Accounting terms make up the language of business used to measure business performance and profitability. The following accounting dictionary of key accounting terms and accounting definitions decodes the language of business with easy to follow illustrations and examples. |
For a more in depth discussion of each accounting term, simply click the link associatedwith each term.
The Accounting Cycle is a ten-step process that consists of the procedures necessary to collect, process, and report economic events in the financial statements for the reporting period.
The Accounting Equation refers to the main accounting formula that lays the foundation of double-entry bookkeeping. Accounting entries entered on one side of the accounting equation must balancewith accounting entries entered on the other side. The accounting equation also represents the relationship of the financial elements listed on the balance sheet, where total assets are listed and balanced with total liabilities and owners equity.
The Accounting Equation
Assets = Liabilities + Owner’s Equity |
Accounts Receivable refers to the current asset listed on the balance sheet thatshows the amount owed to the company from customers who purchased products or services on credit.
Accounts Receivable Turnover measures how quickly a business collects cash for sales on credit, or “turned over” the accounts receivable balance, for the accounting period measured. Accounts receivable turnover is calculated as:
Accounts Receivable Turnover
Net Credit Sales/Average Net Receivables, |where Average Receivables = (Beginning Net Receivables Balance + Ending Net Receivables Balance)/2 |
Accrual Accounting is an accounting term that refers to the method of recognizing and reporting revenues when earned, whether or not cash is actually received, and expenses when incurred, whether or not cash is actually paid. Compare with the accounting term Cash Accounting.
Accumulateddepreciation is an accounting term that refers to the total depreciation expense taken from year to year. Accumulated depreciation accumulates on the balance sheet from period to period as a contra asset account, where it is subtracted from the original cost of the asset to get its book value.
Adjusting Entries are accounting entries made at the end of an accounting period to report transactions thatoccurred but were not recorded during the normal course of business. Adjusting entries are necessary to more accurately represent the financial statements for the reporting period. Adjusting entries are classified as prepayments, accruals, and estimated Items.
Aging of Accounts Receivable bases the estimate for uncollectible accounts on the ending accounts receivable balance and the computationthat the longer an account is outstanding, the higher the likelihood that it will not be collected.
Allowance for Doubtful Accounts is a contra account on the balance sheet that reduces accounts receivable to its net realizable value by subtracting the amount estimated to be uncollectible. When an estimated amount is entered as a journal entry for allowance for doubtful accounts, the associateddebit entry, bad debt expense, reduces net income by the same amount for the reporting period.
An Asset is a probable economic benefit obtained or controlled by a business as a result of a past transaction. In accounting terms, a company does not need to own an asset to have control over it. The accounting equation shows us that assets may be owned (called equity), or financed (a liability).
Assetsare categorized as Current Assets and NonCurrent Assets.
* Current Assets, or short-term assets, are cash or other assets that a business reasonably expects to convert to cash or consume during the year. Examples are cash, inventory, and accounts receivable.
* NonCurrent Assets, or long-term assets, are assets that a company does not expect to consume or convert to cash within one year....