Common Accounting Terminology

Account

An account is a record used to properly classify the activity recorded in the General Ledger.

Account balance

An account balance is the sum of debit entries minus the sum of credit entries in an account. If positive, the difference is called a debit balance; if negative, a credit balance. 

Accounting

Accounting is recording and reporting of financial transactions, including the origination of the

transaction, its recognition, processing, and summarization in the financial statements. 

Accounts Payable

Accounts Payable is an amount owed by the company for delivered goods or completed services. Accounts Payable is a liability. Certain expenses are paid through Accounts Payable,  

Accounts Receivable

Account Receivable is an amount owed to the college from a completed transaction of sales or services rendered. For example-student account balances. Accounts Receivable is an asset. 

Accrual Basis

Accrual basis is a method of accounting that recognizes revenue when earned, rather than when collected and expenses when incurred rather than when paid. The company uses the accrual basis for its accounting. 

Asset

An asset is what the company owns. For example- land, property, buildings, equipment, cash in bank accounts, other investments and accounts receivable. 

Audit

An audit is a formal examination and official endorsement of the accuracy of the financial statements of the company by an independent certified public accountant (CPA). Based on GAAP and FASB rules the company is required to have an audit performed each fiscal year.

Balance Sheet

A Balance Sheet is a summary report of the company’sassets, liabilities and fund balance (net assets) on a specific date. 

Budget

A budget is an estimate of activity for a fiscal year or period. A budget can be created for a department or a project.

Cost of Goods Sold

Cost of Goods Sold (CGS) is the cost of items purchased for resale. For example-the bookshop purchases textbooks to sell in the bookshop, UnCommon Grounds buy rolls that will be used to make sandwiches that will be sold in UnCommon Grounds.

Cost principle

The accounting guideline requiring amounts in the accounts and on the financial statements to be the actual cost rather than the current value. Accountants can show an amount less than cost due to conservatism, but accountants are generally prohibited from showing amounts greater than cost. (Certain investments will be shown at fair value instead of cost.)

Conservatism

This accounting guideline states that if doubt exists between two acceptable alternatives (in other words the accountant needs to break a tie), the accountant should choose the alternative that will result in a lesser asset amount and/or a lesser profit. A classic example is inventory where the replacement cost is less than the actual cost. The accountant must decide whether to leave the inventory at cost or to reduce the inventory amount to its replacement cost. Conservatism directs the accountant to reduce the inventory to the lower amount (the replacement cost). This results in a lower asset amount and a debit to an income statement account, such as Loss from Reducing Inventory to LCM. To learn more, see the Explanation of Lower of Cost or Market (LCM).

Carrying amount

Also referred to as book value or carrying value; the cost of a plant asset minus the accumulated depreciation since the asset was acquired. This net amount is not an indication of the asset's fair market value. Also used in reference to bonds payable: the face amount in Bonds Payable plus Premium on Bonds Payable or minus Discount on Bonds Payable and minus the unamortized issue costs.

Cash

A current asset account which includes currency, coins, checking accounts, and undeposited checks received from customers. The amounts must be unrestricted. (Restricted cash should be recorded in a different account.)

Cash basis of accounting

An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid). The cash basis of accounting is usually followed by individuals and small companies, but is not in compliance with accounting's matching principle.

Chart of accounts

A listing of the accounts available in the accounting system in which to record entries. The chart of accounts consists of balance sheet accounts (assets, liabilities, stockholders' equity) and income statement accounts (revenues, expenses, gains, losses). The chart of accounts can be expanded and tailored to reflect the operations of the company.

Credit

A credit is an entry on the right side of a double-entry accounting system that represents the reduction of an asset or expense or the addition to a liability or revenue. 

Debit

A debit is an entry on the left side of a double-entry accounting system that represents the addition of an

asset or expense or the reduction to a liability or revenue. 

Double-Entry Accounting

Double-entry accounting is a method of recording financial transactions in which each transaction is

entered in two or more accounts and involves two-way, self-balancing posting. Total debits must equal total credits. The company uses this method of accounting.

Equipment

Equipment is a noncurrent or long-term asset account which reports the cost of the equipment. Equipment will be depreciated over its useful life by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation (a contra asset account).

Expense

An expense is funds paid by the company. For example-paychecks to employees, reimbursements to employees, payments to vendors for goods or services. 

FASB

FASB stands for Financial Accounting Standards Board which is

an independent, private, non-governmental authority for the establishment of accounting principles in the United States. 

Financial Statements

Financial Statements are a series of reports showing a summary view of the various financial activities of

the company at a specific point in time. Each statement tells a different story about the financial activity of the company. 

Fiscal Year

A fiscal year is a period of 12 consecutive months chosen by an entity as its accounting period which may

or may not be a calendar year. The company’s fiscal year is June 1^st to May 31st

Fixed Asset

A fixed asset is any tangible item with a useful life of more than one year and a unit cost of $5,000 or

more. For example-campus buildings and major equipment. A fixed asset is an asset. 

Fund Balance (net assets)

Fund balance represents the net assets of the company. To arrive at this number take total assets minus total

liabilities. Any excess revenue over expenses or cumulative appreciation or depreciation on investments will become a net asset at the end of the fiscal year.

 GAAP 

 GAAP stands for Generally Accepted Accounting Principles which are conventions, rules, and procedures

necessary to define accepted accounting practice at a particular time. The highest levels of such principles are set by FASB. 

General Ledger

The general ledger is the collection of all asset, liability, fund balance (net assets), revenue and expense accounts. 

Income Statement

An Income Statement is a summary report that shows revenues and expenses over a specific period of

time, typically a month, quarter or fiscal year.

Insurance expense

The amount of insurance that was incurred/used up/expired during the period of time appearing in the heading of the income statement. The amount of insurance premiums that have not yet expired should be reported in the current asset account Prepaid Insurance.

Interest expense

This account is a non-operating or "other" expense for the cost of borrowed money or other credit. The amount of interest expense appearing on the income statement is the cost of the money that was used during the time interval shown in the heading of the income statement, not the amount of interest paid during that period of time.

Interest payable

This current liability account reports the amount of interest the company owes as of the date of the balance sheet. (Future interest is not recorded as a liability.)

Journal Entry

A journal entry is a group of debit and credit transactions that are posted to the general ledger. All journal entries must net to zero so debits must equal credits.

Liabilities

Obligations of a company or organization. Amounts owed to lenders and suppliers. Liabilities often have the word "payable" in the account title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed. To learn more, see Explanation of Balance Sheet.

Matching principle

The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense.
  

Net Income (loss)

Net Income (loss) is the amount the company, a department or a project made or lost for a specific period of

time. To arrive at this number take total revenues minus total expenses.

Notes payable

The amount of principal due on a formal written promise to pay. Loans from banks are included in this account.

Prepaid expense

A current asset representing amounts paid in advance for future expenses. As the expenses are used or expire, expense is increased and prepaid expense is decreased.

Prepaid insurance

A current asset which indicates the cost of the insurance contract (premiums) that have been paid in advance. It represents the amount that has been paid but has not yet expired as of the balance sheet date.
A related account is Insurance Expense, which appears on the income statement. The amount in the Insurance Expense account should report the amount of insurance expense expiring during the period indicated in the heading of the income statement.

Restricted Fund

A restricted fund is a fund established to account for assets whose income must

be used for purposes established by donors or grantors. The company’s restricted funds are fund 2, 3, 4, 5, 6, 7 and 9. 

Revenue

Revenue is funds collected by the company; it can also be called income. For example-tuition, fees, rentals,

income from investments. 

Revenue recognition principle

The accounting guideline requiring that revenues be shown on the income statement in the period in which they are earned, not in the period when the cash is collected. This is part of the accrual basis of accounting (as opposed to the cash basis of accounting).

Sales

A revenue account that reports the sales of merchandise. Sales are reported in the accounting period in which title to the merchandise was transferred from the seller to the buyer.

Subsidiary Ledger

A subsidiary ledger is a group of accounts containing the detail of debit and credit entries. For example-detail information contained in Accounts Payable.

Supplies

A current asset representing the cost of supplies on hand at a point in time. The account is usually listed on the balance sheet after the Inventory account.
A related account is Supplies Expense, which appears on the income statement. The amount in the Supplies Expense account reports the amounts of supplies that were used during the time interval indicated in the heading of the income statement.

Unrestricted Fund

An unrestricted fund is a fund of the company that has no restrictions as to use or purpose. The company’s unrestricted fund is Fund 1.

Vehicles

A long-term asset account that reports a company's cost of automobiles, trucks, etc. The account is reported under the balance sheet classification property, plant, and equipment. Vehicles are depreciated over their useful lives.