Accounting Terminology
Glossary of Accounting Terms and Definitions
A
Above the Line
Above the line items are those revenue and expense items that directly affect the calculation of periodic net income.
Absolute Change
Absolute change is the numeric change in the value of a commodity, expense etc.
Absorb/Absorption
Absorb means that one account or group of accounts combines the amounts from similar or related accounts or groups of accounts. Thus, the combined account is a new entity while the old ones are removed. For instance, if you have 3 creditors, John, George and Paul, you can combine them into one 'creditors' account. Hence, they are called absorption.
Absorbed Costs
Absorbed Costs are a combination of both variable and fixed costs.
Absorption Costing
Absorption costing absorbs all costs under two head product costs (manufacturing costs) and period costs (non-manufacturing costs).
Absorption Pricing
Absorption pricing is setting a price which is the sum of the absorbed cost plus a marked-up percentage of profit.
Absorption Variance
Absorption variance is the difference between the predicted and actual absorption costs.
Accelerated Depreciation
Accelerated depreciation is a form of depreciation where larger amounts of depreciation are calculated in the first few years.
Account
An account is the physical record of the transactions incurred related to an asset, liability, revenue, expense etc.
Accounts Analysis
Accounts analysis can be looked as a method of cost behavior analysis by classifying records under two heads: fixed or variable.
Accounts Group
Accounts group is a combination of similar accounts. e.g. fixed assets group, long-term liability group etc.
Accounting
Accounting is the process of recording all the economic events that affect the business/individual over an accounting period. Accounting is done based on the various accounting principles, concepts and the Golden Rules.
Accounting Concepts
There are certain assumptions that are taken for granted while recording the accounts. These assumptions are called accounting concepts. The 4 accounting concepts are Going Concern Concept, Accrual Basis Concept, Consistency Concept and Prudence Concept. Read on for more about Basic Accounting Concepts and Principles.
Accounting Cycle
An accounting cycle is the series of steps to be followed while preparing financial statements. The steps in the accounting cycle are budgeting, journal entries, adjusting entries, ledger posting, preparing financial reports and closing of accounts.
Accounting Entity Assumption
For legal and tax purposes, a business can be treated as a different entity from the owners. Thus, only the transactions related to the business are recorded and not the ones related to owners.
Accounting Equation
The accounting equation lays down the relationship between total assets, liabilities and owner's equity. The accounting equation is Total Assets = Total Liabilities + Owner's Equity
Accounting Event
An accounting event is any event where there is a change (increase/decrease) in value of the assets, liabilities or owner equity.
Accounting Income
Accounting income is the income earned by the business over the accounting year on an accrual basis.
Accounting Measurement and Disclosure
Accounting measurement and disclosure is the accounting concept that says that adequate dates should be used and disclosed for the purpose of decision-making.
Accounting Periods
An accounting period is the frame of time during which the accounts are prepared. An accounting period is usually for a year.
Accounting Principles
Accounting principles are commonly accepted principles assumed while accounting for the business. For details, refer to GAAP (Generally Accepted Accounting Principles).
Accounting Ratios
Accounting ratios are mathematical tools which help in performing the comparative financial analysis for two financial variables.
Accounting System
An accounting system is a holistic approach to accounting. It may be manual as well as computerized. An accounting system helps identify economic events, record them and generate reports at the end of the accounting period or even during the period.
Accounting Theory
An accounting theory develops a framework for the accounting procedure. There are four types of theories of accounting: Classical Inductive, Income, Decision Usefulness and Information economics.
Accounting Timing Difference
Accounting time difference is the effect that considering a deferred financial event would have on the financial statements.
Accounting Treatment
Accounting treatment is the set of rules that lays down how to treat an account and how to handle a particular transaction.
Accounts Payable
Accounts payable are those accounts wherein the business has an obligation to pay for receiving goods or services. They are classified as a liability.
Accounts Payable to Sales
Accounts payable to sales represents the time taken between the sales and payment to creditors.
Accounts Receivable
Accounts receivable are those accounts where the business can owe money for providing goods or services. It is an asset.
Accounts Receivable Reserve
An accounts receivable reserve is a pool of money kept aside by the business to protect itself from default on the accounts receivables.
Accounts Receivable Turnover
Accounts receivable turnover lets the business measure how quickly the customers are paying out the money receivable. It is calculated by Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable.
Accrual Concept
Accrual concept is one of the core accounting concepts. Accrual concept states that a economic event should be recorded in the period in which it is incurred rather than when it is paid for or when cash is received in return.
Accrued Assets
Accrued assets are those assets from which the revenues are earned but not received.
Accrued Expenses
Accrued expenses are those expenses which have been incurred but not paid.
Accrued Income
Accrued income is income that is earned but not yet received.
Accrued Interest
Accrued interest is interest that an asset has earned, but not received.
Accrued Inventory
Accrued inventory is that which has arrived in the warehouse of the business but hasn't yet been paid for.
Accrued Liability
Accrued liabilities are those liabilities that have been incurred by the business and haven't been paid off.
Accrued Payroll
Accrued payroll is employee salaries that remain unpaid at the end of the year.
Accrued Revenue
Accrued revenue is revenue that has been earned but not yet received.
Accumulated Amortization
Accumulated amortization is the accumulated charges against the intangible assets owned by the business.
Accumulated Depreciation
Accumulated depreciation is the charges incurred for the wear and tear of a fixed asset that is calculated periodically.
Acid Test Ratio
Acid test ratio is a ratio that analyzes the liquidity position of the business. It is calculated by Acid Test Ratio = Total Liquid Assets / Current Liabilities.
Acquisition
Acquisition is a situation where one company takes over the controlling stake of another company.
Activity Based Costing
Activity based costing is a form of costing that analyzes the cost of a product based on the cost of the various activities performed for it.
Activity Ratio
Activity ratio is the ability of a business to convert their balance sheet assets into cash or sales.
Actual Cash Value
Actual cash value is a method for determining the actual loss incurred by the business expressed in monetary terms. It is normally used in context of depreciation.
Actual Cost
Actual cost is the exact amount you pay to buy a fixed asset as opposed to the market value or production cost.
Additional Paid-in Capital
Additional paid-in capital is the amount paid by the shareholders over and above the par value of the asset.
Adequate Disclosure
Adequate disclosure is giving the required amount of information in the form of footnotes to indicate the financial status of the business
Adjusted Book Value
Adjusted Book Value may be tangible book value or an economic book value. In a tangible book value, the value of intangible assets are deducted from the total assets. In the economic book value, the assets are adjusted to their market value as opposed to the cost of purchase.
Adjusting Entries
Adjusting entries are the entries done at the end of the accounting period to update certain items that are not recorded as daily transactions. The process of recording adjusting entries are known as adjustment.
Administrative Costs
Administrative costs are those which are not directly required for the process of production, but are included in the final price of the product as they are incurred. e.g sales office rent is an administrative cost as it is not required in the process of production.
Advance
Advance is an amount of money paid before the business earns it.
Agency
An Agency is the contractual relationship between the principal and his agent where the agent is empowered by the principal to take certain decisions on his behalf.
Aggregate
Aggregate means total.
Allocation
Allocations are amounts distributed to each department for their working expenses.
Allowance
Allowance is a discount given to customers in the event of provision of unsatisfactory goods or services.
Allowance for Bad/Doubtful Debts
Allowance for bad debts are amounts of money set aside by the business as a cover for possible defaults on payments.
Alternate Payee Endorsement
Alternate payee endorsement is when the original payee endorses the draft to another entity, and this other entity endorses it again.
Amalgamation
Amalgamation is the merger of two or more business entities.
Amortization
Amortization can mean three things.
- It is a series of payments that result in gradual reduction of a large debt.
- It is writing off the value of an intangible asset over the useful life of the asset.
- It can also mean periodic deduction in the value of a fixed asset by means of depreciation.
Amount Due
Amount due is the amount payable by a debtor to a creditor. Read on to know What is Amortization.
Ancillary
Ancillary refers to something that has lesser importance.
Annualized
Annualizing is a method by which all the amounts pertaining to less than a year are calculated to their one-year equivalents.
Annual Report
An annual report is a detailed report of all the financial statements of a business. It is a mandatory requirement for public companies
Annuity
An annuity is a series of periodical payments of a fixed amount for a fixed period. e.g. insurance premium. Read on for Fixed Annuities Explained and the Annuities Pros and Cons.
Appreciation
Appreciation is the increase in the value of the asset due to economic conditions or improvements to the asset.
Appropriation
Appropriation is the allocation of amounts, that are part of the total net profit, under various heads such as general reserve fund etc.
Arrears
Arrears are debt that have not been paid yet.
Assessed Value
Assessed value is the estimated value that is taken for calculation of tax.
Assessment
Assessment is the total amount of tax or levy payable.
Asset
Asset is something that is owned by a business that has commercial value or exchange value.
Asset Earning Power
Asset earning power is one of the profitability ratios that determine the earning power of assets. It is calculated by Asset Earning Power = Earnings before Taxes / Total Assets.
Asset Turnover Ratio
Asset turnover ratio helps establish the relationship between the sales and the total assets. It is calculated by Asset Turnover Ratio = Total Revenue / Average Assets.
Asset Valuation
Asset valuation is the process by which the value of an asset or an asset portfolio is determined.
Audit
Audit is the process of checking and validating the business records.
Audit Committee
Audit committee is a special committee appointed in an organization to carry out the audit oversight responsibility of the board of directors.
Audit Report
Audit report is an official, signed document that provides the details regarding the purpose, scope and findings of the audit.
Authorized Capital
Authorized capital is the total money that the company has made by selling the issue of authorized shares. It is calculated by Authorized Capital = Number of Shares which are Issued * Par Value of Shares
Average Cost
Average cost = Total Cost / Number of Units.
Average Inventory
Average inventory is the average amount of inventory held over the accounting period. It is calculated by Average Inventory = (Opening Inventory + Closing Inventory) / 2
Average Net Receivables
Average net receivables are the average of the accounts receivable over the accounting period. It is calculated by Average Net Receivables = (Opening Net Receivables + Closing Net Receivables) / 2
Average Settlement Period
Average Settlement Period is calculated
for debtors Average Settlement Period = (Trade Debtors * 365) / Credit Sales
for creditors Average Settlement Period = (Trade Debtors * 365) / Credit Purchases
Average Tax Rate
Average tax rate = Total Taxes Paid / Tax Base.
Avoidable Cost
Avoidable cost is the cost that can be avoided by taking a particular decision.
B
Bad Debt
Bad Debt is the amount owed to us but which cannot be recovered. It is a loss.
Balance
Balance is the difference between the credit and the debit sides of an account.
Balance Sheet
A balance sheet is the list of all the assets and liabilities of the business.
Balloon payment
Balloon payment is the final payment on a loan. It is called so as it is considerably higher than the regular payments.
Bank Balance
Bank balance is the amount of money present in the bank account of the business.
Bank Overdraft
Bank overdraft represents negative balance in the bank account of the company.
Bank Reconciliation
Bank reconciliation is the verification of all the entries in the bank statement with the bank book of the business. Read on for the Purpose of Bank Reconciliation Process and Steps to Accounts Reconciliation.
Bank Statement
A bank statement is the financial statement showing the details of all the transactions that the business had made through the particular bank account.
Bankruptcy
Bankruptcy is a situation where a business/individual does not have enough assets to pay off his liabilities. A person who is bankrupt is called an insolvent.
Barter System
Barter system is a non-monetary system of exchange where commodities are traded for commodities rather than for money.
Base Capital
Base capital = Issued and Paid-up Share Capital + Contributed Surplus + Retained Earnings.
Basic Earning Power
Basic earning power measures the profitability of the assets. It is calculated by the formula Basic Earning Power = EBIT / Total Assets.
Basis
Basis means the starting point for calculating a variety of variables such as profit, loss, depreciation, amortization etc. It can also mean the book value of investments.
Batch
Batch is a collection of items that need to be handled together for production.
B/D
Brought Down. It is the balance from the previous accounting period that is carried forward.
Below the Line
Below the line items are those that directly affect the balance sheet and not the income statements.
Benchmarks
A benchmark is a high standard that is set for performance.
Big 4
Big 4 refers to the 4 biggest accounting firms: PriceWaterhouseCoopers, KPMG, Delloite and Touche and Ernst and Young.
Billings
A billing is a request sent to the debtor asking for payment for a debt.
Bills Payable
Bills payable is a promise made by the receiver of a benefit to the giver of a benefit, to pay an amount of money in the future.
Bills Receivable
Bills receivable is a record of all the bills that are receivable by a firm.
Bond
A bond is a certificate of debt issued either by a corporation or the government to raise money.
Bond Discount
A bond discount is the difference between the face value of the bond and the issued price. The face value in this case is higher than the issued price.
Bond Premium
Bond Premium is the difference between the issued price and the face value of the bond. In this case, the issued price is higher.
Bond Sinking Fund
Bond sinking fund is a provision made by the bond issuing body to pay off the face value of the bond at maturity.
Bonus
A bonus can be looked upon as the remuneration given to an employee in excess of the stipulated salary.
Books
Books refers to the journals, ledgers and other subsidiary books such as sales books and purchase books, as maintained by the business.
Book Building
Book building is a type of share issue where the price of the shares are not fixed, but is determined by investor bidding.
Book Costs
The book cost is the cost of an asset when it was purchased. It may be a historical cost.
Book Income
Book income is the revenue earned by a business as reported in the financial statement.
Book Inventory
Book Inventory = Cost of Acquiring the Inventory - All the Liabilities associated with the Inventory.
Book Keeping
Book keeping is the process of recording all the economic events and transactions of the business.
Book to Market Ratio
Book to market ratio is a ratio that calculates the book value of the equity of a firm to the market value of the equity.
Branch Accounting
Branch Accounting is keeping the books of accounts for geographically separated departments or units of the same business.
Break Even Analysis
Break even analysis can be basically ascertaining how many units of a product sold will cover the costs. The point of the sales volume where the costs are equal to the volume is called break even point. Read on for Break Even Analysis Formulas
Brought Forward
Refer B/D
Budget
A budget gives the list of expense heads and the amounts allotted to expense heads. For example, a sales budget lays down the amount to be spent on sales, etc.
Budgetary Deficit
When there is an excess of expenditure over revenue in a budget, it is known as a budgetary deficit.
Budgetary Control
Budgetary control is a process where the actual amount incurred and the budgeted amount for each expense head is compared.
Budgeting
Budgeting is estimating the expenditure needs of the department or each expense head based on historical data and trend analysis.
Budget Performance Report
Budget performance report represents the comparison between the actual expenditure and the budgeted expenditure.
Buffer
A buffer is a safety measure over the budgeted amount, in case of contingency.
Business Entity
A business entity may be a proprietorship, partnership, corporation, or LLC. Every entity has to follow a separate set of rules.
Business Valuation
Business valuation is the amount that would be realized if the business was sold to a hypothetical buyer.
Bylaws
Bylaws are the different provisions that govern the corporate policies.
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