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complete accounting glossary

A Complete Accounting Glossary of Terms for New Students

The numerous Accounting terms can be quite overwhelming! If you’re a new college student, this glossary page will help you learn the frequently used terminologies in the discipline. Navigate these terms and learn the basics!

A

Abatement – a reduction in tax assessment in consideration of factors like tax refund and overpayment of tax.

Account – a profile showing records of financial transactions and activities.

Account Payable – the amount the debtor is liable to the creditor.

Account Receivable – an amount the creditor is entitled to demand from the debtor following a transaction, provided that payment was not previously made.

Accountant – a person who is knowledgeable about financial transactions and activities. He or she is qualified to maintain, preserve, prepare, and inspect financial records.

Accountant’s Report – a written report or documentation of the accountant’s financial statements and analysis.

Accounting – the process of recording and reporting a business or department’s financial transactions and activities.

Accounting Change – changes in the accounting processes and regulations in terms of principle, accounting estimate, and how financial reports are done.

Accounting Cycle – a series of accounting events in a company to analyze business transactions and create financial statements.

Accrual – payments or benefits or any kind of increase over time.

Accrual Accounting – an accounting method measuring the performance of a company based on prescribed accounting events regardless of whether or not there are cash transactions.

Accrual Basis – an accounting method that pertains to revenue when something is earned. There is an expense when there is a liability.

Accrued Interest – accumulated interest over an initial investment.

Actuary – an expert hired by insurance companies to calculate and analyze risk factors arising from insurance-related transactions.

Annual Report – a yearly report documenting financial statements and other critical business information in a company.

Annuity – series of payments made over an interval, which may be fixed by both parties.

Appreciation – an increase in value that accrues over time.

Asset – intangible or tangible things of value or right belonging to a person, organization, or company.

At Par – method of measurement used to refer to the value of a security. This is equivalent to a security’s nominal value.

Audit – an examination conducted by a certified public accountant analyzing the company’s financial reports and transactions.

Audit Risk – the probability that an auditor may fail to identify errors or fraud in financial statements.


B

Bad Debt – an uncollected receivable.

Balance – computed by subtracting the sum of debit entries from the sum of credit entries in a given account. If the difference is positive, the balance is called a debit balance, whereas, if it comes negative, it is a credit balance.

Bank Reconciliation – a process when an accountant examines the bank statement and cash accounts of a company or department. This is a process of determining whether or not there is a discrepancy. If there is one, the accountant is tasked to explain why.

Bank Statement – a written statement of account sent by the issuing bank to an accountholder documenting the accountholder’s financial transactions.

Bankruptcy – the declaration of a company or institution that their debt is more than their profit.

Beginning Inventory – the documentation of merchandise conducted at the beginning of the accounting period.

Bequest – the act of gifting personal assets.

Board of Directors – individuals who are voted to represent the interest of the stockholders. Often called the Board, they are entrusted with the management, supervision, and decision-making process of the corporation.

Bond – security that attaches more burden to a transaction. This is a payment reserve in case of future failure on the part of any party in a contract to perform what is incumbent upon him.

Book Value – the total amount of a company upon liquidation of all its assets minus its liabilities.

Bookkeeping – the act of keeping or documenting financial transactions and activities in a corporation.

Buyout – purchasing of stocks in a corporation that enables the buyer to have control over the said company’s assets and operations.


C

Call option – a contract giving the holder the right to purchase stocks, bonds, or any debt instrument in a period specified under the contract.

Capital asset – property or properties that may potentially generate long–term profit. This is usually real estate.

Capital Expenditure – the amount spent to acquire a capital asset.

Capital Gain – the increase in the value of a corporation’s capital asset.

Capital Stock – the total amount of shares in a corporation provided for in the articles of incorporation.

Cash Basis – a method of documenting revenue and payment of financial transactions. The revenue is secured when cash is received from one party.

Cash Dividend – the profit distributed to the stockholders, usually in the form of cash.

Cash Flow – the net amount of cash receipts and disbursements in an accounting period.

Casualty Loss – loss incurred due to acts of nature; does not necessarily include those incurred due to acts of men.

Close – the clearing of accounts in preparation for the next accounting period.

Collateral asset – an asset that serves as security to ensure that the debt will be paid.

Commercial Paper – an instrument used for unsecured short–term loans.

Comparative Financial Statement – a comparison or analysis done on current and previous accounting periods.

Compliance Audit – a process of inquiry on the organization’s adherence to an imposed set of rules and guidelines from the federal and national governments.

Consolidation – two corporations that combine to create a new entity.

Contributed Capital – also paid-in capital, this is the amount the stockholders gave to the corporation as an investment upon purchase of their stock.

Convertible Stock – a type of stock that may be converted to another type of stock.

Cost Accounting – an accounting method that collects information about the company’s spending and evaluates whether or not the costs incurred were proper and contract efficient.

Cost of Capital – the earnings of a business. This is a hypothetical rate of return if the same amount is invested in a different corporation with equal risk.

Cost of Goods Sold – the value of raw materials and production of finished goods.

Credit – represents the company’s reduction of assets. Companies that follow the double-entry bookkeeping system, it can be found on the right side of the book.

Credit Agreement – an agreement whereby a party borrows money with an unconditional promise to pay the debt in a determinable future time.

Credit Balance – the amount that remains after a short sale.

Current Asset – assets, tangible and intangible that are convertible to cash within the year.


D

Dealer – principal in a securities transaction, who is a person or entity.

Debenture – a debt that is unsecured by any collateral.

Debenture Stock – a certificate issued to lenders by a company or government entity. This certificate is akin to a loan contract containing an obligation that the funds borrowed shall be returned with interest. The loan is secured by the company’s property.

Debit – cash-out transactions.

Debt – the amount of money or service the debtor owes to the creditor.

Debt Instrument – an instrument issued to a lender or investor. It is a written obligation that the lender or investor owes money to an entity or organization. The said instrument contains a provision which signifies a promise to pay.

Declining–Balance Method – this is also known as the reducing balance method. This method imposes higher depreciation charges in the early years of an asset’s beneficial life and imposes a lower depreciation charge on the asset’s remaining useful life.

Defalcation – the misuse of funds by someone who is tasked to supervise such funds.

Default – the failure of a party to perform his or her financial obligation, or perform the service agreed upon.

Depreciation – a reduction of value caused by wear and tear. This occurs when an asset’s value decreases with time.

Derivatives – a financial instrument, the value of which relies on the value of an instrument or asset.

Disbursement – usage of money for financial transactions and activities.

Disclosure – publicizing of information related to the activities of an organization or corporation.

Dividends – cash or benefits distributed to the stockholders, directors, and/or employees when a corporation sees significant gains.


E

Encumbrance – a burden or a lien imposed on an asset.

Ending Inventory – the inventory done at the end of an accounting period to monitor the total merchandise held by the corporation during such time.

Endorsement – a process in which a holder of an instrument transfers ownership over such an instrument through affixing a signature on the said document.

Equity – the total value of a business when total liabilities are deducted from the total assets.

Escrow – money, stocks, or any asset under the custody of a third party to ensure that both parties abide by the provisions of their contract before such amount, stock or asset can be released.

Expenditure – the usage of a corporation’s money or asset.

Expense – an activity where the money is spent on an asset.


F

Fiduciary – a person or organization bound by a mutual trust to protect the interest of a person or organization. He or she is obligated to perform tasks he or she is required to perform under their agreement.

Financial statements – the documentation and analysis of financial reports and data. This may be conducted on specified accounting periods imposed by the organization.

Fiscal Year – a period used by corporations and government entities for financial reporting. It may also include budgeting. In accounting, it is a period in which financial statements and reports are prepared. It’s usually one year regardless of what month the said period is reckoned.

Generally Accepted Accounting Principles (GAAP) – rules, guidelines, philosophy, and procedures necessary for an accounting practice.

Goodwill – a company’s reputation as a provider of goods or services. This takes into consideration the years of operation, which enabled the company to secure a loyal following of customers.

Grant – an amount given by a government unit or any entity as a contribution, donation for any purpose.


H

Horizontal Analysis – is a type of analysis used to compute changes in the financial statements over a period of time. This is also called trend analysis.


I

Income – the earnings of the corporation or business after providing a service or selling a product.

Insolvency – a person, corporation, or entity who has incurred consequential financial losses, consequently, incapacitating the same to pay existing debts.

Insolvent – a person who suffers from insolvency, finances are no longer liquid.

Interest – a charge on the principal amount borrowed in case of failure to pay on time.

Inventory – the act of listing a supply of goods at the start or end of the accounting period.


J

Journal – a record of the daily financial transactions of a company.


L

Ledger – a compilation of records of business transactions by type.

Letter of Credit – a document issued in transactions involving import or export of goods. This is proof of the commitment of a bank to guarantee payment of the imported or exported goods.

Liquid Assets – the corporation’s money. An asset is liquid when it is already converted to cash.

Liquidation – the process of winding up the corporation. Liquidation happens when the remaining assets are distributed to the person/s entitled to it.

Loan – a transaction or an agreement between two parties, wherein one party, called the creditor, lends money or allows the use of the property to another, called the debtor.

Loss – an occurrence where the company incurs an excess of revenue over revenue in a given time or activity.


M

Management – includes policies, administration, and a select group of people that performs supervision and necessary decision–making before the implementation of business objectives.

Market – intended public place where manufacturers can offer their goods and services directly to the public or through an intermediary.

Maturity – the time when a loan becomes due and demandable. Accrual of interest begins from the date of maturity.

Merger – a form of business acquisition wherein one corporation acquires the assets as well as the liabilities of another corporation or corporations to form a new corporate entity.

Mortgage – security over real property assets.


N

National Association of State Boards of Accountancy (NASBA) – an organization formed by the 54 State Boards of Accountancy. The NASBA is the body that administers the national CPA examination, and grants license to Certified Public Accountants, as well as sets the guidelines and regulations for the practice of public accountancy in the United States.

Nationalization – a process wherein the government takes over the operations, assets, including the liabilities of a privately–owned corporation to protect the public interest.

Negligence – failure or omission to do an act which a reasonably prudent man is enjoined to do considering the circumstances. Negligence also contemplates the doing of an act which was expressly prohibited by a person in authority. There is negligence when a person fails to exercise ordinary diligence or standard of care which ordinary prudence requires.

Net Income – often referred to as net profit, signifies the company’s total earnings in a given period. The net income is calculated when the total expenses incurred by the company are deducted from the total revenue generated in that same period.

Net Assets – a company generates net assets when there is an excess in the securities currently owned, cash at hand, receivables, and interest over the liabilities of the company.

Net Sales – the sum of the company’s total sales. It is generated after subtracting the returns, discounts, and allowances issued by the company during a given period.

Net Worth – signifies the wealth or value of a person or entity. It is defined by the excess of assets when subtracted from the liabilities.


O

Obligations – an amount borrowed which may require payment or services promised to be rendered by one party or both parties at a determinable future time.

Offer – the price by which a property or security is sold to another by the owner.

Operating Cycle – the period needed for the completion of the manufacturing process. It is the duration between the acquisition of raw materials for the manufacturing of goods or services and the end of production, including final cash realization through sales.

Organization – may refer to a group of persons comprising a sector of the company. Simply, it is the act of arranging products into a catalog or in any order beneficial to the business.

Opportunity Cost – an amount that represents the benefits a person, business, or investor may miss when he chooses to proceed with one alternative over another.

Overhead Cost – expenses that do not necessarily go into the production of goods. The best example of overhead costs is the cost of maintaining the corporate office.

Overhead Rate – the sum specifically allocated for the cost of production.


P

Partnership – a form of business venture where two or more persons come to an agreement, which may be expressed or implied, to come together to carry on a business or trade for profit and sharing. These persons, called the partners, allocate money, property, or industry to create a common fund to finance the business. They exercise equal rights over the administration and share the risk of loss and liability.

Penalty – a liability as a result of non–performance or omission of any act mandated by law.

Period – an interval of time with a specified length or characterized by certain conditions.

Personal Property – movable properties or those that are movable in nature and not permanently attached to land or building. A few examples include money, car, computers, or intangible personal properties like royalties, copyright, and patent.

Preemptive Right – sometimes referred to as the right of refusal granted to existing stockholders in a corporation, or lessee of a building to purchase the shares or property before he offers it to third persons.

Production – the process of creating or manufacturing goods, products, or other commercial objects for distribution.

Profit – the sum gained as a positive difference from offering the products in the market for sale after deducting the production and overhead costs.

Promissory Note – a written instrument evidencing indebtedness to another, which contains an unconditional promise to pay the amount due plus interest, on demand, or in a determinable future time.

Proxy – a person authorized to represent a shareholder in a meeting. The proxy will exercise the shareholder’s right to vote within the duration he is authorized to do so.


Q

Qualified opinion – a statement issued by an auditor in his auditor’s report that expressly narrates the company’s financial statement. For a qualified opinion to hold value in the business, it must be issued following the Generally Accepted Accounting Principles (GAAP).

Quarter – a period of three–month intervals within a given year.

Quarterly Reports – a summary of the unaudited statement of accounts, prepared and issued by the company every three months, or every quarter. It is also sometimes referred to as interim financial statements.


R

Receivables – the sum of money or amount due and to be collected from debtors and customers.

Recession – a term often used in macroeconomics, which signifies a sufficient decline in the economy. According to economists, there must be two consecutive quarters of a significant decrease in the domestic economy or the gross national product of a given country.

Research and Development (R&D) – an essential component in any industry, research is a methodical and schematic activity which aims to discover new knowledge to fill the gap in scientific data. Whereas, the development of the translation of the research data into creating a design for innovative products and solutions.

Return on Investment (ROI) – a means of measuring the amount of profit gained by an investor or a firm through its daily operation. It usually is an indicator that business is doing well, effective, and is efficient in running its business.

Revenue – the amount generated from the ordinary course of business; it forms part of the income of the business. Revenue comes from the sales of products, merchandise, and services rendered, as well as interest from dividends and rents.

Risk – as defined in financial terms, pertains to a chance of generating a negative outcome or return. It includes the possibility of incurring a loss of all or the entire investment.

Risk Management – the process of identifying and monitoring the risks of doing business, it also includes the assessment of a possible return in investment.


S

Security – a certificate of ownership that can be transferred to another.

Start–up Cost – the cost to sustain a newly–established business venture. Start–up cost excludes acquisition cost that was sustained in bringing a new material in the production.

Stock Option – the right given to persons, not a member or stockholder of a corporation, to buy or sell a given number of shares of stock at a specific price point.


T

Tax Year – a twelve-month period or an entire year that covers a particular tax return. In the United States, the tax year for individual taxpayers runs from January 1 to December 31.

Taxable Income – the sum of an individual’s earnings during the tax year. This is subject to the Internal Revenue Service (IRS) regulations.

Taxation Process – the process of levying mandatory contributions from individuals, corporations, and other entities to generate public funds to supplement government finances.

Taxpayer Identification Number (TIN) – a unique set of numbers that identifies an individual taxpayer or other taxable entity in filing a tax return or financial statements.

Term – the time agreed upon by parties within which the provision and conditions of the contract must be performed.

Trade – a fundamental concept in Economics that includes the buying and selling of goods and services among different parties.

Trademark – a component of intellectual property, Trademark is a distinctive feature that differentiates and identifies a product, service, or goods from any other manufacturer.

Trust – a relationship reposed with confidence; trust is a legal practice and agreement wherein one person, called the trustor, transfers the legal title or right to possess a property to a trustee.


U

Uniform Accountancy Act (UAA) – jointly developed by the American Institute of Certified Public Accountants (AICPA) and the National Association of State Boards of Accountancy (NASBA), proposes for a new regulatory framework to regulate the public accounting profession in the country. It aims to enhance the practice of public accountancy in the United States, as well as to streamline the practice across different states.


V

Value – the amount or price attached to goods or products, or the service offered by a producer based on its production cost.

Value-Added Tax (VAT) – amount attached to goods that represents the consumption tax. It is levied on the value added to a given product and pertains to the cost of production stages and the time the goods are purchased.

Valuation – the process of determining, and later, attaching the value or worth of a company’s assets.

Variance – pertains to the difference between the assessed value of the goods and its actual value post-production and cost of point of the purchase cost.

Venture Capital – a person or an investment company that primarily seeks for up–and–coming business to finance. Venture capital’s primary objective is to secure capital growth by investing in new assets.


W

Wage – the amount paid to an employee or a worker for a day’s work and is usually computed at an hourly rate.

Withholding – the amount withheld or deducted by the employer from an employee’s salary and paid as a contribution to the proper authority.

Working Capital – also known as the Net Working Capital, it is the amount generated by deducting the company’s current assets from its current liabilities.

Write–Off – an accounting method where, to sustain a positive net worth, the company reduces the total value of its assets, consequently debiting its liabilities. Simply, it charges the company’s asset to its expenses or loss.


Y

Yellow Book – the other name given to the Government Auditing Standards published by the Comptroller General of the United States. The Yellow Book contains the standards to be followed for auditing the accounts of government organizations, functions, programs, as well as non–government organizations.

Yield – the return on a given investment an investor earns or generates over a particular period. It is the amount realized from the amount invested, taking into account the current market value.

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