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Fundamental Accounting Terms
Account: An accounting device used in bookkeeping to record increases and decreases of
business transactions relating to individual assets, liabilities, capital, withdrawals, revenue,
expenses, and so on.
Accounting: A system that measures the business’s activities in financial terms, provides written
reports and financial statements about those activities, and communicates these reports to
decision makers and others.
Accounting Cycle: For each accounting period, the process that begins with the recording of
business transactions or procedures into a journal and ends with the completion of a postclosing
trial balance.
Accounting Equation: Assets = Liabilities + Owner’s Equity
Accounts Payable: Amounts owed to creditors that result from the purchase of goods or services
on account: a liability.
Accounts Receivable: An asset that indicates amounts owed by customers.
Accumulated depreciation: A contra-asset account that summarizes or accumulates the amount
of depreciation that has been taken on an asset.
Assets: Properties (resources) of value owned by a business (cash, supplies, equipment, land).
Balance Sheet: A statement, as of a particular date, that shows the amount of assets owned by a
business as well as the amount of claims (liabilities and owner’s equity) against these assets. A
snapshot of the business on a given date. Also known as a net worth statement [Italics added].
Bank Reconciliation: The process of reconciling the checkbook balance with the bank balance
given on the bank statement.
Bookkeeping: The recording function of the accounting process.
Book Value: Cost of equipment less accumulated depreciation.
Calendar Year: A one-year period beginning on January 1 and ending on December 31.
Employers must use a calendar year for payroll purposes, even if the employer uses a fiscal year
for financial statements and for any other reasons.
Capital: The owner’s investment of equity in the company.
Chart of Accounts: A numbering system of accounts that lists the account titles and account
numbers to be used by a company.
Compound Entry: A transaction involving more than one debit or credit. Sometimes referred to
as a split transaction [Italics added].
