Accounting and Bookkeeping Terminology and Principles

• Account — An account is a unit or record in an accounting system to track the financial activities of an asset, revenue, expense, liability, or equity.
• Accounts Payable — It refers to the amount due to vendors or suppliers for goods or services received that have not yet been paid for or purchased on credit without a promissory note.
• Accounts Receivable — It refers to the amount owed by a company from the company providing goods and/or services on credit. The term trade receivable is also used in place of accounts receivable.
• Credit — A credit is an entry made on the right side of an account. It either increases equity, liability, or revenue accounts or decreases an asset or expense account. Record the corresponding credit for the purchase of a new computer by crediting your expense account.
• Debit — A debit is an entry made on the left side of an account. It either increases an asset or expense account or decreases equity, liability, or revenue accounts. For example, you would debit the purchase of a new computer by entering the asset gained on the left side of your asset account.
• Double Entry Bookkeeping — Double-entry bookkeeping or double-entry accounting means that every transaction will involve at least two accounts (a debit to one account and a credit to another) to keeps a company's accounts balanced.
• Equity — Also known as owner's capital or shareholder equity it refers to the remaining value of an owner’s interest in a company after all liabilities have been deducted. It is referred to as “shareholders’ equity” (for corporations) or “owner’s equity” (for sole proprietorships).
• Expense — Expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues.
• Liability or Liability Account — A liability account is a general ledger account that records the company's obligations, debt, customer deposits, and customer prepayments, deferred income, and others. which are the result of past transactions.
• Net profit — It is the amount gained by the business by computing the difference between the costs and income in a given period.
• Revenue — This refers to the amount a company receives from selling goods and/or providing services to customers.

• Asset — These are resources owned by a company that has economic value and is used to generate profit.
• Depreciation Expense — This is an expense that is listed on the Income Statement, while Accumulated Depreciation may be a negative asset. The accounting entry for depreciation involves a journal entry that creates a depreciation expense and an accumulated depreciation account.
• Depreciation Schedule — A depreciation schedule should show the book value at the beginning of each year, the rate of depreciation applied (if the method requires it), the depreciation expense, the accumulated depreciation, and the book value at the end of each year.
• Fixed Asset — This is any form of asset that cannot be easily turned into cash. They are referred to as property, furniture and fittings, plant, and equipment, as these are the types of asset that are most commonly fixed.
• Fixed Asset Register — This is a system that is used to compile and hold details of each fixed asset that a business owns.
• Straight Line Depreciation — This is a method of depreciation used to determine the salvage value (this is the value of an asset at the end of its life) of a fixed asset, subtract that from the original cost of the asset and expense the remaining value over the useful life of the asset equally each year.
• Reducing Balance Method — This is a method of depreciation used to capture a higher level of depreciation in the early years of an asset’s life, with lower values in later years. This method of depreciation is calculated simply by multiplying the book value at the beginning of the year by a specific depreciation rate.

These terminologies and principles are important when recording general journal entries for balance day adjustments.

• Accrual — The recognition of an expense or revenue that has occurred but has not yet been recorded.
• Bad debt expense — The entry made for uncollectible or non-recoverable debts. This happens when a customer failed to pay the company for the rendered services or delivered products on credit.
• Balance Sheet or Statement of Financial Position — The balance sheet or statement of financial position reports the assets, liabilities, and owner’s (stockholders’) equity. It provides a summary statement of the firm’s financial position at a given point in time. It reveals the worth of a company, how that worth is made up, its assets (what the company owns and each asset’s current book value) and its liabilities (how the assets were funded).
• Cash Flow Statement — The statement of cash flow reports the sources and uses of cash by operating activities, investing activities, financing activities, and certain supplemental information for the period specified in the heading of the statement. It summarises the amount of cash or cash equivalents entering and leaving a company.
• Closing procedures — This is the phase in the accounting cycle when the balances of the temporary accounts are transferred to the capital account. Therefore, the balance of the owner’s capital account includes on a cumulative basis the net results of all revenue, expense, and drawings transactions.
• Day Balance Adjustments — The day balance adjustments is done at the end of the accounting period and are used to ensure that the organisation’s revenue and expenses align with the correct accounting period. It involves aligning recorded costs, aligning recorded revenues, and reversing entries with the appropriate accounting period.
• Deferred Revenue — These are transactions ordinarily recorded by debiting cash and crediting a liability account for the unearned revenue when a business receives fees for services before the actual service is rendered. It shows the obligation to perform future services.
• Inventory — This is done at the end of the month to undertake a closing of an account. The account is closed by physically making the values in the account match the physical count of products left. It also acts to close the purchases account and the difference between the two becomes the cost of goods sold.
• Journal — The journal is a record that keeps the accounting transactions in the order of occurrence (listed or ordered by date). It is used to record and summarise the transactions that occur in a business.
• Journal Entry — The journal entry is when an entry is made to the appropriate journal.
• Ledger — The ledger is the record that keeps accounting transactions by accounts.
• Opening Entries — This refers to recording the assets, liabilities, and equity to start the accounting system of a business – to ‘open’ its accounting records (a once-only entry).
• Profit and Loss Statement — The profit and loss statement tells whether the business is making a profit or loss. This statement may be kept for any period of time. For example, at startup, they may be produced monthly. Annual ones are produced at the end-of-year for preparation of your income tax. It only shows revenues, expenses, gains, and losses. It will not display money received or money paid out in an accrual-based system.
• Revenue, Expense, and Drawings Accounts — These are temporary accounts that accumulate data related to a specific accounting year and are used to facilitate the preparation of the income statement and provide additional information.

• General Ledger — Referred to as “the books”, it contains all the organised accounts (chart of accounts) of the business transactions. It provides a permanent record of all the transactions throughout the life of the business. The five key accounting items that a general ledger tracks are: Assets; Liabilities; Owner's Capital (Equity); Revenue; and Expenses.
• Reconciliation — In an accounting process, reconciliation is comparing two sets of records to check that figures are correct and confirms that accounts in the general ledger are consistent, accurate, and complete.
• Subsidiary ledgers or Sub ledgers — These are ledgers used for maintaining individual records of specific aspects of the business, which are summarised in the general ledger. It records individual transactions from the journals.
• Source Documents — The source documents used for creating your general ledger are the various documents that exist in your organisation used for creating journals (eg. invoices, bank statements).

• Balance Sheet or Statement of Financial Position — The balance sheet or statement of financial position reports the assets, liabilities, and owner’s (stockholders’) equity. It provides a summary statement of the firm’s financial position at a given point in time. It reveals the worth of a company, how that worth is made up, its assets (what the company owns and each asset’s current book value) and its liabilities (how the assets were funded).
• Business Activity Statement — Business Activity Statement (BAS) is a type of report used to assess the business' tax liability depending on the type of business. BASs are issued by the ATO either monthly or quarterly. A form needs to be lodged with the ATO and payment made to the ATO by the due dates.
• Income statement — The income statement, also referred to as a ‘profit and loss statement,’ ‘statement of incomes and losses,’ or ‘report of earnings,’ shows the income the business has earned in the accounting period, the costs or expenses that were incurred by the business during the period, and the net profit.
• Trial balance — This is a worksheet where all of the general ledger accounts with their balance as either debit or credit are listed. The trial balance is used to determine whether there are any gross errors in the books. It is used as a checking mechanism because the total of all debits must equal the balance of all credits.

• Accrual accounting — Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made. The method follows the matching principle, which states that revenues and expenses should be recognized in the same period. The key principles of accrual accounting are: Revenue, Expense, and Matching principles.
• Bad debt — A bad debt is defined as a debt that cannot be recovered.
• Bank reconciliation — Bank reconciliation is the process of comparing the amounts in the Cash account in the general ledger to the amounts appearing on the bank statement. The objective is to be certain that there is consistency between the amounts and that the company's amounts are accurate and complete.
• Bank statement — A bank statement is a document (also known as an account statement) that is typically sent by the bank to the account holder every month, summarizing all the transactions of an account during the month. Bank statements contain bank account information, such as account number and a detailed list of deposits and withdrawals.
• Cash accounting — Cash accounting is an accounting method where payment receipts are recorded during the period in which they are received, and expenses are recorded in the period in which they are actually paid. It recognizes transactions only when payment is exchanged.
• Cost principle — Cost principle states that amounts in the accounting system should be quantified, or measured, by using historical cost.
• Doubtful debt — A doubtful debt is a debt that a business or individual might be able to collect. A doubtful debt may at some point in the future become a bad debt.
• Going concern assumption — Going concern assumption also known as continuity assumption, states that accounting systems assume that a business will continue to operate.
• Interim reports — Interim reports are reports of a financial period shorter than a fiscal year. These reports are usually produced during three (3) quarters of each financial year. These reports include the following financial statements: Balance sheet, Income statement, and Statement of cash flows.
• Invoice — An invoice is a document, sent by the seller to the customer, that requests payment for products or services. It lists what goods or services were provided, how much they cost, and which forms of payment the seller accepts.
• Objectivity principle — Objectivity principle states that accounting measurements and accounting reports should use objective, factual and verifiable data.
• Petty cash — Petty cash or a petty cash fund is a small amount of money available for paying small expenses (incidentals) that occurs during the day to day running of a business. Petty Cash is also the title of the general ledger current asset account that reports the amount of the company's petty cash.
• Proof of lodgement — A deposit slip or lodgement slip which is filled out and stamped whenever cash or cheques are deposited into a bank account. Another form of proof of lodgement is the receipts for online banking transactions. These items help with the bank reconciliation process as they provide evidence that money was indeed deposited and should be showing on the bank statement.
• Separate entity assumption — Separate entity assumptions states that a business entity, like a sole proprietorship, is a separate entity - a separate thing from its business owner.
• Unit-of-measure assumption — Under unit-of-measure assumption, it is assumed that a business’s domestic currency is the appropriate measure for the business to use in its accounting.