Essential Accounting Principles and Foundational Terminology
Essential Accounting Terminology and Principles
A
Accrual-Basis Accounting
The accounting basis in which companies record transactions that change a company’s financial statements in the periods in which the events occur.
Accruals
Adjusting entries for either accrued revenues or accrued expenses.
Accrued Expenses
Expenses incurred but not yet paid in cash or recorded.
Accrued Revenue
Revenues for services performed but not yet received in cash or recorded.
Adjusted Trial Balance
A list of accounts and their balances after the company has made all adjustments.
Adjusting Entries
Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and expense recognition principles.
B
Book Value
The difference between the cost of a depreciable asset and its related accumulated depreciation.
C
Calendar Year
An accounting period that extends from January 1 to December 31.
Cash-Basis Accounting
The accounting basis in which companies record revenue when they receive cash and an expense when they pay out cash.
Comparability
The ability to compare the accounting information of different companies because they use the same accounting principles.
Consistency
The use of the same accounting principles and methods from year to year within a company.
Contra Asset Account
An account offset against an asset account on the balance sheet.
Cost Constraint
A constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.
D
Deferrals
Adjusting entries for either prepaid expenses or unearned revenues.
Depreciation
The process of allocating the cost of an asset to expense over its useful life.
E
Economic Entity Assumption
An assumption that every economic entity can be separately identified and accounted for.
Expense Recognition Principle
The principle that companies match efforts with accomplishments (often referred to as the matching principle).
F
Fair Value Principle
The principle stating that assets and liabilities should be reported at fair value.
Faithful Representation
Information that accurately depicts what really happened.
Fiscal Year
An accounting period that is one year in length.
Full Disclosure Principle
An accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.
G
Going Concern Assumption
The assumption that the company will continue in operation for the foreseeable future.
H
Historical Cost Principle
An accounting principle that states that companies should record assets at their cost.
I
Interim Periods
Monthly or quarterly accounting time periods.
M
Materiality
A company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor.
Monetary Unit Assumption
An assumption that requires that only those things that can be expressed in money are included in the accounting records.
R
Relevance
The quality of information that indicates the information makes a difference in a decision.
Revenue Recognition Principle
The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.
T
Timely
Information that is available to decision-makers before it loses its capacity to influence decisions.