Accounting Terms - Vocabulary and Notes

Accounting Terms, Vocabulary, and Notes

Accounting - A tool that lets interested parties get the information they need from the
mountain of raw data.
A system for developing and communicating information needed for economic decision-making

Assets – Things of value
Probable future economic benefits obtained as a result of past transactions or events
Expected to benefit an entity in the future
Examples: cash, land, inventory, patents, buildings, equipment

Liabilities – Debts owed
Probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities
Debts owed in either money or other assets or via services
Examples: wages payable, mortgage notes payable, warranties payable

Information which has been verified is considered more reliable, and therefore more valuable than unverified information. Accounting information is a basic social need. Accounting tools are developed to fill those human information needs and accounting
evolves over time as human information needs change. As accounting information systems evolve, like all human tools, they improve. Computer records are replacing paper records.

Inventory – Goods being held for sale

Stock-outs – Where customers are ready to buy, but no goods are ready to be sold

Excess inventory – Where too many perishable goods are left over and can’t be sold

Every economic transaction has 2 sides.
Examples: lender/borrower, seller/purchaser, employer/employee, receiver/sender

Note receivable – The borrower’s promise to repay the debt with interest

Note payable – Borrower gains cash, but must give up future resources to repay the
debt plus interest

Duality – All transactions have 2 sides

Owners’ Equity – ownership interests
Residual interest in the assets of an entity that remains after deducting its liabilities
What is owned
Examples: common stock, retained earnings

Business enterprises – Entities established with an objective of earning profits

Revenue – Inflows of assets of an entity of its liabilities
Inflows of new resources that come from doing business
Examples: sales revenues, rent revenues

Gains – Increases in equity or “net assets”
Arise from activities other than normal business operations or events that are not within the control of the business at all
Examples: gain on sale of equipment, gain on settlement of lawsuit

Losses – Decrease in equity or net assets
Examples: loss on sale of equipment, earthquake loss, fire loss, loss on settlement of lawsuit

Net Assets = Assets – Liabilities

Expenses – Outflows or other use of assets as a result of delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s major operations
The costs incurred by an entity in order to produce revenues
Examples: wages expense, utilities expense, cost of goods sold

Net income – The difference which results from adding all revenues and gains and subtracting all expenses and losses
The “bottom line” – the profit (if net income is positive) or loss(if net income is negative)

Comprehensive income – The change in equity (net assets) of a business enterprise from transactions and other events and circumstances from nonowner sources
A single figure that encompasses all changes in net assets.
The total of net income plus any other nonowner changes in equity