Accounting Terminologies
Accounting
Accounting is the process of recording, summarizing, and reporting financial information.
Bookkeeping
The process of recording, organizing, and maintaining a business's financial transactions
Financial Information
Data that shows the financial health, performance, and position of a person or organization
Transactions
An instance of buying or selling something
Assets
What a business owns
Liabilities
What a business owes
Equity
The value of an ownership stake
Financial Statements
Financial statements are formal records that summarize a company's financial performance and position, providing a clear picture of its financial health.
Accounting is the process of recording, summarizing, and reporting financial information.
Bookkeeping
The process of recording, organizing, and maintaining a business's financial transactions
Financial Information
Data that shows the financial health, performance, and position of a person or organization
Transactions
An instance of buying or selling something
Assets
What a business owns
Liabilities
What a business owes
Equity
The value of an ownership stake
Financial Statements
Financial statements are formal records that summarize a company's financial performance and position, providing a clear picture of its financial health.
Internal Users
Individuals within a company who use it for day-to-day operations and strategic planning, primarily management, employees, and owners.
External Users
Individuals or organizations outside of a company who use its accounting information for decision-making.
Stakeholders
Any individual, group, or entity that has an interest in or is affected by a company's actions and financial performance.
Management
Provides internal financial information and analysis to help managers make decisions, plan operations, and improve performance.
Investors
An individual or entity that provides capital to a business with the expectation of a future financial return.
Creditors
An individual or entity to whom a business owes money for goods, services, or loans provided on credit.
Regulators
Government bodies or authorities that set and enforce rules for financial and accounting practices.
Decision-Making
The process of using financial and economic information to choose the best course of action from multiple alternatives to achieve a goal.
Individuals within a company who use it for day-to-day operations and strategic planning, primarily management, employees, and owners.
External Users
Individuals or organizations outside of a company who use its accounting information for decision-making.
Stakeholders
Any individual, group, or entity that has an interest in or is affected by a company's actions and financial performance.
Management
Provides internal financial information and analysis to help managers make decisions, plan operations, and improve performance.
Investors
An individual or entity that provides capital to a business with the expectation of a future financial return.
Creditors
An individual or entity to whom a business owes money for goods, services, or loans provided on credit.
Regulators
Government bodies or authorities that set and enforce rules for financial and accounting practices.
Decision-Making
The process of using financial and economic information to choose the best course of action from multiple alternatives to achieve a goal.
Sole Proprietorship
A business with a single owner
Partnership
a business structure where two or more individuals agree to manage a business and share its profits and losses, with each partner contributing money, property, labor, or skill.
Corporation | Company
A legal entity separate from its owners, meaning it has its own assets, liabilities, and can enter into contracts and be sued independently.
Economic Entity Assumption
The accounting principle that a business is a separate entity from its owners, and its financial activities must be kept distinct from those of its owners and any other businesses.
Going Concern Assumption
A fundamental accounting principle that presumes a business will continue to operate for the foreseeable future without the need to liquidate or significantly curtail its operations.
Monetary Unit Assumption
An accounting principle that states that only transactions that can be expressed in a stable currency should be recorded in a company's financial records.
Time Period Assumption
The accounting principle that allows a business's long life to be divided into artificial, shorter time frames like months, quarters, or years for reporting financial information.
Legal Entity
A business or organization that is recognized by law as a distinct person, separate from its owners, with rights and responsibilities of its own.
Unlimited Liability
A business owner is personally responsible for all of the company's debts, and their personal assets can be used to pay those debts.
Limited Liability
The owners of a company are not personally responsible for its debts and financial obligations.
A business with a single owner
Partnership
a business structure where two or more individuals agree to manage a business and share its profits and losses, with each partner contributing money, property, labor, or skill.
Corporation | Company
A legal entity separate from its owners, meaning it has its own assets, liabilities, and can enter into contracts and be sued independently.
Economic Entity Assumption
The accounting principle that a business is a separate entity from its owners, and its financial activities must be kept distinct from those of its owners and any other businesses.
Going Concern Assumption
A fundamental accounting principle that presumes a business will continue to operate for the foreseeable future without the need to liquidate or significantly curtail its operations.
Monetary Unit Assumption
An accounting principle that states that only transactions that can be expressed in a stable currency should be recorded in a company's financial records.
Time Period Assumption
The accounting principle that allows a business's long life to be divided into artificial, shorter time frames like months, quarters, or years for reporting financial information.
Legal Entity
A business or organization that is recognized by law as a distinct person, separate from its owners, with rights and responsibilities of its own.
Unlimited Liability
A business owner is personally responsible for all of the company's debts, and their personal assets can be used to pay those debts.
Limited Liability
The owners of a company are not personally responsible for its debts and financial obligations.
GAAP
U.S. accounting standards, rule-based.
IFRS
International accounting standards, principle-based.
FASB
Organization that sets GAAP rules.
IASB
Organization that issues IFRS.
Principle-based
Based on guidelines and judgment.
Rule-based
Based on strict, detailed rules.
Revenue Recognition
Record revenue when earned.
Matching Principle
Match expenses to related revenue.
Conservatism
Avoid overstating income or assets.
Historical Cost
Record assets at purchase price.
Full Disclosure
Show all necessary information.
U.S. accounting standards, rule-based.
IFRS
International accounting standards, principle-based.
FASB
Organization that sets GAAP rules.
IASB
Organization that issues IFRS.
Principle-based
Based on guidelines and judgment.
Rule-based
Based on strict, detailed rules.
Revenue Recognition
Record revenue when earned.
Matching Principle
Match expenses to related revenue.
Conservatism
Avoid overstating income or assets.
Historical Cost
Record assets at purchase price.
Full Disclosure
Show all necessary information.
Principle
A basic rule or guideline.
GAAP
Generally Accepted Accounting Principles
IFRS
International Financial Reporting Standards
Consistency
Using the same methods every period.
Relevance
Information that helps users make decisions.
Reliability
Information that is accurate and trustworthy.
Comparability
Reports can be compared across companies and years.
Faithful Representation
Showing transactions truthfully, without bias.
A basic rule or guideline.
GAAP
Generally Accepted Accounting Principles
IFRS
International Financial Reporting Standards
Consistency
Using the same methods every period.
Relevance
Information that helps users make decisions.
Reliability
Information that is accurate and trustworthy.
Comparability
Reports can be compared across companies and years.
Faithful Representation
Showing transactions truthfully, without bias.
Accounting Equation
The basic formula | Assets = Liabilities + Equity.
Assets
Resources owned by a business.
Liabilities
Debts or obligations the business owes.
Equity
The owner’s share of the business after liabilities.
Transaction
A business event that affects financial accounts.
Capital
Money invested by the owner into the business.
Loan
Money borrowed that must be paid back.
Purchase
Buying goods or services.
The basic formula | Assets = Liabilities + Equity.
Assets
Resources owned by a business.
Liabilities
Debts or obligations the business owes.
Equity
The owner’s share of the business after liabilities.
Transaction
A business event that affects financial accounts.
Capital
Money invested by the owner into the business.
Loan
Money borrowed that must be paid back.
Purchase
Buying goods or services.
Double-entry
Every transaction affects at least two accounts.
Debit | Dr
Left side of a T-account.
Credit | Cr
Right side of a T-account.
T-account
A visual tool used to record debits and credits.
Ledger
A book or system of accounts.
Account
A record of increases and decreases of a specific item.
Expense
A cost incurred by the business.
Revenue
Money earned by the business.
Every transaction affects at least two accounts.
Debit | Dr
Left side of a T-account.
Credit | Cr
Right side of a T-account.
T-account
A visual tool used to record debits and credits.
Ledger
A book or system of accounts.
Account
A record of increases and decreases of a specific item.
Expense
A cost incurred by the business.
Revenue
Money earned by the business.
Compound Entry
A journal entry with more than two accounts.
Contra Account
An account with an opposite normal balance
Unearned Revenue
Money received before service is provided.
Prepaid Expense
Expense paid in advance | an asset.
Accrued Expense
Expense incurred but not paid.
Accrued Revenue
Revenue earned but not received.
Normal Balance
The side (debit | credit) where an account increases.
A journal entry with more than two accounts.
Contra Account
An account with an opposite normal balance
Unearned Revenue
Money received before service is provided.
Prepaid Expense
Expense paid in advance | an asset.
Accrued Expense
Expense incurred but not paid.
Accrued Revenue
Revenue earned but not received.
Normal Balance
The side (debit | credit) where an account increases.
Chart of Accounts
A list of all accounts used by a business.
Account Number
A code assigned to each account for organization.
Classification
Grouping accounts by type | Assets, Liabilities, etc.
Sub-account
A detailed account under a main category.
General Ledger
Where all account balances are stored.
Control Account
A summary account | e.g Accounts Receivable
A list of all accounts used by a business.
Account Number
A code assigned to each account for organization.
Classification
Grouping accounts by type | Assets, Liabilities, etc.
Sub-account
A detailed account under a main category.
General Ledger
Where all account balances are stored.
Control Account
A summary account | e.g Accounts Receivable
Journal
The book where transactions are recorded first.
Source Document
Proof of a transaction | receipt, invoice, etc.
General Journal
A journal for all types of transactions.
Special Journals
Journals for specific transaction types | sales, purchases, cash receipts, etc.
Invoice
A document requesting payment.
Receipt
Proof of payment received.
Credit Note
Document issued when goods are returned.
Debit Note
Document sent to request a credit note.
Cheque
A written order to pay money from a bank.
The book where transactions are recorded first.
Source Document
Proof of a transaction | receipt, invoice, etc.
General Journal
A journal for all types of transactions.
Special Journals
Journals for specific transaction types | sales, purchases, cash receipts, etc.
Invoice
A document requesting payment.
Receipt
Proof of payment received.
Credit Note
Document issued when goods are returned.
Debit Note
Document sent to request a credit note.
Cheque
A written order to pay money from a bank.
Ledger
A book containing individual accounts.
Posting
Transferring data from the journal to the ledger.
T-Account
A visual representation of an account | left = debit, right = credit.
Account Balance
The difference between debits and credits.
Folio
Reference number linking journal and ledger.
Debit Side
Left side of a ledger account.
Credit Side
Right side of a ledger account.
A book containing individual accounts.
Posting
Transferring data from the journal to the ledger.
T-Account
A visual representation of an account | left = debit, right = credit.
Account Balance
The difference between debits and credits.
Folio
Reference number linking journal and ledger.
Debit Side
Left side of a ledger account.
Credit Side
Right side of a ledger account.
Trial Balance
A list of all ledger account balances, shown in debit and credit columns.
Ledger Balance
The final amount in an account after all postings.
Debit Balance
When total debits > total credits in an account.
Credit Balance
When total credits > total debits.
Totals
The sum of all debit balances and credit balances.
Balancing
Ensuring debit equals credit.
A list of all ledger account balances, shown in debit and credit columns.
Ledger Balance
The final amount in an account after all postings.
Debit Balance
When total debits > total credits in an account.
Credit Balance
When total credits > total debits.
Totals
The sum of all debit balances and credit balances.
Balancing
Ensuring debit equals credit.
Error of Omission
Entire transaction is not recorded.
Error of Commission
Wrong account of the same type is used.
Error of Principle
Wrong class/category of account used.
Error of Original Entry
Wrong amount posted.
Compensating Errors
Two errors that cancel each other out.
Transposition Error
Reversing digits | 54 instead of 45.
Suspense Account
Temporary account used when trial balance doesn’t balance.
Entire transaction is not recorded.
Error of Commission
Wrong account of the same type is used.
Error of Principle
Wrong class/category of account used.
Error of Original Entry
Wrong amount posted.
Compensating Errors
Two errors that cancel each other out.
Transposition Error
Reversing digits | 54 instead of 45.
Suspense Account
Temporary account used when trial balance doesn’t balance.
Accrual Accounting
Records revenue when earned and expenses when incurred, not when paid.
Cash Accounting
Records only when cash is received or paid.
Revenue Recognition Principle
Revenue is recorded when earned, not when money arrives.
Matching Principle
Expenses must match the revenue they help generate.
Accounts Receivable
Money owed by customers for credit sales.
Accounts Payable
Money the business owes for credit purchases.
Records revenue when earned and expenses when incurred, not when paid.
Cash Accounting
Records only when cash is received or paid.
Revenue Recognition Principle
Revenue is recorded when earned, not when money arrives.
Matching Principle
Expenses must match the revenue they help generate.
Accounts Receivable
Money owed by customers for credit sales.
Accounts Payable
Money the business owes for credit purchases.
Adjusting Entries
Journal entries made at period end to update account balances.
Prepaid Expense
Expense paid in advance | asset until used.
Accrued Expense
Expense incurred but not yet paid.
Accrued Revenue
Revenue earned but not yet received.
Unearned Revenue
Cash received before service is provided | liability.
Depreciation
Allocation of asset cost over useful life.
Journal entries made at period end to update account balances.
Prepaid Expense
Expense paid in advance | asset until used.
Accrued Expense
Expense incurred but not yet paid.
Accrued Revenue
Revenue earned but not yet received.
Unearned Revenue
Cash received before service is provided | liability.
Depreciation
Allocation of asset cost over useful life.
Depreciation
Allocation of the cost of a fixed asset over its useful life.
Straight-Line Method
Equal depreciation expense each year.
Accumulated Depreciation
Total depreciation charged to date | contra-asset.
Bad Debts
Amounts owed by customers that will not be collected.
Allowance for Doubtful Accounts
Estimated uncollectible receivables.
Contra Asset
An account that reduces the value of an asset.
Net Book Value
Cost of asset minus accumulated depreciation.
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Allocation of the cost of a fixed asset over its useful life.
Straight-Line Method
Equal depreciation expense each year.
Accumulated Depreciation
Total depreciation charged to date | contra-asset.
Bad Debts
Amounts owed by customers that will not be collected.
Allowance for Doubtful Accounts
Estimated uncollectible receivables.
Contra Asset
An account that reduces the value of an asset.
Net Book Value
Cost of asset minus accumulated depreciation.
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