhe research
Cash money avallable Lo spend now usually ln a checklng accounL
Cash f|ow Lhe amounL of acLual cash generaLed by buslness operaLlons whlch usually dlffers from proflLs
shown
Chart of accounts a llsLlng of all Lhe accounLs or caLegorles lnLo whlch buslness LransacLlons wlll be classlfled
and recorded Lach accounL usually has a number 1ransacLlons are coded by Lhls number for manlpulaLlon on
compuLers
Cont|ngent ||ab|||t|es llablllLles noL recorded on a companys flnanclal reporLs buL whlch mlghL become due
lf a company ls belng sued lL has a conLlngenL llablllLy LhaL wlll become a real llablllLy lf Lhe company loses Lhe
sulL
Cost of sa|es cost of goods so|d Lhe expense or cosL of all lLems sold durlng an accounLlng perlod Lach unlL
sold has a cosL of sales or cosL of Lhe goods sold ln buslnesses wlLh a greaL many lLems flowlng Lhrough Lhe
cosL of sales or cosL of goods sold ls ofLen compuLed by Lhls formula CosL of Sales 8eglnnlng lnvenLory +
urchases uurlng Lhe erlod Lndlng lnvenLory
Cred|t an accounLlng enLry on Lhe rlghL or boLLom of a balance sheeL usually an lncrease ln llablllLles or
caplLal or a reducLlon ln asseLs 1he opposlLe of credlL ls deblL Lach credlL ln a balance sheeL has a balanclng
deblL CredlL has oLher usages as ln ?ou have Lo pay cash and your credlL ls no good Cr we wlll credlL your
accounL wlLh Lhe refund
Deb|t an accounLlng enLry on Lhe lefL or Lop of a balance sheeL usually an lncrease ln asseLs or a reducLlon ln
llablllLles Lvery deblL has a balanclng credlL
Deferred charges see prepald expenses
Deferred |ncome a llablllLy LhaL arlses when a company ls pald ln advance for goods or servlces LhaL wlll be
provlded laLer lor example when a magazlne subscrlpLlon ls pald ln advance Lhe magazlne publlsher ls llable
Lo provlde magazlnes for Lhe llfe of Lhe subscrlpLlon 1he amounL ln deferred lncome ls reduced as Lhe
magazlnes are dellvered
Deprec|at|on an expense LhaL ls supposed Lo reflecL Lhe loss ln value of a flxed asseL lor example lf a
machlne wlll compleLely wear ouL afLer Len years use Lhe cosL of Lhe machlne ls charged as an expense over
Lhe Lenyear llfe raLher Lhan all aL once when Lhe machlne ls purchased SLralghL llne depreclaLlon charges Lhe
same amounL Lo expense each year AcceleraLed depreclaLlon charges more Lo expense ln early years less ln
laLer years uepreclaLlon ls an accounLlng expense ln real llfe Lhe flxed asseL may grow ln value or lL may
become worLhless long before Lhe depreclaLlon perlod ends
D|scounted cash f|ow a sysLem for evaluaLlng lnvesLmenL opporLunlLles LhaL dlscounLs or reduces Lhe value
of fuLure cash flow (See presenL value)
D|v|dend a porLlon of Lhe afLerLax proflLs pald ouL Lo Lhe owners of a buslness as a reLurn on Lhelr
lnvesLmenL
Doub|e entry a sysLem of accounLlng ln whlch every LransacLlon ls recorded Lwlce as a deblL and as a
credlL
Larn|ngs per share a companys neL proflL afLer Laxes for an accounLlng perlod dlvlded by Lhe average
number of shares of sLock ouLsLandlng durlng Lhe perlod
80 20 ru|e a general rule of Lhumb ln buslness LhaL says LhaL 20 of Lhe lLems produce 80 of Lhe acLlon
20 of Lhe producL llne produces 80 of Lhe sales 20 percenL of Lhe cusLomers generaLe 80 of Lhe
complalnLs and so on ln evaluaLlng any buslness slLuaLlon look for Lhe small group whlch produces Lhe ma[or
porLlon of Lhe LransacLlons you are concerned wlLh 1hls rule ls noL exacLly accuraLe buL lL reflecLs a general
LruLh noLhlng ls evenly dlsLrlbuLed
Lqu|ty Lhe owners share of a buslness
Lxpend|ture expendlLure occurs when someLhlng ls acqulred for a buslness an asseL ls purchased salarles
are pald and so on LxpendlLure affecLs Lhe balance sheeL when lL occurs Powever expendlLure wlll noL
necessarlly show up on Lhe lncome sLaLemenL or affecL proflLs aL Lhe Llme Lhe expendlLure ls made All
expendlLures evenLually show up as expenses whlch do affecL Lhe lncome sLaLemenL and proflLs Whlle mosL
expendlLure lnvolves Lhe exchange of cash for someLhlng expenses need noL lnvolve cash (See expense
below)
Lxpense an expendlLure whlch ls chargeable agalnsL revenue durlng an accounLlng perlod An expense
resulLs ln Lhe reducLlon of an asseL All expendlLures are noL expenses lor example a company buys a Lruck lL
Lrades one asseL cash Lo acqulre anoLher asseL LxpendlLure has occurred buL no expense ls recorded Cnly
as Lhe Lruck ls depreclaLed wlll an expense be recorded 1he concepL of expense as dlfferenL from an
expendlLure ls one reason flnanclal reporLs do noL show numbers LhaL represenL spendable cash 1he

Account|ng G|ossary

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dlsLlncLlon beLween expendlLure and an expense ls lmporLanL ln undersLandlng how accounLlng works and
whaL flnanclal reporLs mean (1o expense ls a verb lL means Lo charge expendlLure agalnsL lncome when Lhe
expendlLure occurs 1he opposlLe ls Lo caplLallze)
I|sca| year an accounLlng year Lhan beglns on a daLe oLher Lhan !anuary 1
I|xed asset see asseL
I|xed cost a cosL LhaL does noL change as sales volume changes (ln Lhe shorL run) llxed cosLs normally
lnclude such lLems as renL depreclaLlon lnLeresL and any salarles unaffecLed by ups and downs ln sales
Goodw||| ln accounLlng Lhe dlfference beLween whaL a companles pays when lL buys Lhe asseLs of anoLher
company and Lhe book value of Lhose asseLs SomeLlmes real goodwlll ls lnvolved a companys good
repuLaLlon Lhe loyalLy of lLs cusLomers and so on SomeLlmes goodwlll ls an overpaymenL
Income see proflL
Interest a charge made for Lhe use of money
Inventory Lhe supply or sLock of goods and producLs LhaL a company has for sale A manufacLurer may have
Lhree klnds of lnvenLory raw maLerlals walLlng Lo be converLed lnLo goods work ln process and flnlshed
goods ready for sale
Inventory obso|escence lnvenLory no longer salable erhaps Lhere ls Loo much on hand perhaps lL ls ouL of
fashlon 1he Lrue value of Lhe lnvenLory ls seldom exacLly whaL ls shown on Lhe balance sheeL CfLen Lhere ls
unrecognlzed obsolescence
Inventory shr|nkage a reducLlon ln Lhe amounL of lnvenLory LhaL ls noL easlly explalnable 1he mosL common
cause of shrlnkage ls probably LhefL
Inventory turnover a raLlo LhaL lndlcaLes Lhe amounL of lnvenLory a company uses Lo supporL a glven level of
sales 1he formula ls lnvenLory 1urnover CosL of Sales Average lnvenLory ulfferenL buslnesses have
dlfferenL general Lurnover levels 1he raLlo ls slgnlflcanL ln comparlson wlLh Lhe raLlo for prevlous perlods or
Lhe raLlo for slmllar buslnesses
Invested cap|ta| Lhe LoLal of a companys longLerm debL and equlLy
Iourna| a chronologlcal record of buslness LransacLlons
Ledger a record of buslness LransacLlons kepL by Lype or accounL !ournal enLrles are usually Lransferred Lo
ledgers
L|ab|||t|es amounLs owed by a company Lo oLhers otteot llobllltles are Lhose amounLs due wlLhln one year
or less and usually lnclude accounLs payable accruals loans due Lo be pald wlLhln a year Laxes due wlLhln a
year and so on looqtetm llobllltles normally lnclude Lhe amounLs of morLgages bonds and longLerm loans
LhaL are due more Lhan a year ln Lhe fuLure
L|qu|d havlng loLs of cash or asseLs easlly converLed Lo cash
Marg|na| cost marg|na| revenue marglnal cosL ls Lhe addlLlonal cosL lncurred by addlng one more lLem
Marglnal revenue ls Lhe revenue from selllng one more lLem Lconomlc Lheory says LhaL maxlmum proflL
comes aL a polnL where marglnal revenue exacLly equals marglnal cosL
Net worth LoLal asseLs mlnus LoLal llablllLles neL worLh ls seldom Lhe Lrue value of a company
Cpportun|ty cost a useful concepL ln evaluaLlng alLernaLe opporLunlLles lf you choose alLernaLlve A you
cannoL choose 8 C or u WhaL ls Lhe cosL or loss of proflL of noL chooslng 8 C or u? 1hls cosL or loss of proflL
ls Lhe opporLunlLy cosL of alLernaLlve A ln personal llfe you may buy a car lnsLead of Laklng a Luropean
vacaLlon 1he opporLunlLy cosL of buylng Lhe car ls Lhe loss of Lhe en[oymenL of Lhe vacaLlon
Cverhead a cosL LhaL does noL vary wlLh Lhe level of producLlon or sales and usually a cosL noL dlrecLly
lnvolved wlLh producLlon or sales 1he chlef execuLlves salary and renL are Lyplcally overhead
ost Lo enLer a buslness LransacLlon lnLo a [ournal or ledger or oLher flnanclal record
repa|d expenses deferred charges asseLs already pald for LhaL ls belng used up or wlll explre lnsurance
pald for ln advance ls a common example 1he lnsurance proLecLlon ls an asseL lL ls pald for ln advance lL lasLs
for a perlod of Llme and explres on a flxed daLe
resent va|ue a concepL LhaL compares Lhe value of money avallable ln Lhe fuLure wlLh Lhe value of money ln
hand Loday lor example $7833 lnvesLed Loday ln a 3 savlngs accounL wlll grow Lo $100 ln flve years 1hus
Lhe presenL value of $100 recelved ln flve years ls $7833 1he concepL of presenL value ls used Lo analyze
lnvesLmenL opporLunlLles LhaL have a fuLure payoff
r|ceearn|ngs (]L) rat|o Lhe markeL prlce of a share of sLock dlvlded by Lhe earnlngs (proflL) per share /L
raLlos can vary from sky hlgh Lo dlsmally low buL ofLen do noL reflecL Lhe Lrue value of a company
rof|t Lhe amounL lefL over when expenses are subLracLed revenues toss ptoflt ls Lhe proflL lefL when cosL
of sales ls subLracLed from sales before any operaLlng expenses are subLracLed Opetotloq ptoflt ls Lhe proflL
from Lhe prlmary operaLlons of a buslness and ls sales mlnus cosL of sales mlnus operaLlng expenses Net ptoflt
befote toxes ls operaLlng proflL mlnus nonoperaLlng expenses and plus nonoperaLlng lncome Net ptoflt oftet

Account|ng G|ossary

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toxes ls Lhe boLLom llne afLer everyLhlng has been subLracLed Also called lncome neL lncome and earnlngs
noL Lhe same as cash flow and does noL represenL spendable dollars
eta|ned earn|ngs proflLs noL dlsLrlbuLed Lo shareholders as dlvldends Lhe accumulaLlon of a companys
proflLs less any dlvldends pald ouL 8eLalned earnlngs are noL spendable cash
eturn on |nvestment (CI) a measure of Lhe effecLlveness and efflclency wlLh whlch managers use Lhe
resources avallable Lo Lhem expressed as a percenLage etoto oo epolty ls usually neL proflL afLer Laxes
dlvlded by Lhe shareholders equlLy etoto oo lovesteJ copltol ls usually neL proflL afLer Laxes plus lnLeresL
pald on longLerm debL dlvlded by Lhe equlLy plus Lhe longLerm debL etoto oo ossets oseJ ls usually Lhe
operaLlng proflL dlvlded by Lhe asseLs used Lo produce Lhe proflL 1yplcally used Lo evaluaLe dlvlslons or
subsldlarles 8Cl ls very useful buL can only be used Lo compare conslsLenL enLlLles slmllar companles ln Lhe
same lndusLry or Lhe same company over a perlod of Llme ulfferenL companles and dlfferenL lndusLrles have
dlfferenL 8Cls
evenue Lhe amounLs recelved by or due a company for goods or servlces lL provldes Lo cusLomers 8ecelpLs
are cash revenues 8evenues can also be represenLed by accounLs recelvable
|sk Lhe posslblllLy of loss lnherenL ln all buslness acLlvlLles Plgh rlsk requlres hlgh reLurn All buslness
declslons musL conslder Lhe amounL of rlsk lnvolved
Sa|es amounLs recelved or due for goods or servlces sold Lo cusLomers toss soles are LoLal sales before any
reLurns or ad[usLmenLs Net soles are afLer accounLlng for reLurns and ad[usLmenLs
Stock a cerLlflcaLe (or elecLronlc or oLher record) LhaL lndlcaLes ownershlp of a porLlon of a corporaLlon a
share of sLock 9tefetteJ stock promlses lLs owner a dlvldend LhaL ls usually flxed ln amounL or percenL
referred shareholders geL pald flrsL ouL of any proflLs 1hey have preference ommoo stock has no
preference and no flxed raLe of reLurn 1teosoty stock was orlglnally lssued Lo shareholders buL has been
subsequenLly acqulred by Lhe corporaLlon AotbotlzeJ by oolssoeJ stock ls sLock whlch offlclal corporaLe acLlon
has auLhorlzed buL has noL sold or lssued (SLock also means Lhe sLock of goods Lhe sLock on hand Lhe
lnvenLory of a company)
Sunk costs money already spenL and gone whlch wlll noL be recovered no maLLer whaL course of acLlon ls
Laken 8ad declslons are made when managers aLLempL Lo recoup sunk cosLs
1r|a| ba|ance aL Lhe close of an accounLlng perlod Lhe LransacLlons posLed ln Lhe ledger are added up A LesL
or Lrlal balance sheeL ls prepared wlLh asseLs on one slde and llablllLles and caplLal on Lhe oLher 1he Lwo sldes
should balance lf Lhey donL Lhe accounLanLs musL search Lhrough Lhe LransacLlons Lo flnd ouL why 1hey keep
maklng Lrlal balances unLll Lhe balance sheeL balances
Var|ab|e cost a cosL LhaL changes as sales or producLlon change lf a buslness ls produclng noLhlng and selllng
noLhlng Lhe varlable cosL should be zero Powever Lhere wlll probably be flxed cosLs
Work|ng cap|ta| currenL asseLs mlnus currenL llablllLles ln mosL buslnesses Lhe ma[or componenLs of
worklng caplLal are cash accounLs recelvable and lnvenLory mlnus accounLs payable As a buslness grows lL
wlll have larger accounLs recelvable and more lnvenLory 1hus Lhe need for worklng caplLal wlll lncrease
Wr|tedown Lhe parLlal reducLlon ln Lhe value of an asseL recognlzlng obsolescence or oLher losses ln value
Wr|teoff Lhe LoLal reducLlon ln Lhe value of an asseL recognlzlng LhaL lL no longer has any value WrlLe
downs and wrlLeoffs are noncash expenses LhaL affecL proflLs