Accounting Glossary Terms

 Assets = liabilities + owner's equity. The accounting equation is the basis for the financial statement called the balance sheet.

 With the accrual method, you record income when the sale occurs, not necessarily when you receive payment. You record an expense when you receive goods or services, even though you may not pay for them until later. When you hear the word accrual, try and remember the word timing! Basically accrual means we record things as they happen, not when the cash changes hands. As soon as a sale takes place, it is recorded regardless of when the payment is actually received. And on the opposite side of that, when an expense is incurred it is recorded upon receipt with the date of payment being irrelevant. This coincides with one of the GAAP Principles, Matching.

 Special accounting entries that must be made when you close the books at the end of an accounting period. Adjusting entries are necessary to update your accounts for items that are not recorded in your daily transactions.

 The Accounts Receivable aged items should be reviewed on a regular basis, at least at year-end. At that time, it may be determined that some of the receivables may not be collectable. To give a clearer picturer of the true value of the receivables, it is recommended that you set up an allowance for the items you feel may be uncollectible. This is merely a temporary entry and can be reversed once collected. (and later, if they are deemed truely uncollectable, then they can be changed to an actual write-off (detailed below). The allowance is set up as a contra account and sits directly under the Accounts Receivable account as a negative value. As the two amounts net together, this gives the Balance Sheet a more realistic value.

 An aging report is a list of customers' accounts receivable amounts and their due dates. It alerts you to any slow-paying customers. You can also prepare an aging report for your accounts payable, which will help you manage your outstanding bills.

 See Depreciation.

 As noted above in the accrual definition, a purchase is recognized when it occurs, and as the payment will take place and be recorded at a later date, it is kept track by entering the transaction into an A/P area (also known as a subledger, or in computerized terms, module). Details of vendor/supplier purchases and payments are maintained in this area, as well as vendor information including: contact, full address and other contact information. All computer systems provide specific reports for both the summary and details of the current Accounts Payable. Most payables are due within 30 days. Some suppliers will offer discounts if paid early or charge interest when paid late.

 As noted above in the accrual definition, a sale is recognized when it occurs, and the payment will take place and be recorded at a later date, it is kept track of by entering the transaction into the A/R area (also known as a subledger, or in computerized terms, module). Details of customer sales and payments are maintained in this area, as well as customer information including: contact, full address and other contact information. All computer systems provide specific reports for both summary and details of the current Accounts Receivable. An average receivable is 30-60 days but this will vary depending on the industry. It is up to you to decide if you will charge your customers interest on overdue accounts.

 Something a company "owns". There are three types of assets: Current, Fixed and Intangible. Current assets are liquid meaning they can easily be turned into cash, they would include: Petty Cash, Bank accounts, Investments, Accounts Receivable (A/R) and inventory. Fixed assets, also known as Capital or Tangible Assets are something a company owns and are things you can actually touch. Examples would be computers, equipment, tools, building, land, furniture and company vehicles. Intangible assets include items such as goodwill, copyrights and patents. Assets belong on the Balance Sheet.

 Balance sheet: Also called a statement of financial position, it is a financial "snapshot" of your business at a given date in time. It lists your assets, your liabilities, and the difference between the two, which is your equity, or net worth. Unfortunately owners and managers often bypass this very important report. As opposed to external readers, they will review the Income Statement, but INSIST on reviewing this report as well. The Balance Sheet consists of three sections: Assets, Liablilities, and Equity (or Capital). (for more information on the three sections of the Balance Sheet, see Assets, Liabilities and Equity.) Unlike the Income Statement, the Balance Sheet lives on from year to year. A good example of this is, just because it is year end the Bank balance does not start at zero. What many readers DON'T know is that the net of the Income Statement must reflect in the Equity section of the Balance Sheet in order for it to balance!

 We're often asked the difference between bookkeeping and accounting. Think of bookkeeping as more of the day to day transactions that take place in a business and the maintenance of this data entry. Most bookkeepers should be well versed in the data entry of Vendor bills and preparing cheques, as well as preparing customer invoices and applying the applicable cash receipts. Although some bookkeepers may have experience in the following, these may be tasks for someone with more experience: bank reconciliations, payroll, inventory maintenance, job-costing and all government remittances. (See CA for more information on accounting.)

 If you use the cash method, you record income only when you receive cash from your customers. You record an expense only when you write the cheque to the vendor.

 Money invested in the business by the owners. Also called equity.

 When the owner(s) contribute something of value to their business it is considered a contribution. Examples of this may be cash or fixed assets (including a computer, tools, equipment relavent to running the business). The fixed asset is assigned a fair market value so that it can be entered into the accounting records as both an asset and a capital contribution.

 The list of account titles you use to keep your accounting records.

 This book is published by The Canadian Institute of Chartered Accountants. It contains the Recommendations of the Accounting Research Committee and of the Auditing Standards Committee, and Acoounting / Auditing Guidelines. The handbook is avaiable free including revisions. Basically the book is "the accounting bible" covering every aspect of accounting.

 Closing the books refers to procedures that take place at the end of an accounting period. Adjusting entries are made, and then the income and expense accounts are "closed." The net profit that results from the closing of the income and expense accounts is transferred to an equity account such as retained earnings.

 A contra account exists when two accounts work together to form a net balance. Contra accounts are always placed one under the one another in your list of accounts. For example Accounts Receivable and Allowance for Doubtful accounts. As well each fixed asset has a contra depreciation account. For example Equipment and Accumulated Depreciation - Equipment.

 There are several accounts amoung the "chart of accounts" that act as control accounts, with details of these accounts maintained elsewhere. Examples of this would be Accounts Receivable, Accounts Payable, Payroll accounts and inventory. An example of this is the Accounts Receivable control account states the total of what is due in at a specif time. Whereas, the Accounts Receivable reports provide details of who owes the money, how much and specifically for what invoice(s). The A/R is known as the subsidiary ledger or sub-ledger.

 One of the three types of businesses (the other two being a sole-proprietor and partnership). It is the only one that is considered a separate entity. Therefore, a separte income tax return is prepared based on the performance of the corporation. There are many reasons to incorporate a business including to save taxes, for liability reasons, to portrait a larger image, etc.

 Cost of inventory items sold to your customers. It may consist of several cost components, such as merchandise purchase costs, freight, and manufacturing costs.

 Writing off all or part of a customer's account balance. A credit memo would be required, for example, when a customer who bought merchandise on account returned some merchandise, or overpaid on their account.

 At least one component of every accounting transaction (journal entry) is a credit. Credits increase liabilities and equity and decrease assets.

 Assets that are in the form of cash or will generally be converted to cash or used up within one year. Examples are accounts receivable and inventory.

 Liabilities payable within one year. Examples are accounts payable and payroll taxes payable.

 Debits and credits are the bookkeeping terms used to express how an account is affected by a transaction. Based on the type of account affected, ie Asset, Liability, etc., this will determine if it is a debit or a credit. See the Debit / Credit chart also available on the Tools & Training page. A hint, don't get confused with your bank statement. When you deposit money into your account, in YOUR records the bank is increasing, which is an asset, and when an asset increases, it is a Debit. On the bank statement the deposits show as credits. (That credit represents their books, that money is on loan to them from you, therefore it is a credit to them, so ignore their debit and credit columns).

 Also known as amortization. When large items are purchased, ie company car, new computer, photocopier, etc., they can not be fully expensed in the year they are purchased. This is because they have a life of more than one year. Depending on the type of item, the percentage of depreciation will vary. The cost should therefore be divided over a specific amount of time. These are considered capital assets (also known as fixed or tangible assets). For example equipment has a life of five years and therefore depreciates at 20% per year. A side note - there are different types of depreciations to choose from, an example is declining balance. Another note, the first year, the depreciation is valued at 1/2, therefore equipment would be 10%.

Depending on the size of the company depreciation can be calculated monthly, quarterly or once at year end.

 Revenue is money earned which appears on the Income Statement. Deferred revenue represents money received or promised but not recognized as earned because the work hasn't been done yet, and therefore sits on the Balance Sheet under the Liability section. (A liability is money a company owes, this rings true, because if the job is never done, the money is due back!) Once the job is complete (or partially done) the deferred revenue (or a portion of it) is transferred to the appropriate revenue account. An example of this would be in the construction industry, often work is done in stages. You can transfer or recognize the amount earned once a particular phase is complete. Other examples can be deferred memberships or events.

 In double-entry accounting, every transaction has two journal entries: a debit and a credit. Debits must always equal credits. Double-entry accounting is the basis of a true accounting system.

 A general ledger account used by some sole proprietorships and partnerships to keep track of amounts drawn out of the business by an owner.

Debit memo: Billing a customer again. A debit memo would be required, for example, when a customer has made a payment on their account by check, but the check bounced.

 Equity also known as Capital, is the third and final section of the Balance Sheet. The items listed in this section include: Shares, Current and Retained Earnings and shareholder's contributions.. The equity section is the "Company's Worth".

 These are the accounts you use to keep track of the costs of doing business: where your money goes. Examples are advertising, payroll taxes, and wages. Expenses are income statement accounts.

 This represents two reports, the Balance Sheet and the Income Statement (also known as the Profit and Loss Statement). The two reports work together to give a picture of the company's history as well as its current position.

 The twelve month period covering the business year. For sole-proprietors and partnerships, the fiscal year end matches the calendar year. However, the year end for a corporation reflects on it's anniversary date. Please note if a corporation starts mid year and wants another year end, they can shorten their first year end to coincide with the date they want. For example many industries use the industry standard. Another item to note is that a corporation, if they have a specific reason may ask (CRA) for permission to change their yearend.

 Also referred to as a Tangible asset, because it is "something you can touch". Examples include, computer, equipments, tools, building, vehicles and software.

 To total the amounts in a column, such as a column in a journal or a ledger.

 Generally Accepted Accounting Principles are the rules or guidelines set to keep record keeping consistent, conservative and reliable. There are several principles and assumptions that must be considered while maintaining a set of accounting records. It is important to not assume anything and always confirm the bookkeeping practices you are using with an accounting professional. An example of a principle is Consistency, this includes maintaining the same valuation method for calculating inventory and depreciation. Once a method has been chosen, it must stay consistent. There are always exceptions, and the method can change with disclosure, as long as it's not changed continually to suit your needs.

 A general ledger is the collection of all balance sheets, income, and expense accounts used to keep the accounting records of a business.

 These are the accounts you use to keep track of your sources of income. Examples are merchandise sales, consulting revenue, and interest income.

 One of the two Financial Statements. This is the report most owners and managers focus on. The Income Statement is also known as the Statement of Profit and Loss, it consists of two sections: Revenue (or Income) and Expenses The Income Statement starts fresh every year. Once the year-end is closed, all the revenue and expense totals are reverted back to a zero balance with the net transferring as Current Earnings to the Balance Sheet. This is how the two reports are connected. The net of the Income Statement must reflect in the Equity section of the Balance Sheet in order for it to balance!

Readers can use the Income Statement for comparisons. They can compare their figures to competitors as well as period to period. For example, month to month, quarter to quarter, or last year to this year.

 Unlike a tangible asset, this is an asset "you can not touch". Examples would include: Goodwill, Patents and Trademarks. These items are assigned a fair market value and placed in the books as part of the Balance Sheet. An example of this would be when you purchase a business, you may pay for unused leases, the purchase of equipment, etc., as well as for the name and reputation of the business, this is known as Goodwill and as part of the purchase price belongs in the accounting records.

 Items purchased for resale. The purchase price is placed on the books and decreases as the items sell. For accounting purposes the inventory can be broken down into specific categories, i.e. for a retail store: clothing, shoes, toys, etc. (all control accounts), with the details provided in a sub ledger. The details would breakdown each item by name, price, etc. There are several methods used to track and record inventory, including: LIFO (last in first out) with an example being canned goods in a grocery store. FIFO (first in first out), using the same grocery store scenario, used for perishables, i.e. milk, eggs, etc). Average, doesn't matter, therefore if several items are purchased over time at different prices, an average value is used for calculations. Specific, a good example would be for big ticket items that can be tracked by details or serial numbers, i.e. a car dealership.

 The chronological, day-to-day transactions of a business are recorded in sales, cash receipts, and cash disbursements journals. A general journal is used to enter period end adjusting and closing entries and other special transactions not entered in the other journals. In a traditional, manual accounting system, each of these journals is a collection of multi-column spreadsheets usually contained in a hardcover binder.

 Each transaction affects a minimum of two accounts and is recorded as a journal entry, often assigned a number for reference purposes. Information in the journal entry would include, the source, the date, a description of the entry, what accounts are debited and credited and for what value. If applicable, the entry may also be job-costed (this means the revenue and / or expense is allocated to a specific department, job, etc.)

 The opposite of an asset, something a company "owes". There are Current and Long Term Liabilities. Current liabilities include short term loans, A/P, amounts owed to the government (GST, PST, Source deductions, EHT, WSIB, etc.). Long term liabilities run over an extended period of time, for example a mortgage. Liabilities belong on the Balance Sheet.

 See Inventory

 Liabilities that are not due within one year. An example would be a mortgage payable.

 Goods held for sale to customers.

 In accounting the main book of entry is called the General Ledger. This consists of a page for each account detailing all it's activity. For Accounts Receivables and Accounts Payables, the details are maintained in subledgers or modules, with only the figures integrating into the GL.

 Also called profit or net profit, it is equal to income minus expenses. Net income is the bottom line of the income statement (also called the profit and loss statement).

 An unincorporated business with two or more owners.

 To summarize all journal entries and transfer them to the general ledger accounts. This is done at the end of an accounting period.

 Items paid for prior to an event, or the product being used are recorded on the Balance Sheet classified as a prepaid until the event takes place or the item is used. At this time the value is recognized and transferred to the Income Statement and categorized as the proper expense type. Examples are: last month's rent (this could sit on the Balance Sheet for 5 years, based on the length of the lease), Insurance covering a one year term, prepayments for travel, courses, etc.

 Also called unearned revenue, it represents money you have received in advance of providing a service to your customer. Prepaid income is actually a liability of your business because you still owe the service to the customer. An example would be an advance payment to you for some consulting services you will be performing in the future.

 Also called an income statement or "P&L." It lists your income, expenses, and net profit (or loss). The net profit (or loss) is equal to your income minus your expenses.

 An unincorporated business with only one owner.

 Also called allowance for bad debts, it is an estimate of uncollectable customer accounts. It is known as a "contra" account because it is listed with the assets, but it will have a credit balance instead of a debit balance. For balance sheet purposes, it is a reduction of accounts receivable.

 Profits of the business that have not been paid to the owners; profits that have been "retained" in the business. Retained earnings is an "equity" account that is presented on the balance sheet and on the statement of changes in owners' equity

 All corporations must issue shares. Either common or preferred. At this time it is determined how much a share is worth and how many shares each owner has. The owner's then pay for his/her shares and it is recognized on the Balance Sheet in the Equity section. Once this has been determined there is no reason for this to change unless ownership changes. Any changes must be documented in the corporate minute book.

 An unincorporated business with only one owner.

 Sub ledgers work closely with control accounts. These ledgers contain the details of each sub ledger. An example of a control account is Accounts Receivable. On the Balance Sheet the AR has one total while the sub-ledger will contain all the details totaling this amount. Details would include: each customers' name as well as the outstanding invoice number(s), date(s) and amount(s)

 This is a short cut bookkeepers use to assist in following the activity of several transactions. When using T accounts, a large letter T is drawn on a piece of paper, with the debits represented on the left side and the credits represented on the right side. Each T is assigned a separate account.

 A trial balance is prepared at the end of an accounting period by adding up all the account balances in your general ledger. The debit balances should equal the credit

 In accounting each piece of paper warrants a transaction. For example a customer's invoice, a deposit, a vendor's bill, a cheque, etc. all require it's own accounting transaction, including debits and credits. For bookkeeping purposes the debits and credits should balance in value for every transaction (on a computerized system, the entry will not post if it is not in balance).

 Also called prepaid income, it represents money you have received in advance of providing a service to your customer. It is actually a liability of your business because you still owe the service to the customer. An example would be an advance payment to you for some consulting services you will be performing in the future.

 Although the term "I am going to write this off" is often used, in this context it merely means, I am expensing this in my records as an Income Statement item. However, a write off occurs when an Accounts Receivable becomes dated and is determined to be uncollectable. At year-end aged receivables are often reviewed and determined if they are uncollectable. The Receivable is cleared with the other side of the entry becoming an expense known as Bad Debt (expense). A receivable is usually written off if: the client is unable to pay, gone out of business, died or gone bankrupt.