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BOOKKEEPING TERMS and DEBITS & CREDITS

The use of debits and credits in double entry bookkeeping can be traced back many centuries. Some of the terminology used in bookkeeping includes the following: 1. Account a record in the general ledger to which amounts are posted; typical accounts include Cash, Accounts Receivable, Accounts Payable, Sales, Wages Expense, and so on. 2. Accounts Payable: Accounts of money you owe. A liability that is usually created when you've made a purchase on credit. 3. Accounts Receivable: Accounts of money owed to you for the sale of goods or services. 4. Accrual basis: A method of accounting where transactions are recorded as they occur regardless of when payment for that transaction is made or received 5. Accrued Assets: Assets from revenues earned but not yet received. 6. Accrued Expenses: A liability incurred during the accounting period for which payment has not been made. 7. Accrued Income: Income earned during an accounting period but not received/recorded by the end of the period. 8. Adjusting (Closing) Entries Special accounting entries that are made when you close the books at the end of an accounting period to bring the ledger up to date. Entries to transfer the balances from the temporary accounts to the owners (stockholders) equity account. 9. Aging: The grouping of like transactions by date. Example - sorting invoices by due date. 10. Asset: Items that a business or individual owns or are owed. 11. Audit: The scrutinizing of accounting records and supporting documents for accuracy and completeness. 12. Audit trail: The information within the accounting system that reveals the effects of a transaction. 13. Bad Debt: An account or receivable that has been deemed unrecoverable and written-off. 14. Balance Sheet Accounts real or permanent accounts; asset, liability, and capital (equity) accounts, indicating the net worth of the company for the given time period. 15. Capital: The right to assets of the owner of a business.. 16. Cash basis: An accounting method where transactions are recorded when the actual change of payment occurs, regardless of when the goods or services are delivered. 17. Certified Financial Statements: Financial statements that have been audited and certified by a CPA. 18. Chart of Accounts a numerical listing of a businesss accounts that are available in the general ledger.

19. Contra Account an account with a balance that is opposite of the normal balance; e.g. Accumulated Depreciation is a contra asset account because its credit balance is the opposite of the normal debit balance for an asset account. 20. Control Account an account in the general ledger with summary information. The supporting details are contained in a subsidiary ledger. 21. Credit an amount entered on the right side of an account; will cause the account balances of revenues, liabilities, stockholders (owners) equity, and gains to increase; will cause the balances of assets and expenses to decrease. 22. Debit an amount entered on the left side of an account; will increase the account balances of assets, expenses, losses; will decrease the account balances of liabilities, stockholders equity, revenues. 23. Depreciation: The allocation of the cost of a tangible, long-term asset over its useful life. 24. Double Entry each bookkeeping or accounting entry will involve at least two accounts: at least one account will be debited, one account will be credited. 25. Expenses: The daily costs incurred in running a business. 26. Fiscal: A 12 month accounting period. Not necessarily a calendar year. 27. General Journal book of original entry, used to record accounting/bookkeeping entries in order by date. 28. General Ledger: A book containing accounts to which debits and credits are posted from books of original entry. The master record of all the balance sheet and income statement account balances. 29. Gross profit: The amount of net sales minus the amount of cost of sales 30. Income Statement Accounts temporary accounts; A statement that summarizes revenues and expenses, gain, and loss 31. Invoice: A form, sent from the seller to the buyer, listing the items bought, price, terms etc.. 32. Liability: A debt or obligation. 33. Net sales: The amount left when returns, discounts, and allowances are deducted from sales revenue. 34. Operating Expenses: The expenses that are incurred from the daily operation of the business. 35. Owners' equity: The owners' right to the assets of an entity. 36. Permanent Accounts accounts whose balances carry forward to the next accounting year; e.g. balance sheet accounts

37. Posting The process of transferring amounts from a journal to the appropriate general ledger accounts. 38. Prepaid Expenses: Amounts that are paid in advance for product is not used up during the accounting period. 39. Purchase order: Written instructions to a vendor to ship and bill for the listed items. 40. Reversing Entry: An entry made to reverse a prior entry.. 41. Subsidiary Ledger a record containing the detail for a control account in the general ledger. 42. Temporary Accounts accounts that are closed at the end of the accounting year so that they begin the new year with a zero balance; e.g. income statement accounts and the owners Drawing account. 43. Trial Balance A work sheet listing of the balances of the accounts in the general ledger to prove that the total amount of debit balances is equal to the total amount of credit balances

The Accounting Equation


Assets = Liabilities + Capital

Chapter 2: Recording Business Transactions

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