Chapter 9.1® - Basic Introductory Accounting Terminologies
Event – An event is a happening of consequence that is the source of cause of changes in accounting assets, liabilities or shareholder’s equity. An event can be internal to an organization (within the company) or external (outside of the company).
Transaction – An accounting external event that involves a transfer of money, assets or something of value (shares) between two or more companies.
Account – An account is a systematic arrangement that records transactions & events to a particular account such as Payroll expense or a balance sheet item such as Cash. Separate accounts are kept for each type of asset including those falling in the category of assets, liabilities, owner’s equity, revenues, expenses or income summary.
Permanent Account – A permanent account is an account that is indefinite including an asset, liability or equity account and appears on the Balance sheet. The ending balance of each permanent account is not closed at your end; the ending balances of one year are rolled over to become the beginning balances of the following year. For instance, if an organization has $200 million cash at the end of December 31st, 2009 (ending balance), it will roll this over to January 1st, 2010 as $200 million beginning balance for that year’s balance sheet.
Temporary (Nominal) Account – A temporary (nominal) account includes revenue, expenses & dividend accounts. Revenues & expenses appear on the income statement while the dividend account appears on the balance sheet. Temporary accounts are periodically closed, usually during year-end. For instance, a company will close its revenue account at December 31st, 2009 to measure its full revenues for the year 2009 and reset it on January 1st, 2010 to account for revenues in that year, 2010.
Ledger – A ledger is a book or an electronic database that contains all accounts that exist in the trial balance of a company’s financial records. Each account usually has a separate page (in books) or a separate SCOA (standard chart of account) in electronic record. A general ledger is a collection of all the assets, liabilities, owner’s equity, revenue & expense accounts. A subsidiary ledger on the other hand contains all details related to a given general ledger account. For instance, Accounts Receivable is a general ledger account as a whole while each supplier or vendor is listed on the subsidiary ledger as a single listing.
Journal – A journal is the book of original entry where all transactions are recorded and collected as data & all other events are recorded. After writing a journal entry, accountants usually do a batch upload to the general ledger.
Posting – The process of transferring the numbers, events and facts from the book of original entry (journal) to the general ledger accounts. In real life account, any journal entries uploaded via the electronic system must be approved by a higher level manager.
Trial Balance – A trial balance is a list of all open accounts in the ledger & their ending balances. A trial balance taken immediately after all adjustments have been posted (including periodic adjusting entries) is called an adjusted trial balance. A trial balance taken immediately after all closing entries have been posted is known as a post-closing or after-closing trial balance. A trial balance can also be extracted from the electronic database at any time of the year, depending on the needs of senior management & executives.
Adjusting Entries – Adjusting entries are made at the end of an accounting period to bring all accounts up to date on an accrual accounting basis so that the post-closing trial balance is accurate, and these numbers will then be used to construct financial statements of a company. Common adjusting entries include prepaid expenses, accrued revenues & accrued liabilities.
Financial Statements – Financial statements reflect all of the accounting information that was gathered by posting journal entries and include all data collected, tabulated and summarized. There are four common financial statements including the balance sheet, the income statement, the statement of cash flows & the statement of retained earnings. Each of these financial statements is explained in greater detail on this website. Some companies also show a fifth financial statement known as a statement of Other Comprehensive Income and this is becoming mandatory especially with the new rules brought about by the International Financial Reporting Standards (IFRS).
Closing Entries – Closing entries is a formal process by which all temporary accounts e.g. revenues, expenses & dividend payments are reduced to zero during year-end to determine net income or net loss for that given year. Any profit or loss is transferred to owner’s equity account on the balance sheet. This process is also known as “closing the ledger”, or “closing the books” or simply “closing.”