ACCOUNTING DICTIONARY

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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Account A record in a ledger for accumulating chronological additions, deductions and balances of individual assets, liabilities, owner's equity, revenues and expenses. For example a stock (i.e. inventory) account is used to keep track of the day-to-day (chronological) receipt and shipment of goods, and the balance of stock on hand.

Account balance The amount remaining in an account after all additions and deductions have been made up to the current date.

Accounting equation Assets = liabilities + owner's equity. An expression of the relationship between the major categories of accounts on the organisation's balance sheet. A mathematical expression of the statement "all assets are supplied by debt or by the owners". This also reflects the "double entry" nature of accounting. When you deposit cash in the bank from the owner's investment, to keep the balance sheet "balance", you have to increase an Asset (cash) and increase Proprietorship (owner's equity). For more visit DEAD CLIP and see examples.

Accounting information systems Information systems that record and report business transactions, the flow of funds through an organisations, and produce financial statements. This provides information for the planning and control of business operations, as well as for legal and historical record keeping.

Accounts payable Another term for creditors.

Accounts receivable Another term for debtors.

Amortization The process of spreading the cost of an intangible asset over the expected useful life of the asset. For example: a company pays $100,000 for a patent, they amortize the cost over the 16 year useful life of the patent. Same as depreciation, which is used for tangible assets.

Asset A resource controlled by an organisation, and in which they have ownership rights. Examples include: cash, stock, debtors, vehicles, buildings and patents. Funds for the acquisition of assets are supplied by either the owners (owner's equity) or by creditors (liabilities). See also accounting equation.

Audit (1) To examine with intent to verify that claims being made are correct. Examples include: financial audit, manufacturing audit and energy audit. (2) The process of verifying the correctness of a set of accounts using: detailed checks on transactions and totals, broad tests on account values as well as testing internal control.

Audit trail Printed documents and computer records that are used to trace changes in account balances from original input documents through account transformation to final information output. The audit trail provides the means by which an audit may be conducted.

Balance Sheet A financial statement produced by an organisation showing the assets balanced by the liabilities and owner's equity of the organisation. The balance sheet is normally presented with the previous period's (month or year) numbers side-by-side with the current period. Sometimes called a statement of financial position. See also income statement and accounting equation..

Budget A summary of projected levels of costs and revenues for an organisation. Used as a control mechanism to highlight areas of the organisation that may be getting out of control.

Business function Processes or functions performed while carrying out the affairs of a business. Examples include buying and selling, renting, receiving and spending cash, hiring and firing employees.

Cash Receipt The process of receiving cash and cheques in payment for goods, services or prior credit purchases. Also refers to the physical document given to a customer to acknowledge the cash received.

Cash Receipt Journal A special journal used to record only cash receipts. The cash receipts journal is usually in multi column form with columns for: date, reference, account number, customer name, multiple columns for major revenue sources, debtors and amount of cash received.

Channels of distribution The means by which a product gets from the original manufacturer to the final user of a product or service. This typically may include: manufacturer / producer to wholesaler to retailer to consumer. There are however many innovative ways of channelling the products to the consumer including direct selling and mail order which may cut out some of the intermediates between the producer and the consumer, thereby reducing the price to the consumer or increasing the profits of the producer, or both.

Chief executive officer (CEO) The person in overall charge of an organisation. Sometimes called the President or General Manager.

Classify The process of determining which accounts to debit and which to credit in order to properly record an accounting transaction.

Company A form of organisation, which is a group of individuals acting as a single "legal person" according to the statutes of the country in which formed, and therefore able to take ownership to goods, form contracts and be held responsible for actions. A typical and unique feature of a company is the characteristic called limited liability. Sometimes called a corporation. See also partnership and proprietorship.

Comptroller See controller.

Controller Another term for chief accountant, also called the comptroller.

Corporate culture The environmental aspects of an organisation including its underlying ethics and social interaction.

Credit control The process of controlling credit sales to credit worthy customers, thus limiting the investment in debtors and the losses due to bad debts. See also credit rating and credit limit.

Credit limit The upper limit beyond which a customer will not be allowed to purchase on credit. See also credit control and credit rating.

Credit Rating A credit worthiness indicator based on the riskiness of a customer. The rating is usually based on such criteria as: level of current debt, ability to repay, borrowing history and repayment experience. See also credit limit and credit control.

Creditors Vendors from whom an organisation purchases goods or services on credit and have a current amount owing. Also called accounts payable.

Customer An organisation or individual who buys goods or services from a vendor.

Data Raw, unprocessed facts. See information for contrast.

Debtors Customers who purchase goods or services from an organisation on credit and have an outstanding balance. An item listed among the organisations assets. Also called accounts receivable.

Demand As applied to economics, the requirement for a particular product or service in the economy. When the demand exceeds the supply, prices of the given product will tend to rise due to the relative scarcity of the product, encouraging further production and discouraging further purchases until a point of equilibrium (balance) is established. See also supply.

Depreciation The process of spreading the cost of a tangible asset over the expected useful life of the asset. For example: an organisation buys a new computer and depreciates it over its five year expected useful life. See also amortisation.

Direct material See material.

Economies of scale The value gained by an increase in production quantity or organisational size. This value may come as a result of increase in bargaining power, less wastage of time and materials, more ready access to capital markets, improved technology, or improved management expertise.

Effective Producing the right quantity and quality of outputs for a given situation. Doing the right thing at the right time. See also efficient.

Efficient Carrying out tasks and using resources in the most economical manner for the given level of quality required. Doing things right. See also effective.

Ethics Principles of right conduct, especially as it applies to a given profession. Examples include: it is un-ethical for a public auditor to be a major shareholder in a company that is also their audit client; it is unethical for a computer programmer to write a virus into a client program, even for the "fun" of it.

Expense The cost of resources consumed in the generation of revenue. Examples include: employee salaries, cost of goods sold, rent, advertising, travel expenses and depreciation of computers.

General Journal A chronological record of all transactions that are not recorded in a special journal such as the cash receipts or cash disbursements journal. The general journal is usually in multi column form with columns for: date, account number, reference, debit, and credit. the debit and credit columns are to allow balancing of the journal as a control on accuracy.

General Ledger A systematic collection incorporating all of the general accounts of an organisation. If kept in book form, each account would have its own page. The system of organisation often follows the pattern: (1) Assets, (2) Liabilities, (3) Owner's Equity, (4) Revenues, and (5) Expenses. Contrast with subsidiary ledger.

Income Statement A financial statement produced by an organisation showing the revenues and expenses of the organisation and net income. The income statement is normally presented with the previous period's (month or year) numbers side-by-side with the current period. Sometimes called a profit and loss statement (P & L). See also balance sheet.

Information The meaning and value content of data when it has been processed. See also information economics.

Inventory See stock.

Invoice See sales invoice.

Journal A chronological record of events or transactions. See also general journal.

Labour The worker's input (and their cost) into the manufacture of a product, often separated into direct labour (that which goes directly into the product such as time required to solder an integrated circuit to a motherboard) and indirect labour (that which is used in maintaining the manufacturing environment such as equipment maintenance). Indirect labour is usually part of the overhead component of cost. The term labour when used without the direct or indirect qualifier usually refers to direct labour.

Ledger A systematic collection of individual accounts. See also General Ledger.

Leverage The process of using borrowed funds to generate income at a rate of return that is higher that the cost of the borrowed funds. For example an organisation may borrow funds at 16%, investing the funds in new production equipment that is expected to generate a rate of return of 25%. See also strategic leverage.

Liability A debt owed by an organisation. Examples include: Creditors, hire purchase, mortgage and overdraft.

Limited liability A typical feature of a company where the satisfaction of obligations is limited to the resources of the company, and ordinarily cannot be extended to the shareholders of the company. This feature protects the private resources of the individual shareholders.

Mail order The marketing system in which a producer, wholesaler or retailer allows the consumer to order products (usually from a catalogue) by mail and delivers the products by return mail.

Management (1) The process of managing an organisation especially performing such major tasks as planning, organising and controlling. (2) Those workers in an organisation who make decisions and oversee the work of others for the fulfilment of those decisions.

Market Share The percentage of the total market sales that are made by one company. For example: a particular company may have a 10% market share of all PCs sold internationally.

Marketing (1) The function in an organisation that is responsible for the promotion, selling and distribution of the goods and services produced. (2) The process of getting an organisation's goods or services into the hands of customers.

Materials Physical goods (and their cost) used in the manufacture of a product, often separated into DIRECT MATERIAL (that which goes directly into the product such as cream into ice cream, or steel into cars) and INDIRECT MATERIAL (that which is used in maintaining the manufacturing environment such as cleaning fluids or oil for lubrication of manufacturing equipment). Indirect materials are usually part of the overhead component of cost. The term materials when used without the direct or indirect qualifier usually refers to direct materials.

Middleman Individuals and organisations in the chain of distribution separating the manufacturer of a product from the final consumer. Examples include wholesalers and retailers. See also channels of distribution.

Mission statement A broad enduring statement of the purpose of the organisation, its reason for existence.

Niche marketing A method of marketing that targets specific market segments for a firm's goods and services, rather than attempting to enter the mass market. An example is Rolls Royce with their luxury/ultra high price niche.

Objective A sub-goal, the achievement of which is necessary for the accomplishment of a goal. Specific targets. Contrast with goal.

Organising A major function of management involving the systematic bringing together of organisational resources such as: people, facilities, equipment and stock to achieve the goals of the organisation. Sometimes called coordinating.

Overhead The costs associated with providing and maintaining the manufacturing or working environment. For example: renting the building, heating and lighting the work area, supervision costs and maintenance of the facilities. Includes indirect labour and indirect material.

Overtrading The process of growth within a business characterised by rapidly increasing sales that result in such demands on inventory and receivables that the organisation moves into financial difficulties. The fundamental cause of this condition is insufficient capital investment to sustain the high level of growth.

Owner's Equity The owner's investment in an organisation, representing the owner's interest in assets and control over the organisation. Contrast with asset and liability.

Packing Slip A document that is included by the vendor with goods when they are shipped to a customer. This is usually a copy of the shipping docket.

Partnership A form of organisation in which a group of individuals act as a single entity but are held individually liable for the acts of the partnership, and the acts of each partner acting as an agent for the partnership.

Planning (1) The process of establishing fundamental directions, and steps of actions to arrive at desired goals. (2) A major function of management.

Problem definition A process of the analysis phase of the SDLC which produces a concise definition of the problem under consideration including the current situation and the desired situation in the light of a given goal. The description of the difference between what you HAVE and what you WANT.

Purchase Order A document from a purchaser to a supplier (the terms vendor or seller are synonyms for supplier) ordering goods or services from that supplier. The purchase order usually includes order number, date and supplier details followed by multiple order lines containing: line item number, item number, description, quantity, price, line total, as well as order total.

Receiving Docket A form used to record details of goods received from a vendor. A copy of the form is kept on file and a second copy is sent to the payments department to verify the receipt of goods prior to paying the vendor.

Retailer A type of business that sells direct to end consumers from a shop. Examples include book shops, computer stores, clothing stores and food stores.

Return on investment (ROI) The concept that investments should not only be recouped or paid back but that they should gain a profit for the investor. ROI is most often measured in terms of rate of return measured as an interest rate. See also DCF, NPV and IRR.

Revenue The income earned by an organisation through the operation of its business. Examples include: sales of merchandise at retail, sale of manufactured goods to a retailer and services performed by an freelance programmer. Contrast with expense.

Sales invoice A document which records the sale of goods or services from a vendor to a customer. Information contained on a sales invoice usually includes: Vendor name, address, phone, customer name, address and phone, date; Multiple lines for: line number, item ID no., product description, quantity, price, extension; subtotal, GST, and grand total.

Sales order A document produced by a supplier based on a purchase order (by telephone or mail) from a purchaser (often called the customer) describing goods or services required. It usually acts as the initiating document in the process of shipping or supplying the product or service to the purchaser and invoicing (see sales invoice) them.

Shipping Docket A form used to record details of goods being shipped to a customer. A copy of the form is usually included with the goods when sent to the customer (called the packing slip), another copy is kept on file and a third copy sent to the billing department as notification that the goods have been sent, and the customer can now be billed for them. The form usually includes customer name, address, phone, date sent, mode of shipment, suppliers name, address and phone and multiple lines with: stock ID, description, and quantity.

Spreadsheet (1) A multicolumn sheet of paper used for performing numeric work, especially accounting and business related weekly or monthly summaries. (2) A computer application program that supports a user in numeric manipulation, especially in column / row format. The first spreadsheet, Visicalc, revolutionized and legitimized the use of microcomputers for "real work" in the late 1970s.

Statement A summary of a customer or vendor's account activity during the previous period (usually monthly). For example a customer's monthly statement (sent by the vendor to the customer) would show: purchases, payments and current balance owing.

Stock Goods that an organisation has in its possession. Stock may fall into a variety of categories: retail, wholesale or finished stock (all of which are "finished goods"); work in progress (goods that are partly complete in the manufacturing process) and raw materials. Also called inventory.

Subsidiary ledger A systematic collection of subsidiary accounts which, when summed, yield the total of a general account in the general ledger. A subsidiary ledger provides needed operating details for certain general accounts. For example: the creditors subsidiary ledger would contain a separate account for each organisation or individual whom the organisation buys goods or services from on credit.

Supply As applied to economics, the production for sale of a given product or service in the economy. When the supply exceeds the demand, prices of the given product will tend to fall because of the oversupply, encouraging further purchases of the product and discouraging further production until a point of equilibrium (balance) is established. See also demand.

Synergism A characteristic of some systems (in the broadest sense) in which the productivity of the whole system is more than the sum of the parts. For example: the value of a pair of gloves may be $50, but the value of a single glove may only be $5.

System A collection of components working together to achieve a common goal.

Time to market The time duration between conception of a new product or service, through the design, engineering and construction phases, until final delivery of the product or service to the end customer.

Transaction An event of a financial nature that must be recorder in the organisations accounts. Examples include: purchasing stock, selling merchandise, paying employees, selling an obsolete computer and paying rent.

Variable (1) A programming construct that allows the temporary storage of data while in the midst of processing. For example a program may be processing weekly payments of accounts payable and producing cheques. The program may use a variable to accumulate the total of payments, adding each new payment to the sum in the variable. (2) In reference to management decision making, costs that vary with quantity of effort or production. For example: direct materials or direct labour is a variable cost.

Vendor An organisation or individual who sells goods or services to a customer. Also called a supplier.

Vertical integration An organisational growth strategy involving acquisition and development of business units that act as inputs to other business units within the organisation. This may be illustrated by a wholesale organisation that wishes to grow using vertical integration. They could acquire a company that manufacturers products that they have been wholesaling, as well as establishing retail outlets for the range of products they have been distributing on a wholesale basis.

Warranty A promise by a vendor that the product or service sold is of a particular quality and that they will repair or replace the item within a specified time period if the item malfunctions.

What-if analysis A method of model manipulation in which questions of a "what-if" nature are asked and the necessary variables or characteristics of the model are changed to see how the changes impact the outcomes of the model. For example an electronic spreadsheet may have been created to model the sales forecast of a company. The question "what if market share falls by 3%, but total market rises by 5%" is asked, and the variables containing data on organisational market share and total market are varied accordingly. See also sensitivity analysis.

Wholesaler A type of business that purchases product direct from the manufacturer at a discounted price, then resells the product to retailers who then sell to the end consumer. This is sometimes called the channel of distribution. For example a software wholesaler purchases a large quantity of a software product from the producer, and then sells it to computer shops, who sell the software to the end user.