Term Definition


To build up or accumulate over time. Usually refers to expenses or to revenues.




In reference to cost, it means assigning asset value to become expense in the period using prescribed methods such as the straight-line method of amortization (i.e. taking asset value, and turning it into an expense). This cost allocation may or may not truly reflect how an asset’s value is expiring over time.



Accumulated Amortization:

Each fixed asset has an accumulated amortization account. It is where all the amortization expense for the years is collected and accumulated. It is a contra account that is attached to each asset.




The allocation of the cost of a long-term, fixed asset to expense at a pre-determined rate over time. This is done to reflect the wearing out of the asset over time.



Amortization, Declining Balance:

Amortizes an asset’s value more quickly in the beginning than at the end of its life. The formula is:

Amortization Expense (for year) = (Purchase Price – Accumulated Amortization) x Amortization Rate (%)


Amortization, Straight-Line:

Amortizes an asset’s value equally over the life of the asset.

Amortization Expense (for year) = (Purchase Price – Salvage Value) ÷ Useful Life (in years)


Bad Debt:

Debt owed to a business that is not paid for a variety of reasons. These reasons include, delinquent customers, bankruptcy, or fraud.



Book Value:

It is the value for an asset in the accounting records after all accumulated amortization has been removed.

Book Value = Purchase Price - Accumulated Amortization.



Classified Balance Sheet:

A vertical Balance Sheet that reports information is a highly organized, and categorized manner, which makes analysis with the numbers easier.



Closing entries:

The last step in the accounting cycle that closes out all of the temporary accounts, places their values into the Capital account, and resets he temporary accounts at zero for the new accounting period.



Contra Account:

An account that offsets or acts contrary to the normal account with which it is associated. For example: Drawings is a contra account to Capital. See more.



Cost of Goods Sold:

Known as COGS. It is an expense. It is the cost of merchandise inventory that has been sold during the accounting period. The formula is:

COGS = Beginning Inventory + Purchases – Purchase Returns and Discounts + Freight-IN - Ending Inventory


Current Asset:

A short-term asset (i.e. can be converted to cash within one year).



Current Liability:

A short-term liability (i.e. payment is due within a year).




Another term for amortization.



Fixed Asset:

An asset that is expected to last for more than a year, AND will be used to generate revenue for the business. Examples of fixed, long-term assets include land, buildings, equipment and machinery, and vehicles.



Gross profit:

It is the difference between the cost of what you’re selling, and the price at which you are selling it.

Gross Profit = Net SalesCost of Goods Sold.


The price of money. It is the cost of borrowing funds. It is stated as a percentage cost on a yearly basis, however, it is usually paid monthly. Example: 4% interest means to borrow $100 would cost you $4 per year.



Long-Term Liabilities:

Debt due to be paid beyond a year’s time, that will also require several years to pay off in full. Examples include bank loan, and mortgages.



Merchandise business:

A business that sells goods, rather than a service. There are two kinds: periodic and perpetual.



Merchandise business – periodic:

A merchandise business that only periodically keeps its inventory level in its accounting records up to date by doing an inventory count, often at the end of the month.



Merchandise business – Perpetual:

A merchandise business that always keeps its inventory level in its accounting records up to date.



Merchandise Inventory:

Inventory items purchased by a business for the purpose of being re-sold to customers at a higher price.



Net Sales:

It is the value of revenue that a business keeps for itself.

Net Sales = Sales Revenue - Sales Returns - Sales Discounts.


Operating expenses:

Expenses incurred from the regular operating activities of a business. Regular operating activities would be wages, delivery costs, heat, electricity, advertising, etc.



Permanent Accounts:

Accounts that are never closed out during the closing entry process nor reset to zero. They hold value indefinitely. Examples of permanent accounts include cash, land, accounts payable, and capital (basically everything from cash down to capital in the chart of accounts).



Prepaid Expense:

Expenses that are paid for in advance by a business. To the receiver of the early payment, it is usually called unearned revenue. See unearned revenue.




A fixed rate of pay. People who earn a salary, are paid based on a set salary, regardless of how many hours they work.



Salvage Value:

This is the scrap value of a fixed asset. It represents value that will never leave the asset, and therefore is not amortized.



Temporary Accounts:

The accounts that are closed out during the closing entry process. They are Drawings, Revenues, and Expenses.



Unearned Revenue:

Unearned revenue is revenue paid to a business in advance of the business actually earning it. It is often a prepaid expense to the customer that is paying early. See prepaid expense.



Useful life:

The length of time a fixed asset is expected to last and serve the business in the generation of revenue.




An hourly rate of pay. People who earn a wage, are paid based on how many hours they work.




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