Basic Accounting & Bookkeeping Terminology

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 An accounting method whereby economic events are recorded at the time a transaction occurs rather than when money actually exchanges hands. Accrual accounting is used by most large businesses; however many small businesses utilize cash accounting. 

 An accounting entry / category that represents a company’s obligation to pay off a near-term debt to its creditors or suppliers. It appears on the balance under the current liabilities category. Another common usage refers to a business department that is responsible for handling payments owed by the company to its various creditors.  

 An accounting entry that represents the money that a company is owed from its clients. (The opposite of accounts payable.) In most cases it refers to services that have already been rendered, but this does not always have to be the case. 

 The reconciliation of an account is a process whereby the accuracy of the account balance is checked for correctness. 

 An accounting method whereby economic events are recorded when money exchanges hands, rather then when two parties agree to an exchange. Cash accounting is used by many small businesses, while accrual accounting is used by most large businesses. ( 

 An accounting procedure whereby the cost of an asset is accounted for over the course of its useful life rather than all at once. This allows a company to write-off the value of an asset over time and smooth their net income. 

  An accounting system whereby every transaction is recorded in (at least) two accounts. The two entries will have equal and offsetting sides – the debit and the credit. This process ensures that the fundamental accounting equation, i.e. Assets = Liabilities + Equity, is satisfied. 

  Records of the financial activities and standing of an entity that are included in the 10Ks of public companies. They provide wide ranging insights as to the health, profitability, and financial inner-workings of a company. The three parts of financial statements are the income statement (also know as the statement of profit and loss), balance sheet, and statement of cash flows.  

  The foundation of modern double entry accounting which represents the relationship between a business’s assets, liabilities, and shareholder’s equity. Also known as the balance sheet equation, it is represented as: Assets = Liabilities + Equity. The basic intuition is that all assets are financed by either borrowings (liabilities) or shareholder contributions (equity). If this equation does not hold than something is wrong!  

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  A document which provides a complete history of all of a company’s transactions.  

 Articles of value that are owned by a company and are recorded on the balance sheet. Typical examples include cash, accounts receivable, land, buildings, equipment, and inventory. Current assets= assets that are expected to be used up and/or sold within either one year or one business cycle. Typical examples include cash, inventory, and prepaid expenses. 

 Obligations and debts that are incurred in the process of doing business. Examples include accounts payable, long term debts, and accrued expenses. Current liabilities= liabilities that are due within one year or one business cycle. Typical examples include short term debt, accounts payable, and unearned revenue. 

 The ownership interest in a business which can be calculated as assets – liabilities. (See fundamental accounting equation.) In the case of an individual asset, equity refers to the portion of the asset which is owned, for example the amount of a house’s mortgage which has been paid off is the level of equity. 

 Costs directly attributable to the production of a certain type of goods. Can include the cost of physical inputs used in making a final product and the cost of the services required to bring the final product to bear 

 Money spent and costs associated with efforts to generate revenues that are not included in cost of goods sold. Examples may include rent, utility costs, and insurance costs. 

 Profits made after deducting the costs directly associated with the production of a product for sale, i.e. cost of goods sold. Gross profit = revenues – cost of goods sold. 

Profits made after accounting for all expenses that a business occurs. This is the ‘bottom line’ of the income statement, and is transferred to retained earnings on the balance sheet at the end of an annual accounting cycle. (Note that profit and cash flows aren’t the same thing. 

 The money that a company takes in during a given period of time. This is the top line of the income statement