Understanding Financial Accounting: Key Terms and Definitions

Depreciation

Decline in value of long-term tangible assets such as buildings, furniture, or equipment. It is systematically recognized by accountants as depreciation expense over the useful lives of the affected assets.

Accrued Expense

Expenses that are recognized before cash is paid. An example is accrued salaries expense.

Book Value

Historical (original) cost of an asset minus accumulated depreciation to date.

Callable Bond

Bonds that the issuer, at its option, may pay off prior to maturity.

Amortization

(1) Systematic and periodic allocation of the costs of intangible assets to expense over their useful lives; (2) periodically transferring the discount on a note or a bond to interest expense.

Cash Equivalent

Investments securities that are for short-term investing, and they have high credit quality and are highly liquid Trade Discount

Trade Discount

It is a reduction to the published price of a product. For example, a high-volume wholesaler might be entitled to a 40% trade discount, while a medium-volume wholesaler is given a 30% trade discount. A retail customer will receive no trade discount and will have to pay the published or list price.

Sales Tax Payable

Sales taxes payable is a liability account in which is stored the aggregate amount of sales taxes that a business has collected from customers on behalf of a governing tax authority. The business is the custodian of these funds, and is liable for remitting them to the government on a timely basis.

Internal Control System

Cash Over and Short Account Maker (for Note Receivable)

Account used to record the amount of cash shortages or overages; shortages represent expenses and Overages represent revenues.

Weighted Average

Inventory cost flow method in which the cost allocated between inventory and cost of goods sold is based on the weighted average cost per unit, which is determined by dividing the total cost of goods available for sale during the accounting period by the total units available for sale during the period. If the weighted average is recomputed with each successive purchase, the result is a moving average

Inventory

A measure of sales volume relative to inventory levels; calculated as the cost of goods sold divided by average inventory; indicates how many times a year, on average, the inventory is sold (turned over).

Straight-Line Depreciation

Depreciation computations that produce equal amounts of depreciation to allocate to expense each period over an asset’s life; computed by subtracting the salvage value from the asset’s cost and then dividing by the number of years of useful life.

Units of Production Depreciation

Depreciation computations that produce varying amounts of depreciation based on the level of an asset’s usage each period rather than a measure of time; for example, automobile depreciation may be based on total estimated miles to be driven rather than total estimated years to be used.

Contingent Liability

Obligations with amounts due that depend on events that will be resolved in the future.

Bond Contract Rate

Rate of interest specified in the bond contract that is the percentage of face value used to calculate the amount of interest paid in cash at specified intervals over the life of the bond.

Stated Value

Arbitrary value assigned to stock by the board of directors; like par value, designates legal capital.

Income Summary Account

Classified Balance sheet

Balance sheet that distinguishes between current and noncurrent items.

Primary objective of financial accounting

The main objective of financial accounting is to accurately prepare an organization's final accounts for a specific period, otherwise known as financial statements.