Glossary

The accounting terms used on this site, in plain words.

Account: A record that collects all increases and decreases of one item, such as Cash or Accounts Payable. Its balance is the difference between its debits and its credits.
Accounting equation: Assets = Liabilities + Equity. Every transaction keeps both sides equal, which is why each entry needs equal debits and credits.
Accrual: An adjustment that records revenue earned or an expense incurred before the cash is received or paid, such as unpaid salaries or interest earned but not yet collected.
Accumulated depreciation: A contra-asset account that collects all depreciation recorded on an asset to date. It has a credit balance and is subtracted from the asset's cost.
Adjusting entry: An entry made at the end of a period to record accruals, deferrals and depreciation so that revenue and expenses fall in the right period. It affects one income statement and one balance sheet account.
Allowance for doubtful accounts: A contra-asset account that estimates the receivables that will not be collected. It is credited with a debit to Bad Debt Expense.
Asset: A resource controlled by the business that is expected to bring future benefits, such as cash, receivables, inventory or equipment. Assets increase with a debit.
Book value: The amount at which an asset is carried in the accounts: its cost minus accumulated depreciation. On disposal, the price is compared with the book value to find the gain or loss.
Capital: The amount invested in the business by its owners. In a sole proprietorship the owner's Capital account also receives net income and drawings at year end.
Cash discount: A reduction offered for paying an invoice early, such as 2/10, n/30 (2% off if paid within 10 days). It is recorded when payment is made within the discount period.
Chart of accounts: The list of all accounts a business uses, usually numbered and ordered by type. Spain (PGC) and France (PCG) have official national charts; US businesses design their own.
Closing entry: An entry at the end of the year that resets revenue, expense and drawings or dividends accounts to zero and transfers their net effect to equity.
Contra account: An account that reduces the balance of a related account and has the opposite normal balance, such as Accumulated Depreciation against Equipment or Sales Returns against Sales Revenue.
Cost of goods sold: The cost of the merchandise sold during the period. Under a periodic system it equals opening inventory plus net purchases minus closing inventory.
Credit: An amount entered on the right side of an account. A credit increases liabilities, equity and revenue, and decreases assets and expenses.
Debit: An amount entered on the left side of an account. A debit increases assets, expenses and drawings or dividends, and decreases liabilities, equity and revenue.
Deferral: An adjustment that postpones revenue or expense already received or paid in cash to the period it belongs to, such as prepaid insurance or unearned revenue.
Depreciation: The allocation of the cost of a long-lived asset, less its salvage value, over its useful life. Straight-line depreciation charges the same amount each year.
Dividend: A distribution of a corporation's earnings to its shareholders. It reduces retained earnings and is not an expense; once declared, it is a liability until paid.
Double entry: The bookkeeping system in which every transaction is recorded in at least two accounts, with equal total debits and credits, so that the accounting equation always holds.
Drawings: Cash or goods taken out of a sole proprietorship by the owner for personal use. Drawings reduce equity directly and are not an expense.
Equity: The owners' claim on the assets after all liabilities are deducted: capital invested plus retained income. Equity increases with a credit.
Expense: The decrease in equity from using up resources to earn revenue, such as rent, salaries or depreciation, recorded when incurred. Expense accounts increase with a debit.
Income summary: A temporary account used in US closing: revenues and expenses are closed to it, and its balance (net income or net loss) is then closed to Retained Earnings or Capital.
Input VAT: Value added tax paid to suppliers on purchases. A business that may deduct it records it as a claim on the tax authorities, not as part of the cost.
Interest: The charge for the use of money, computed as principal × annual rate × fraction of the year. It is an expense for the borrower and revenue for the lender, accrued as time passes.
Journal entry: The record of one transaction in the journal, naming the accounts debited and credited and their amounts. Total debits always equal total credits.
Ledger: The book or file that contains all the accounts of a business, each with its postings and balance. Journal entries are posted to the ledger.
Liability: An obligation of the business to transfer money, goods or services to others, such as amounts owed to suppliers, lenders or employees. Liabilities increase with a credit.
Normal balance: The side on which an account increases and usually shows its balance: debit for assets and expenses, credit for liabilities, equity and revenue.
Note payable: A written promise by the business to pay a fixed sum on a set date, usually with interest, for example to a bank. It is a liability.
Note receivable: A written promise by a customer or borrower to pay a fixed sum on a set date, usually with interest. It is an asset of the holder.
Output VAT: Value added tax charged to customers on sales. It is collected on behalf of the tax authorities and recorded as a liability, not as revenue.
Payroll withholding: Amounts deducted from employees' gross pay, such as income tax and the employees' share of social security, which the employer owes to the authorities until paid.
Periodic inventory: A system that records purchases of goods in a purchases account and determines inventory and cost of goods sold only at the end of the period, from a physical count.
Perpetual inventory: A system that updates the Inventory account at every purchase and sale; each sale also records the cost of the goods sold.
Petty cash: A small fund of currency kept on hand for minor payments. Under the imprest system it is replenished to a fixed amount, and the expenses are recorded when it is replenished.
Posting: Copying each line of a journal entry to the account it names in the ledger, on the same side and with a reference to the entry.
Prepaid expense: A cost paid in advance for a future period, recorded as an asset (such as Prepaid Insurance) and moved to expense as the period passes.
Purchase returns: Goods sent back to the supplier. They reduce the amount owed and the cost of purchases or inventory; any VAT deducted on them is reversed.
Retained earnings: The part of a corporation's equity made up of past net income not distributed as dividends. Net income increases it and dividends decrease it.
Revenue: The increase in equity from selling goods or providing services in the ordinary course of business, recorded when earned. Revenue accounts increase with a credit.
Sales tax: A US state or local tax charged once on sales to the final consumer. The seller credits it to Sales Tax Payable; a business buyer cannot recover it, so it becomes part of the cost.
Social security contributions: Payroll charges for public pension and health systems, paid by employees and employers; in the US, FICA taxes. The employer's share is an expense in addition to gross pay.
T-account: A simplified drawing of an account shaped like the letter T, with debits on the left and credits on the right. It is used to show postings and work out balances.
Trade discount: A reduction from the list price granted to a customer, shown on the invoice. It is not recorded separately: the sale and the purchase are recorded at the net price.
Trial balance: A list of all ledger accounts with their debit or credit balances at a date. Equal totals show that debits equal credits, but do not prove that every entry is correct.
Unearned revenue: Cash received from a customer before the goods or services are delivered. It is a liability until earned, when it is moved to revenue.
VAT settlement: The periodic entry that offsets input VAT against output VAT. The difference is paid to the tax authorities or, if input VAT is larger, refunded or carried forward.
Write-off: Removing an uncollectible receivable from the accounts. Under the allowance method, the allowance is debited and Accounts Receivable credited.