financial accounting glossary

7/25/2019 Financial Accounting Glossary

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PGPM2016_MAFA COURSE_GLOSSARY

Source(http://www.learnaccountingforfree.com/accounting-glossary)

( Please note that this glossary has been downloaded from the above site and covers much more

than your MAFA course. However ,since this is for the comprehensive exam, the reading of thiswill definitely help you as it covers a few terms from Management accounting and Financial

Mangement too.)

Accounting Glossary

Account

A written or electronic record maintained for each of a company's assets, liabilities andcategories of owner's equity, including revenues,expensesanddividends.Accounts are used to

summarize the affects of a company'stransactionson each of its assets, liabilities and categoriesof owners' equity. A company's transactions are originally recorded throughjournal entriesandthenposted to the specific accounts affected. For example, a transaction affecting a company'scash will be recorded and then posted to the cash account to reflect the increase or decrease incash and update its running balance. All of a company's accounts taken as a whole constitute afile referred to as the company'sgeneral ledger.

See alsoNominal accountsandReal accounts

Prior to introduction of computerized accounting systems, manually-maintained accountsappeared in a "T" format with increasing or decreasing entries recorded on the left-hand side

(always referred to as "debit entries") or right-hand side (always referred to as "credit entries") ofthe T-account. Under the rules ofdouble-entry accounting,debit entries always record increasesin asset, expense and dividend accounts while credit entries always record increases in liability,owners' equity and revenue accounts. Double-entry accounting also requires that equal debit andcredit totals be recorded with each and every company transaction.

See alsoTrial Balance

The term "account" is also used the context of business transactions involving extensions ofcredit.

See alsoCredit sales,Purchases on accountandCredit policies

Accounting

The means whereby acompany'sfinancialtransactionsare identified, recorded, summarized andreported for the benefit of those who have an interest in thebusiness.Users of business financialinformation might include owners, managers, creditors, government regulatory bodies and
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others. Accounting is sometimes referred to as the language of business because its ultimatepurpose is to communicate business information.

See alsoFinancial accounting,Managerial accounting,Accounting cycleandAccounting system

Accounting cycle

Theperiodicprocess of identifying, recording and summarizing acompany'stransactionsfor thepurpose of producingfinancial statementsin accordance withGAAP.The traditional accountingcycle typically requires a company to (1) identify its transactions, (2) record transactions in ajournal,(3)postjournal entriestoaccountsin thegeneral ledger,(4) prepare a trial balance, (5)make and post adjusting entries, (6) prepare financial statements, and (7) make and post closingentries before the start of the next accounting period. Today, most accounting systems arecomputerized, and the steps of the accounting cycle are handled electronically. Manualaccounting systems, which rely on paper and pencil, are pretty much relics of the past.

See alsoAccounting system

Accounting period

A period of time, usually a month, quarter or year, in whichfinancial statementsare prepared toreflect a company's cash flows and results of operations for the period as well as its financialpositionat the end of that period.

See alsoCalendar yearandFiscal year

Accounting system

The manual or computerized process whereby acompany'sfinancialtransactionsare identified,recorded, summarized and reported to provide information useful to those who have an interestin thebusiness.The accounting systems used by most companies today follow the steps in thetraditionalaccounting cyclethrough computer systems which automate the process.

See alsoFinancial accountingandManagerial accounting

Accounts Payable

Obligations resulting from the purchase ofinventoryorsuppliesin which thecostis not paid at

the time of purchase but is expected to be paid in the near future, usually within 30 days. In somecases, the term accounts payable is used to describe almost any obligation arising from acompany's operating costs that are payable in the short-term.

See alsoPurchases on account

Accounts Payable Turnover
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A ratio used in financial statement analysis that measures managements short -term liquidity inpaying their suppliers for inventory. It is calculated by inventory purchases divided by theaverage accounts payable balance for the year. Remember the amount for inventory purchasescannot be found on the financial statements but rather must be solved for through a T-accountanalysis of the inventory account. Ending inventory balance beginning inventory balance +

Cost of Goods Sold Balance = Inventory Purchases for the period.

Also review Days Purchases in Accounts Payable

Accounts receivable

Amounts due fromcustomersas a result ofcredit saleswhere the payment for goods or servicessold is not received at the time of sale, but is to be collected in the near future, usually within 30days.

See also Accounts receivable turnover, Days sales in accounts receivable, Uncollectible

accounts receivable,Allowance method of accounting for uncollectible accounts receivable,Current assets,Book value of an asset,Net realizable value of accounts receivable and Sales

returns and allowances

Accounts receivable turnover

A ratio often used in financial statement analysis to measure a company'sperformance in themanagement of its customer credit policies and collections of accounts receivable. Accountsreceivable turnover refers specifically to the average number of times during the year that theaverage balance of accounts receivable is created through credit sales and then collected. Theratio is determined by dividingnet credit sales revenuesfor the year by the average outstanding

balance of accounts receivable during the year. The average balance of accounts receivable istypically calculated by adding the beginning and ending balances and dividing the sum by two.The management of acompany'scredit policies and collections of accounts receivable can have asignificant impact on a company'sprofits.Lax credit policies can improvesalesvolume,but maycause an increase in thecostsassociated with collecting accounts receivable and the ultimate costof uncollectible accounts. Tight credit policies, on the other hand, may negatively affect thevolume of a company's sales and resulting profits. The calculation and comparison of acompany's accounts receivable turnover with that of other comparable companies in the sameindustry can be helpful in evaluating a company's quality of management.

See alsoDays sales in accounts receivable

Accrual basis accounting

The method of accounting that must be used to account for the timing ofrevenuesandexpensesunderGAAP.Accrual basis accounting is comprised of therevenue recognition principleand thematching principle. The revenue recognition principle governs the timing of revenues andprovides for revenues to be recorded in the period in which those revenues are earned, notnecessarily when cash is collected from customers.The earning of revenues takes place when
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goods have been delivered or services have been substantially completed. The matchingprinciplegoverns the timing of expenses and provides for thecostsofoperatingabusinessto berecorded as expenses in the period in which those costs provide benefits to the company, notnecessarily when those costs are actually paid in cash. Cash basis accounting, as opposed toaccrual basis accounting, calls for the recording of revenues and expenses only at the time of

receipt or payment of cash and is not allowed under GAAP. However, cash basis accounting maybe used in certain limited circumstances for federal and state income tax purposes in the UnitedStates.

See also Adjusting entries, Accrued expenses, Prepaid expenses, Accrued revenues and

Unearned revenues

Accrued expenses

Costs that benefit a company's current operations and are recorded as expenses of the periodeven though no actual expenditure has yet been made. Accrued expenses are payable in the

future and are recorded through adjusting entries, with adebitto anexpenseaccountand acreditto a liability(payable) account. The recording of employee salaries for the month of Decemberas a December expense, even though the salaries will not be paid until January, is an example ofan accrued expense.

See alsoMatching principle

Accrued liabilities

A term used to describe payables recorded in conjunction with the recording of accruedexpenses.

Accrued revenues

Revenuesearned and recorded in the currentperiodeven though no cash or other proceeds havebeen received fromcustomersfor the goods or services provided. Accrued revenues are recordedthrough adjusting entrieswith adebit to anasset(receivable)accountand a creditto arevenueaccount. The recording of sales made in December as December revenues, even though the salesprice will not be collected from the customer until January, is an example of an accrued revenue.

See alsoRevenue recognition principle

Accumulated amortization

Acontra-asset accountused to accumulate the total amount of amortizedcostsof acompany'sintangible asset(s) recorded over its useful life. Thisaccountis reflected on a company'sbalancesheetas an offset against the associatedcapitalized costof the intangible asset to report itsbookvalue.

Accumulated depletion
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ountingforfree.com/accounting-glossary/#Receivableshttp://www.learnaccountingforfree.com/accounting-glossary/#Receivableshttp://www.learnaccountingforfree.com/accounting-glossary/#Receivableshttp://www.learnaccountingforfree.com/accounting-glossary/#Accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Credit%20entrieshttp://www.learnaccountingforfree.com/accounting-glossary/#Credit%20entrieshttp://www.learnaccountingforfree.com/accounting-glossary/#Revenueshttp://www.learnaccountingforfree.com/accounting-glossary/#Revenueshttp://www.learnaccountingforfree.com/accounting-glossary/#Revenueshttp://www.learnaccountingforfree.com/accounting-glossary/#Revenue%20recognition%20principlehttp://www.learnaccountingforfree.com/accounting-glossary/#Revenue%20recognition%20principlehttp://www.learnaccountingforfree.com/accounting-glossary/#Revenue%20recognition%20principlehttp://www.learnaccountingforfree.com/accounting-glossary/#Contra-asset%20accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Contra-asset%20accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Contra-asset%20accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Amortizationhttp://www.learnaccountingforfree.com/accounting-glossary/#Amortizationhttp://www.learnaccountingforfree.com/accounting-glossary/#Amortizationhttp://www.learnaccountingforfree.com/accounting-glossary/#Costhttp://www.learnaccountingforfree.com/accounting-glossary/#Costhttp://www.learnaccountingforfree.com/accounting-glossary/#Companyhttp://www.learnaccountingforfree.com/accounting-glossary/#Companyhttp://www.learnaccountingforfree.com/accounting-glossary/#Companyhttp://www.learnaccountingforfree.com/accounting-glossary/#Intangible%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Intangible%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Balance%20sheethttp://www.learnaccountingforfree.com/accounting-glossary/#Balance%20sheethttp://www.learnaccountingforfree.com/accounting-glossary/#Balance%20sheethttp://www.learnaccountingforfree.com/accounting-glossary/#Balance%20sheethttp://www.learnaccountingforfree.com/accounting-glossary/#Capitalized%20costhttp://www.learnaccountingforfree.com/accounting-glossary/#Capitalized%20costhttp://www.learnaccountingforfree.com/accounting-glossary/#Capitalized%20costhttp://www.learnaccountingforfree.com/accounting-glossary/#Book%20value%20of%20an%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Book%20value%20of%20an%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Book%20value%20of%20an%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Book%20value%20of%20an%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Book%20value%20of%20an%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Book%20value%20of%20an%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Capitalized%20costhttp://www.learnaccountingforfree.com/accounting-glossary/#Balance%20sheethttp://www.learnaccountingforfree.com/accounting-glossary/#Balance%20sheethttp://www.learnaccountingforfree.com/accounting-glossary/#Accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Intangible%20assethttp://www.learnaccountingforfree.com/accounting-glossary/#Companyhttp://www.learnaccountingforfree.com/accounting-glossary/#Costhttp://www.learnaccountingforfree.com/accounting-glossary/#Amortizationhttp://www.learnaccountingforfree.com/accounting-glossary/#Contra-asset%20accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Revenue%20recognition%20principlehttp://www.learnaccountingforfree.com/accounting-glossary/#Revenueshttp://www.learnaccountingforfree.com/accounting-glossary/#Credit%20entrieshttp://www.learnaccountingforfree.com/accounting-glossary/#Accounthttp://www.learnaccountingforfree.com/accounting-glossary/#Receivableshttp://www.learnaccountingforfree.com/accounting-glossary/#Assetshttp://www.learnaccountingforfree.com/accounting-glossary/#Debit%20entrieshttp://www.learnaccountingforfree.com/accounting-glossary/#Adjusting%20entrieshttp://www.learnaccountingforfree.com/accounting-glossary/#Customerhttp://www.learnaccountingforfree.com/accounting-glossary/#Accounting%20periodhttp://www.learnaccountingforfree.com/accounting-glossary/#Revenueshttp://www.learnaccountingforfree.com/accounting-glossary/#Accrued%20expenseshttp://www.learnaccountingforfree.com/accounting-glossary/#Accrued%20expenseshttp://www.learnaccountingforfree.com/accounting-glossary/#Payableshttp://www.learnaccountingforfree.com/accounting-glossary/#Matching%20principlehttp://www.learnaccountingforfree.com/accou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A contra-asset account used to accumulate the total amount of depleted costs of a company'snatural resource(s) recorded over itsuseful life.Thisaccountis reflected on a company'sbalancesheetas an offset against the associatedcapitalized costof the natural resource to report itsbookvalue.

Accumulated depreciation

Acontra-asset accountused to accumulate the total amount ofdepreciatedcostsof acompany'sproperty, plant and/or equipment recorded over its useful life. This account is reflected on acompany'sbalance sheetas an offset against the associatedcapitalized costof the property, plantand/or equipment to report thebook value of the asset.

Acid-test ratio

Sometimes referred to as the "quick ratio." The acid-test ratio is used in financial statementanalysisas a more stringent measure of acompany'sliquiditythan thecurrent ratio.The ratio is

calculated by adding amounts of selectedcurrent assetswhich are most liquid, and dividing thattotal by the amount of totalcurrent liabilities.There is no standardization in the assets to be usedin the numerator for this ratio.Financial analystsmay select the assets they wish based on howstringent they wish this liquidity measure to be. In most cases, cash and investments inmarketablesecurities(stocksorbondsof other companies) andaccounts receivableare includedin the selected current assets.

Activity-based costing

A method of allocating costs to products and services. The costs are separated into differentoverhead cost activities (unit level,batch level,product line and facility support) and then

allocated to the products and services by the correspondingoverhead cost driver.Multiple costdrivers are used. This method provides additional more accurate data to help management makedecisions; however, this system is typically much more expensive than a traditionalproductcosting system.

Adjusting entries

Journal entries typically made at the end of an accounting period in order to comply with therequirements of accrual basis accounting in the proper timing of revenues and expenses.Adjusting entries might also refer to any journal entriesmade to modify or correct an accountbalance. Most adjusting entries involve accrued expenses, accrued revenues,prepaid expenses

andunearned revenues.

See alsoAccounting cycle

Administrative costs

Any cost incurred in managing the overall operations of a business. These costs exclude acompany'sproduct and selling costs. For example, the salary of a company's CEO is an
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administrative cost while the salaries of the V.P. of Manufacturing and the V.P. of Sales andMarketing would be classified as product and selling costs, respectively. Administrative coststypically include the costs of a company's accounting, information systems and personneldepartments including any costs of salaries, wages, supplies, depreciation of equipment,allocations of utilities, rent and other costs of operating those departments.

See alsoPeriod costs,Selling and administrative costsandAdministrative expenses

Administrative expenses

Administrative coststhat benefit currentperiodoperationsare accounted for asexpensesof theperiod. Administrative expenses are included as part of "operating expenses" in a multi-stepformatted income statement.

See alsoMatching principleandSelling and administrative expenses

After-tax Cash Flow

The net cash flow resulting from a transaction after all tax liabilities have been paid. It iscalculated by multiplying the before-tax cash flow by 1 minus the tax rate.

Aging of accounts receivable

A listing ofaccounts receivablebased on how long the receivables have been outstanding, or, inother words, the length of time since the date of the sale giving rise to the receivable. An agingof accounts receivable is usually performed bymanagementat the end of anaccounting periodtoassist in estimatinguncollectible accounts receivableunder theallowance method of accounting

for uncollectibles.

Allowance for uncollectible accounts receivable

Sometimes referred to as the "allowance for bad debts," "allowance for doubtful accounts" or"reserve for uncollectible accounts receivable." The allowance for uncollectible accountsreceivable is acontra-asset accountused in theallowance method of accounting for uncollectibleaccounts receivable. It is used to reflect management's estimate of the balance of accountsreceivable that will prove to be uncollectible. The allowance for uncollectible accountsreceivable appears on thebalance sheetas an offset against the total of accounts receivable andthe resulting net amount is referred to as thenet realizable value of accounts receivable.

Allowance method of accounting for uncollectible accounts receivable

The method required under GAAP to account for uncollectible accounts receivable. Thisapproach relies on an estimation of acompany'suncollectible accounts receivable at the end ofan accounting period to recordbad debt expense.Under the allowance method, a contra-assetaccount referred to as the "allowance for uncollectible accounts receivable" is maintained andadjustedat the end of eachperiod to produce a balance equal to the total amount of estimated
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uncollectible accounts. As a result,accounts receivableis reported on a company'sbalance sheetat itsnet realizableorbook valuein an amount equal to the amount of accounts receivable forwhich future collection is anticipated.

See alsoDirect write-off method of accounting for uncollectible accounts receivable

Amortization

In the case of intangible assets, amortization refers to the allocation of an intangible asset'scapitalized cost to expenseover its estimateduseful lifeusing the straight-line method. In thecase of a mortgage note,amortization refers to any periodic partial payment ofprincipalduringthetermof the note.

See alsoAccumulated amortization,Matching principleandFully amortizing mortgage

Analyst

Individuals who are independent of the Company who follow, analyze and report on companies

performance results and provide investors with investment advice

Annual report

A public report prepared by a company's management at the end of each year describing thecompany'sresults of operationsandfinancial positionthroughauditedgeneral purpose financialstatements.In addition, the report usually includes a section where management gives their takeon the company's currentoperationsand prospects for the future.

See alsoAuditor's reportandManagement's report on financial information

Annuity

A continuing payment that has a fixed annual amount. Annuity payments are used in Time Valueof Moneycalculations when the cash flow remains the same amount each ear.

Appreciation

The amount of any asset's increased fair market value over time. Asset appreciation is notrecorded underGAAPuntil an actual sale of the asset takes place, at which time again on saleof

the asset would be recorded. In many cases, assets actually decrease in value subsequent to theiracquisition. The amount of any such decrease is referred to as "depreciation," and is usuallycalculated on a systematic basis and recorded as anexpenseover the asset'suseful life.The factthat gains due to appreciation are not recorded and costs due to depreciation are recorded underGAAP is an example ofconservatismin accounting.

Arms-length transaction
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financial accounting glossary

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