Account A part of the accounting system used to classify and summarize the increases, decreases, and balances of each asset, liability, stockholders’ equity item, dividend, revenue, and expense. The three-column account is normally used. It contains columns for debit, credit, and balance.
Accounting cycle A series of steps performed during the accounting period (some throughout the period and some at the end) to analyze, record, classify, summarize, and report useful financial information for the purpose of preparing financial statements.
Accrual basis of accounting Recognizes revenues when sales are made or services are performed, regardless of when cash is received. Recognizes expenses as incurred, whether or not cash has been paid out.
Business transactions Measurable events that affect the financial condition of a business.
Chart of accounts The complete listing of the account titles and account numbers of all of the accounts in the ledger; somewhat comparable to a table of contents.
Compound journal entry A journal entry with more than one debit and/or credit.
Credit The right side of any account; when used as a verb, to enter a dollar amount on the right side of an account; credits increase liability, stockholders’ equity, and revenue accounts and decrease asset, expense, and Dividends accounts.
Credit balance The balance in an account when the sum of the credits to the account exceeds the sum of the debits to that account.
Cross-indexing The placing of (1) the account number of the ledger account in the general journal and (2) the general journal page number in the ledger account.
Debit The left side of any account; when used as a verb, to enter a dollar amount on the left side of an account; debits increase asset, expense, and Dividends accounts and decrease liability, stockholders’ equity, and revenue accounts.
Debit balance The balance in an account when the sum of the debits to the account exceeds the sum of the credits to that account.
Double-entry procedure The accounting requirement that each transaction must be recorded by an entry that has equal debits and credits.
Horizontal analysis The calculation of dollar and/or percentage changes in an item on the financial statements from one year to the next.
Journal A chronological (arranged in order of time) record of business transactions; the simplest form of journal is the two-column general journal.
Journal entry Shows all of the effects of a business transaction as expressed in debit(s) and credit(s) and may include an explanation of the transaction.
Journalizing A step in the accounting recording process that consists of entering the effects of a transaction in a journal.
Ledger The complete collection of all of the accounts of a company; often referred to as the general ledger.
Nominal accounts See temporary accounts.
Note An unconditional written promise to pay to another party the amount owed either when demanded or at a certain specified date.
Permanent accounts (real accounts) Balance sheet accounts; their balances are not transferred (or closed) to any other account at the end of the accounting period.
Posting Recording in the ledger accounts the information contained in the journal.
Real accounts See permanent accounts.
Simple journal entry An entry with one debit and one credit.
T-account An account resembling the letter T, which is used for illustrative purposes only. Debits are entered on the left side of the account, and credits are entered on the right side of the account.
Temporary accounts (nominal accounts) They temporarily contain the revenue, expense, and dividend information that is transferred (or closed) to a stockholders’ equity account (Retained Earnings) at the end of the accounting period.
Trial balance A listing of the ledger accounts and their debit or credit balances to determine that debits equal credits in the recording process.
Vertical analysis Shows the percentage that each item in a financial statement is of some significant total such as total assets or sales.