Accounting Terminology

1. CAPITAL equity interest of the owner in the business that is the difference between ASSETS and LIABILITIES, also called EQUITY or NET WORTH. In a corporation, capital represents the stockholders' equity. Capital stock consists of common stock and preferred stock. 2. TRANSACTIONS events or happenings in a business that change its financial position and/or earnings. Transactions are recorded in a journal and then posted to a ledger. Examples of business transactions are investing in the business, buying supplies, paying bills, withdrawing money from the business, buying equipment, and paying rent. 3. TRADE CREDIT type of credit extended by one business to another business, allowing the latter to buy goods from the former without making immediate full payment by check or with cash. It is credit obtained through open-account purchases represented by an ACCOUNTS PAYABLE by the buyer and an ACCOUNTS RECEIVABLE by the seller. Trade credit is an important external source of working capital for a business, although it can be very expensive. For example, a credit of 2/10 net 30 (2% cash discount if paid within 10 days, otherwise due in 30 days) translates into a 37% annual interest rate if the cash discount is foregone. 4. TRADE DISCOUNT reduction of the list or regular price in return for the purchase of large quantities, also called quantity discount or price discount. 5. DEBTOR individual who has a legal obligation to pay money to another. 6. CREDITOR business or individual that has extended credit and is owed money. 7. BAD DEBT account or note receivable that proves to be entirely or partially uncollectible despite collection efforts. If the allowance method of estimating bad debts is used, the entry at time of uncollectibility is to debit allowance for bad debts and credit accounts receivable. If the direct write-off method is employed, the entry is to debit bad debt expense and credit accounts receivable.

8. ASSET economic resource that is expected to provide benefits to a business. An asset has three vital characteristics: (1) future probable economic benefit; (2) control by the entity; and (3) results from a prior event or transaction. Assets are expressed in money or are convertible into money and include certain deferred charges that are not resources (e.g., deferred moving costs). They can be recognized and measured in conformity with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Examples of ownership rights or service potentials are cash, automobiles, and land. An asset may be tangible or intangible. The former has physical substance such as a building. The latter lacks physical sub-stance or results from a right granted by the government or another company such as goodwill and a patent. An asset may be current or noncurrent. A current asset has a life of one year or less (e.g., inventory) while a noncurrent asset has a life in excess of one year (e.g., machinery). 9. LIABILITY amount payable in dollars (e.g., accounts payable) or future services to be rendered (e.g., warranties payable). The party having the liability is referred to as the debtor. There are various types of liabilities. An actual liability actually exists and has a stated amount (e.g., bonds payable). An ESTIMATED LIABILITY also actually exists, but the amount has to be predicted (e.g., estimated tax liability). These liabilities are booked and are shown in the balance sheet as credit balances under current or noncurrent liabilities, depending upon whether they will be paid in a period of more or less than one year. A CONTINGENT LIABILITY is one that may or may not become due (e.g., notes receivable discounted; a pending lawsuit). A contingent liability is usually footnoted in the financial statement. 10. TURNOVER frequency with which an item (i.e., fixed asset, inventory, accounts receivable, personnel) is replaced during an accounting period. Assume credit sales of $360,000 and average receivables of $60,000. The number of times receivables turned over for the period is 6 ($360,000/$60,000). In Great Britain, turnover means sales. 11. OVERDRAFT situation where a borrower draws money against a previously established line of credit. The basic cost to the borrower is the interest rate levied on the daily overdraft balance. The borrower typically pays interest only on funds used, since there is no compensating balance requirement,

and only for the period in days for which the funds are taken. For this reason, the effective interest cost of an overdraft "loan" is the nominal or stated interest rate paid on the overdraft balance. 12. BILL written document that transfers goods, title, or other interests from a seller to a buyer and specifies the terms and conditions of the transaction. 13. INVOICE bill prepared by a seller of goods or services and submitted to the buyer. The invoice describes such items as date, customer, vendor, quantities, prices, freight, and credit terms of a transaction. 14. RECEIPTS 1. cash or other assets received. 2. evidence substantiating the occurrence of an event. Accounting documents showing receipt include a receiving report of merchandise or a bill for an expenditure incurred (e.g., hotel bill, restaurant check). 15. VOUCHER form used in an internal control system to contain and verify all information about a bill to be processed or paid. Usually the original bill is then attached to the voucher. The voucher and bill are filed together until time of payment. 16. EQUITY assets minus liabilities, also called NET WORTH. In a sole proprietor-ship, it is the owner's equity. In a corporation, it is STOCKHOLDERS' EQUITY. any right to assets; property right; a liability. An equity holder may be a creditor, stockholder, or proprietor. 17. DIVIDEND distribution of earnings paid to stockholders based on the number of shares owned. The most typical type of dividend is a CASH DIVIDEND. Dividends may be issued in other forms such as stock and property. Dividend reinvestment plans also exist where stockholders can reinvest the proceeds of the dividend to buy more shares of stock. See also LIQUIDATING DIVIDEND; STOCK DIVIDEND. 18. DEBENTURE long-term debt instrument that is not secured by a mortgage or other lien on specific property. Because it is unsecured debt, it is issued usually by large, financially strong companies with

excellent BOND RATINGS. There are two kinds of debentures: a senior issue and a subordinated (junior) issue, which has a subordinate lien. The order of a prior claim is set forth in the bond INDENTURE. Typically, in the event of liquidation, subordinated debentures come after senior debt. 19. SALES RETURN merchandise given back to the seller because of defects. Sales returns reduce the seller's gross sales. Sales return is a contra revenue account. 20. DRAWING ACCOUNT provision allowing a personal withdrawal of cash or other assets from a proprietorship by the owner. It is in effect a disinvestment in the firm and reduces owner's equity. The entry is to debit the owner's capital and credit cash. The drawing account of a proprietor or partner is equivalent to the dividend account used by a corporation. 21. COMMISSION It is an honorary sum (amount) given to a person for the service/favour rendered to the firm. 22. PURCHASE RETURNS It is goods returned to the vender by the firm from whom it has purchased it. This happens when the goods are defective, sub standard quality.