ACC106 : ACCOUNTING TERMS

ACCOUNTING TERMS

1. ACCOUNTS
 A record in an accounting system to show the movements in
individual asset, liability, owner’s equity, revenue and expense
items or an account is a place where all information referring to a
particular asset or liability, or equity is entered. For example, there
will be an account where all information concerning office
machinery will be entered. Similarly there will be an account for
motor car, where all the information concerned with the motor car
will be shown.

2. ACCOUNTANT
 A person whose job is to keep or check account/ financia/
statements

3. ACCOUNTING CYCLE
 It is a procedure to process financial transactions during a period.

4. ACCOUNTING EQUATION
 The equation of the firm’s assets with the claims on the assets. If
the resources in the business are supplied by the owner, the
accounting equation will be as follows:

Assets = Capital (Owner’s equity)

And if people other than the owner have supplied some of the
assets (liabilities), the equation will now change to:

Assets = Capital + Liabilities

5. ACCRUALS
 A concept which states that revenue should be recognised when
earned and expense recognised when incurred.

6. ACCUMULATED DEPRECIATION
 Known as provision for depreciation. The total of depreciation
expense charged against revenues since the asset was acquired.
It is shown in the balance sheet as a deduction from the asset to
which it relates.

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7. AMORTIZATION
 An estimate of the benefits received from intangible assets for a
given period of time and it is used in relation to intangible asset
such as goodwill, copyrights, patent, leases, trade marks and
franchises.

8. ASSETS
 Economic resources that are of value to the business and are
measured in monetary terms. They provide either present or future
benefits to the business and they will be used to assist in the
earning of revenues to the business.

9. BAD DEBTS
 Debtor’s accounts that become uncollectable. They are losses to a
business and should be written off.

10. BALANCE SHEET

 Part of a financial statement. It represents the financial position of a
business on a given date, showing assets, liabilities and owner’s
equity. A balance sheet can be presented in a vertical or horizontal
form.

11. BANK STATEMENT

 A monthly report showing details that have taken place in the firm’s
(depositor’s) account such as the balance in the account brought
forward form the previous bank statement.

12. BOOKEEPING
 Mechanical aspects of accounting such as recording, classifying
and summarising transactions. It is a part of accounting.

13. CAPITAL
 The total of resources supplied to a business by its owner.

14. CAPITAL EXPENDITURE

 Expenditures on assets which provide benefits to the business for
more than one accounting period. Also include any subsequent
expenditures on the assets which will either increase the value or
the capacity of the assets.

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15. CARRIAGE INWARDS

 Also known as transportion inwards. The cost of transport of goods
into a business and it is shown as an expense in the trading
account.

16. CARRIAGE OUTWARDS

 Also known as transportation outwards. The cost of transport of
goods out from the business premise and it is shown as an
expense in the profit and loss account.

17. CASH
 It is a current asset comprises notes, coins, cheques and bank
account balance.

18. CASH BOOK

 Books of original entry for cash and bank receipts and payments.

19. CASH DISCOUNT

 An amount deducted from a debt if payment is made within the
discount period.

20. CASH FLOW STATEMENT

 One of the financial statements prepared and presented by
companies as part of the statutory accounts required by the
regultory authorities.

21. CONSERVATISM
 Known as prudence concept. An accounting concept requiring that
neither assets nor owner’s equity are overstated. Expected losses
are recorded when anticipated but expected gains (profits) are not
recorded until they are realized.

22. CONTRA
 A contra, for a cash book items in which is where both the debit and
credit entries are shown in the cash book.

23. CONTROL ACCOUNT

 Account that shows the total amount of all individual accounts
balance.

24. COPYRIGHT
 Exclusive rights to reproduce and sell, for example a book or a
product for some specific period of time.

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25. COST OF GOOD SOLD

 All cost related to getting goods into a condition and location for
sale from which no future benefits will be derived.

26. CREDIT
 It is an entry in a ledger that shows an increase in a liability,
revenue or proprietorship account or a decrease in an asset or
expense account. Also an allowance made to a purchaser to take
possession of goods or services and make payment at a later date.

27. CREDIT NOTE

 A document that evidences an allowance made for goods returned
or an adjustment to the original invoice.

28. CREDITORS
 A current liability which is the amount owed by a business to
another party as a result of the purchase of goods, services or
future benefits.

29. CURRENT ASSETS

 Assets that are either in the form of cash or those assets which are
expected to be converted into cash within a year.

30. CURRENT RATIO

 A ratio comparing current assets with current liabilities.

31. CURRENT ACCOUNT

 A cheque account that the business uses to make payments.

32. CURRENT LIABILITES

 Those liabilities that have to be paid within one year.

33. DEBIT
 An entry on a ledger that shows an increase in an asset or expense
account or a decrease in a liability, proprietorship or revenue
account. The entry is shown on the left hand side of the accounts in
double entry.

34. DEBTOR
 A current asset that refers to an amount owing to a business by
another party as a result of the sale of goods, services or assets on
credit.

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35. DEBENTURES
 Loan capitals with a fixed rate of interest payable by the company
to the debenture holders regardless of the performance of the
company.

36. DEBIT NOTE

 Document sent to a supplier showing an allowance to be given for
unsatisfactory goods.

37. DEPRECIABLE ASSET

 Long-term tangible asset, the economic benefits of which will expire
over their useful life.

38. DEPRECIATION
 The allocation of the cost of a fixed asset over its useful life to a
business and it is shown as an expense in each of the accounting
periods in which the asset is used.

39. DISCOUNT ALLOWED

 A cash discount given to customers by a business for early
payment.

40. DISCOUNT RECEIVED

 A reduction given to a firm or business by a supplier when the firm
or business pays its account before the time allowed elapses.

41. DISSOLUTION
 Occurs when a partnership firm ceases operation and its assets are
disposed off.

42. DIVIDENS
 Dividends are profits of the company that are distributed to the
shareholders as a return on their investment. Dividends are paid in
proportion to the nominal value of the shares unless the Artice of
Association restricts them to the amount paid up on the shares.

43. DOUBLE ENTRY

 System where each transaction is entered twice, once on a debit
side and once on credit side.

44. DOUBTFUL DEBT

 An estimate of the amount that may not be collected from
outstanding debtors.

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45. DRAWINGS
 Amount of assets (cash or goods or fixed assets) are taken out of
the business by the owner for personal use.

46. EXPENSES
 Costs incurred in earning revenue, from which no future benefits
beyond the accounting period are expected to be derived.

47. FINAL ACCOUNTS

 Used to mean collectively the Trading and Profit and Loss Account
and the Balance Sheet.

48. FIXED ASSETS

 Purchase assets that have a long life and are to be used in the
business.

49. FOLIO COLUMNS

 Columns used for entering reference numbers.

50. GENERAL LEDGER

 A ledger for all accounts other than those for customers and
suppliers.

51. GOODWILL
 An excess of the price paid for an asset over its fair value. This
excess value arises because of certain factors such as better
location or better quality management.

52. GROSS PROFIT

 Difference between net sales and cost of goods sold or gross profit
exists when total sales exceed cost of goods sold.

53. HISTORICAL COST

 An accounting concept where assets are shown at the price they
have been acquired.

54. HORIZONTAL BALANCE SHEET

 A side by side presentation of the Balance Sheet in which assets
are shown on one side while capital and liabilities on the other side.

55. IMPERSONAL ACCOUNT

 An account that is not titled with the name of any person (those of
debtors and creditors). Real and nominal accounts are impersonal
account.

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56. IMPORT DUTY

 Tax charged on goods imported. This is a revenue to the
government and at the same time it is to discourage imports and
encourage use of local goods. To the importers, it is an expense
and it will increase the cost of sales.

57. IMPREST SYSTEM

 A system used in the operation of a petty cash fund. An advance
that has been determined by the management that is enough to
meet small amount expenses for a specified period and will be
given to the petty cashier.

58. INTANGIBLE ASSET

 An asset that cannot be seen and touched. It gives the holder an
exclusive right of use for a specified period of time.

59. INTEREST
 The growth in the principle amount borrowed which represents the
amount charged for the use of money for a given time period.

60. INVENTORY
 Known as stock. It is goods purchased and held for sale in its
regular course of business.

61. INVOICE
 A document issued by a selling business to a credit buyer showing
the full details of the goods sold and the prices of the goods.

62. LIABILITY
 Total of funds owed for assets supplied to a business or expenses
incurred not yet paid.

63. LIMITED PARTNER

 A partner whose liability is limited to the capital contributed in the
partnership business. A limited partner cannot take part in the
partnership management. Not all partners can choose to be a
limited partner; there must be at least one unlimited partner.

64. LIQUID ASSET

 Known as “quick asset”. It is a current asset. Current asset can be
in the form of cash or that which is easily convertible into monetary
form.

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65. LIQUIDITY
 The ability of a business to settle its short term liability using current
assets. The liquidity of a business can be measured using current
ratio and acid test ratio.

66. LONG TERM LIABILITY

 Obligations expected to be paid after one year.

67. NARRATIVE
 A brief explanation in the general journal of what the business
transaction is all about. The explanation is made after recording the
accounts to be debited and credited in the journal.

68. NET BOOK VALUE

 The value of fixed assets recorded in the balance sheet is the
excess of cost over the accumulated depreciation. The net book
value cannot be less than zero.

69. NET PROFIT

 Revenue in a period is more than the expenses for the same
period. Net profit increases the owner’s equity.

70. NET REALISABLE VALUE

 Estimated proceeds from sale of an asset after deducting all
expenses incurred on and before completion of sale.

71. NOMINAL ACCOUNT

 Known as temporary account. It is an account which is opened at
the beginning of the year and later closed to Profit and Loss
Account at the end of the year for profit calculation. Includes all
revenue and expenses accounts.

72. NOTES PAYABLE

 A written documentation to a lender as an obligation to make timely
payment. This is shown as a liability in the lender’s balance sheet
and recorded at its face value.

73. NOTES RECEIVABLE

 A written promise received from the maker of the promissory note
to make timely payment. This is shown as an asset in the balance
sheet.

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74. OFFICIAL RECEIPT

 This business document is prepared by seller to acknowledge the
amount received from the buyer or debtor. It states the amount
received, types of payment either in cash or by cheque and the
reasons for the payment.

75. OPENING ENTRY

 This entry is prepared at the beginning of a new accounting period
to record asset, liabilities or owner’s equity in the books of original
entry of a new business.

76. PARTNERSHIP
 It is a business formed by at least two persons or a maximum of 20
persons. For professional partnership like accountants and
architect the maximum number of partners is 50. The partners may
share capitals, knowledge and skills to run business effectively and
also share profit or loss of the business based on partnership
agreement.

77. PETTY CASH VOUCHER

 This voucher is a supporting document which will be filled in by the
person who wants to make a claim from the petty cashier for the
various expenses he or she has made.

78. POSTING
 Process of transfering the debit total and credit total from the
journal into their respective accounts in the ledger to show the
effect of transactions on those accounts. The process can be done
either daily, weekly or monthly depending on the number of
transactions occurred in the business.

79. PURCHASES
 Buying of goods for the purpose of selling them again or cost of raw
materials purchased to be used in production of products. There
are 2 types of purchases that are cash purchases and credit
purchases.

80. PURCHASE ORDER

 It is document prepared by a buyer to order goods or materials from
the suppliers.

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81. PURCHASE RETURN

 Known as return outward refers to the goods previously purchased
by the business and returned to the supplier due to damage, wrong
size, etc. It is contra account to purchases where it will be deducted
from the gross purchase to get net purchase in the trading account.

82. QUICK ASSET

 Known as “quick asset”. It is a current asset. Current asset can be
in the form of cash or that which is easily convertible into monetary
form.

83. RATIO ANALYSIS

 This analysis is made to analyse the performance of the business.
It is used to measure the strength and weakness and the
profitability of the business in relation to past performance or to the
industry ratio averages.

84. REAL ACCOUNT

 This account records the assets, liabilities and equities of the
business such as machinery and building, and creditors. The
balance of this account is shown in the balance sheet at the end of
the accounting period.

85. REDEMPTION
 It is situation where the issuing company buys back the shares from
the shareholders at a specified date in the future.

86. RETURN OUTWARD

 The goods previously purchased by the business and returned to
the supplier due to damage, wrong size, etc. It is contra account to
purchases where it will be deducted from the gross purchase to get
net purchase in the trading account.

87. REVENUES
 It is a monetary value of goods and services that have been
rendered or supplied to customer.

88. SALES
 A sale is a revenue and considered to be earned when the goods or
services are transferred from the business to the customers. There
are 2 types of sales; cash sales and credit sales.

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89. SALES INVOICE

 It is a supporting business document prepared by the seller,
showing the amount to be paid by the customer to the supplier. This
document will be used as a basis to record sales in the business
book of accounts.

90. SALVAGE VALUE

 It is an estimate of the fixed asset’s value at the end of its useful
life. The value may be based on the asset’s worth as scrap or on its
expected trade in value.

91. SCRAP VALUE

 It is an estimate of the fixed asset’s value at the end of its useful
life. The value may be based on the asset’s worth as scrap or on its
expected trade in value.

92. SOLE PROPRIETOR

 This is a business, which is owned by an individual who usually
runs the business. All business profit belongs to the owner and if
there are losses, it will be borne by the owner alone. In this
business, the owner will also have unlimited liability.

93. STANDING ORDER

 These are instructions made by the business to the bank to pay
regular amounts of money to a particular person or businesses at a
stated date.

94. SUSPENSE ACCOUNT

 It is a temporary account, which is used to record the difference
between total debits and credits in the trial balance due to errors
not yet corrected. When all errors are discovered and corrected, the
suspense account will be closed.

95. TRADE DISCOUNT

 It is given by the supplier to the customer for purchasing in large
quantity. It will be deducted from the total amount by the supplier
when preparing the invoice. Therefore, there will be no account for
this discount.

96. TRADING ACCOUNT

 This account shows the trading activities of the business that are
buying and selling goods. In this account, the gross profit or gross
loss will be calculated.

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97. TRADING AND PROFIT AND LOSS ACCOUNT

 Also known Income Statement. It is a statement showing revenue
and expenses to compute profit over a specified period. A service
firm calculates profit by drawing up a Profit and Loss Account
whereas a trading firm and a manufacturing firm also prepare a
Trading Account and a Manufacturing Account respectively in
addition to the Profit and Loss Account.

98. TRANSACTION
 It is an economic event that affects the financial position on the
business and requires recording. It refers to event that has
happened and not the event that is going to happen in the future. It
usually involves two or more parties. Every transaction will affect at
least two items in the accounting equation.

100. UNLIMITED LIABILITY

 It is a characteristic of both proprietorship and partnerships where
each partner is responsible for all the debts of a firm. Personal
assets can be required to pay creditors’ claims.

101. UNPRESENTED CHEQUES OR LODGEMENT

 It is a cheque written by the business but not yet presented by the
payee at the bank for payment.

102. USEFUL LIFE

 The period of time in which an asset will be useful in an economic
sense.

103. VERTICAL BALANCE SHEET

 It is a presentation of balance sheet in a vertical form.

104. WORKING CAPITAL

 It is the amount by which current assets exceed current liabilities.

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