Essential Accounting Terms & Financial Definitions

Fundamental Accounting Principles

Accrual Basis of Accounting

Revenue is recognized when earned, and expenses are recognized when incurred, regardless of when cash changes hands.

Cash Basis of Accounting

Revenue is recognized when cash is received, and expenses are recognized when cash is paid.

Matching Principle

Requires expenses to be recognized in the same period as the revenues they helped generate.

Time Period Principle

States that a business should report its financial results over specific, consistent time periods.

Key Financial Statement Components

Current Assets

Assets expected to be converted to cash, sold, or consumed within one year or one operating cycle, whichever is longer.

Long-Term Investments

Investments held for more than one year, typically found on the asset side of a company's balance sheet.

Plant Asset

A long-term tangible asset used in the production of goods or services, such as land, buildings, and equipment.

Intangible Asset

An asset that has value but lacks physical substance, such as copyrights, patents, and trademarks.

Current Liability

An obligation due within one year or one operating cycle, whichever is longer.

Accounting Processes & Reporting

Accounting Cycle

The complete sequence of accounting procedures, from recording transactions to preparing financial statements.

Operating Cycle of a Business

The average period of time required to convert inventory into cash from sales.

Accounting Period

The specific span of time covered by a set of financial statements.

Fiscal Year

A 12-month period used for financial reporting and tax purposes, which may not align with the calendar year.

Interim Financial Report

A financial report covering a period shorter than a full fiscal year.

Pro Forma Statement

A financial statement showing the proposed effect of hypothetical transactions or future events.

Journal Entries & Balances

Adjusting Entry

Journal entries made at the end of an accounting period to ensure revenues and expenses are recognized in the correct period.

Closing Entries

Journal entries made at the end of an accounting period to transfer temporary account balances to permanent accounts.

Unadjusted Trial Balance

A list of all general ledger account balances before adjusting entries are made.

Post-Closing Trial Balance

A list of permanent accounts and their balances after closing entries have been posted.

Specific Account Types & Concepts

Accrued Revenue

An asset representing revenue earned for goods or services delivered but not yet billed or collected.

Prepaid Expense

An expense paid in advance but not yet fully consumed or expired.

Contra Account

An account that reduces the balance of another account.

Temporary Accounts

General ledger accounts that are closed at the end of each accounting period, starting fresh with a zero balance.

Permanent Accounts

Balance sheet accounts (assets, liabilities, and owner's equity) whose balances carry forward to the next accounting period.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset evenly over its useful life.

Depreciation

The portion of a company's fixed asset cost allocated to an accounting period on the income statement.

Profit Margin

A profitability ratio indicating how much revenue from sales exceeds costs in a business.

Working Papers

Documents prepared by accountants or auditors to support their findings and conclusions, often including transaction records.