Below is a list of the most common accounting terms with a short definition.

Accounting Cycle:  Sequence of accounting procedures used to process transactions.

The flow of data is:  transaction occurs ® documents prepared ® journal entry entered ® entry posted to the General Ledger.

Accounts Payable:  Amounts owed to other persons/businesses.

Accounts Receivable:  Amounts due from other persons/businesses (extension of credit to customers on an open account).

Accrual Basis Accounting:  Recognizes revenue when earned and expenses when incurred. This is the type of accounting that Perfection Management uses. The advantage is an up-to-the-minute picture of your business.

Assets:  Any tangible (physical) and intangible (right) properties owned by a business. Included are:  Cash, Accounts Receivable, Prepaid Expense, Land, and Building.

Balance Sheet:  Reports the financial position of a business at a specific date. It reports Assets, Liabilities, and Owner's Equity.

Cash Basis Accounting:  Recognizes revenue when cash is received and expenses when paid. This is the type of Accounting used when not on a computer system. Although correct, the timeliness of information is forfeited.

Chart of Accounts:  A listing of accounts in the ledger. The order of the accounts should agree with the order of items in the Balance Sheet and Income Statement. The accounts are numbered to permit indexing and for posting references.

Cost of Goods Sold (COGS): 

COGS = Beginning Inventory + Net Purchases - Ending Inventory

Credit:  Information that is entered into the right side of the T-account. Amounts entered are credited to the account.

Debit:  Information that is entered into the left side of the T-account. Amounts entered are charged to the account.

Expenses:  Cost of goods or services consumed in the process of producing revenues.

General Ledger:  A collection of all individual accounts.

Gross Margin:  Gross Margin = Sales - Cost of Goods Sold

Income Statement:  Reports the results of earning activity for a specific period of time. It reports Revenues, Expenses, and Net Income.

Revenue - Expense = Net Income

Journal:  A complete record of each transaction.

Liabilities:  What the business owes to creditors. Included are:  Accounts Payable, Notes Payable, and Unearned Revenue (e.g. prepaid sales received).

Net Income:  The difference between Revenues and Expenses.

Net Income = Revenues - Operating Expenses.

Owner's Equity:  The residual claims of the owners against the assets of the business after total liabilities are deducted.

Owner's Equity = Assets - Liabilities

Posting:  The process of transferring amounts entered in the journals to the proper General Ledger account.

Retained Earnings:  The accumulated profit (net income) of the company that has been retained in the firm.

Revenues:  The increase of assets as a result of goods sold or services rendered.

T-Account:  A separate account is maintained for each Asset, Liability, Owner's Equity, Revenue, or Expense. A simple format for an account is the T-Account.

Transactions:  Events that affect Assets, Liabilities, and Owner's Equity. External transactions involve parties outside the firm (example:  buying supplies). Internal transactions don't involve parties outside the firm (example:  using supplies). Not all events are transactions (example:  firm receiving order, interest rate increase, and executive retires). Transactions increase (or decrease) an Asset, Liability, or Owner's Equity.

Trial Balance:  A listing of all accounts from the General Ledger along with their balances. May be prepared at anytime during the accounting period. It should always be done at the end of the period before financial statements are prepared. The Trial Balance is not a complete proof of accuracy; it only indicated that Debits and Credits are equal.

Working Capital:  The excess of current assets over current liabilities.