Monday, January 21, 2008

Useful Accounting Terminology

Here is a list of some of the basic verbiage and terminology used in Accounting. You should familiarize yourself with these because you will see them used again later.

Event: A happening that will cause a change in assets, liabilities, or equity.

Transaction: An external event between two or more entities.

Account: An arrangement of transactions to show the effect of transactions and events on assets and equity. There should be an account for each asset, liability, expense, and for capital.

Real Accounts: Permanent accounts set up for assets, liabilities, and equity. These accounts will appear on the balance sheet.

Nominal Accounts: Temporary accounts such as revenue, expenses, and dividends. These accounts will be closed periodically.

Ledger: The book or computer file that contains all of the accounts.

Journal: The book of original entry. All transactions and events are recorded here first, and later posted from here to the ledger.

Trial Balance: A list of all open accounts in the ledger and their balances. Two types of trial balances are the "adjusted trial balance" and the "post-closing" trial balance.

Adjusting Entries: These are made at the end of an accounting period so that accurate financial statements may be prepared.

Financial Statements: Final summaries (or scorecard) of accounting data for a given period. The types of financial statements are the balance sheet, the income statement, the statement of cashflows, and the statement of retained earnings.

Closing Entries: The entries that close out the nominal accounts for the period, reducing them to zero. This is when a net income would be determined and transferred to an owners' equity account.

Stop back next entry when I discuss what Debits and Credits are.

To return to initial post in my Accounting Review Guide, click HERE.

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