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  • Last updated: May 31, 2019, 4:04 p.m.

Accounting Terminology

General Accounting Terminology

Accounts Payable: Money or other obligations owed to creditors for services and materials, a Liability on the Balance Sheet.

Accounts Receivable: Money or other obligations due for services rendered or items sold on terms, an Asset on the Balance Sheet.

Accrual Based Accounting: Represents a method of recording accounting transactions when they occur, whether or not cash has changed hands. The accounting software uses an Accrual based accounting system.

Accrued Liabilities: Represents expenses that are incurred prior to being paid. For example, salaries earned by your employees and paid in a subsequent month are accrued as a liability until they are paid.

Accrued Revenue: Represents revenue that is earned and recorded but not yet received in the form of cash.

Asset: The things a company owns, seen on the Balance Sheet and represented as 1-xxxx accounts in your Chart of Accounts.

Balance Sheet: The primary financial statement that shows detailed assets, liabilities and equity at a point in time.

Cash Based Accounting: Represents a method of recording accounting transactions most easily described as accounting for cash transactions. Entries do not affect your financial statements until cash changes hands. In this environment, you do not track receivables and payables. Cash received is recorded as income when received and expenses are recorded when paid.

Chart of Accounts: A list of categories or accounts where transactions are recorded.

Cost of Goods Sold (COGS): Represents the cost of items or services sold to customers. These costs are kept in the Inventory asset account (1-xxxx) until they are sold. Then they are passed over to the COGS (5-xxxx) account. Seen on the Profit and Loss and represented as 5-xxxx accounts in your Chart of Accounts.

Credit: When we are talking about credits in relation to double-entry accounting - we are talking about one half of a transaction (the other side being a debit). Credits and debits affect accounts in different ways depending on what type of account is being used. For more information please see this article.

Current Year Earnings: This account represents year to date earnings, not yet recorded into the Retained Earnings account.

Debit: When we are talking about debits in relation to double-entry accounting - we are talking about one half of a transaction (the other side being a credit). Credits and debits affect accounts in different ways depending on what type of account is being used. For more information please see this article.

Deferred Revenue: Represents income received, but not yet earned. This is typically a liability account.

Double Entry Accounting: The accounting products follow the convention of Double Entry Accounting. Every accounting transaction is comprised of debits that equal credits.

Equity (Capital): The owner's interest in the business, which is the total assets minus the total liabilities of a company, seen on the balance sheet and represented in as 3-xxxx accounts in your Chart of Accounts.

Expenses: Costs incurred in the business used to generate revenue, seen on the Profit and Loss report and represented in your Chart of Accounts as 6-xxxx accounts.

General Ledger: An accounting record where all of your accounts are maintained. In the accounting products, when you enter any transaction, the General Ledger accounts are automatically updated.

Gross Profit: Represents your revenue from sales of inventory or services, less Cost of Goods Sold, before overhead expenses.

Journals: Account ledgers where entries are recorded. The accounting products have General, Disbursements, Receipts, Sales, Purchases, and Purchases journals. Every transaction creates a corresponding set of debit and credit entries in a specific journal.

Liability: The things a company owes in cash or other resources, represented as 2-xxxx in your Chart of Accounts. These are claims against assets.

Net Profit/Loss: Total Income minus Total Expenses minus Total COst of Sales. The bottom line!

Operating Profit: Profit before Other Income is added and Other Expenses are subtracted.

Overhead Expenses: Represents the expenses of a business independent of how much revenue is generated. Can also be considered Fixed Costs, things like rent, salaries, and utilities.

Profit and Loss Statement (or Income Statement): The primary financial statement that shows detailed revenues and expenses for a period of time.

Prepaid Expenses: Represents expenses that are paid in advance of incurring them. For example, you might pay a year's worth of insurance and accrue 1/12 of it each month. This is typically an asset account.

Retained Earnings: Represents the cumulative net income or loss of a business since its inception. When you Start a New Year in the accounting products, the program automatically transfers your year-end (Current Year's Earnings) income or loss to this account. This is called the closing entry.

Start a New Year: The process in the accounting products that closes the "books" of a fiscal year, transfers your Current Years Earnings to Retained Earnings and prepares the accounts for a new fiscal year. All Income and Expense accounts are zeroed to start the new year.

Subsidiary Ledgers: Customer and vendor balances that equal the amount of the Accounts Receivable and Accounts Payable General Ledger accounts.

Trial Balance: A list of all your General Ledger accounts and their current balances.

Accounts List

The Account List has two different parts

Balance sheet accounts (Assets, Liabilities and Equity) carry balances over from Fiscal Year to Fiscal Year. Balance Sheet Accounts are used to produce a summary of financial balances of a company as of a specific date.
  • Asset Accounts include Checking and Savings Accounts, Undeposited Funds, Accounts Receivable, Inventory and Fixed Assets. These are money you have, items you own, and money owed to you. In AE Asset Accounts are labeled 1-xxxx. Debit increases, Credit decreases.
  • Liability Accounts include Accounts Payable, Company Credit Cards, Sales Tax collected, Payroll Withholding and Long Term Liabilities like a bank loan or mortgage. They are money that you owe. In AE Liability Accounts are labeled 2-xxxx. Debit decreases, Credit increases.
  • Equity Accounts are the Owner or Shareholders value. In other words, the total Equity is the difference between Assets and Liabilities. Assets = Liabilities + Owner’s Equity. Depending on the Company Structure (LLC or Inc. for example), Equity Accounts may be used in different ways. Customers would need their CPA to apply the use of Equity Accounts to their Company Structure. In AE Equity Accounts are labeled 3-xxxx. Debit decreases, Credit increases.
Profit and Loss accounts (Income, Cost of Sales and Expenses) zero out when moving to a new Fiscal Year. The P&L Accounts are used to calculate the Company’s profit or loss over a given period. Income – Cost of Sales – Expenses = Profit or Loss.
  • Income Accounts are used to track Revenue generated by the Company; typically a result of sales. You can use one Income Account or multiple Income Accounts. Customers may want to assign different Income Accounts to sales to track different types of Income. An Accountant generally only needs the Total Income. Use of multiple Income Accounts is more for the Owner’s benefit. In AE Income Accounts are labeled 4-xxxx. Debit decreases, Credit increases.
  • Cost of Sales (COGS) Accounts are used to track costs directly related to products you sell. If you own a Book Store, the purchase price of the books that you are selling will typically be assigned to a Cost of Sales Account. Like Income Accounts, the Customer can set these accounts to best suit the needs. In AE Cost of Sales Accounts are labeled 5-xxxx. Debit increases, Credit decreases.
  • Expense Accounts are used to track expenses for the operation of the business that are not directly related to the products you are selling. Telephone, Advertising, Rent, Utilities and Office Supplies are some examples of Expense Accounts. Expense Accounts can also be set up to suit the Customer, but there are some Accounts that need to be there. The Customer would need to seek the advice from a CPA for help. In AE Expense Accounts are labeled 6-xxxx. Debit increases, Credit decreases.
  • Other Income Accounts are used to track other revenues like interest earned on savings or dividends paid from share. They function in the same way as expense accounts.
  • Other Expense Accounts are used to track other expenses such as interest charged. They function in the same way as income accounts.