The ABC inventory system is different from activity-based costing. The ABC inventory system is used in order to focus on the most important items in inventory. Usually a relatively few items will account for a very significant value. These relatively few items with great importance are categorized as the "A" items. It is also common for many of the items in inventory to have a relatively small aggregate value. These items are categorized as "C" items. The remaining items are categorized as the "B" items. By closely monitoring the "A" items, a company is able to manage the most important items with a relatively small effort.

Costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products being manufactured. This system, which treats fixed manufacturing costs as a product cost, is required for external financial statements.

The allocation of the cost of a plant asset to expense in an accelerated manner. This means that the amount of depreciation in the earlier years of an asset's life is greater than the straight-line amount, but will be less in the later years. In total the amount of depreciation over the life of the asset will be the same as straight-line depreciation. The difference between accelerated and straight-line is the timing of the depreciation. For profitable companies, the use of accelerated depreciation on the income tax return will mean smaller cash payments for income taxes in the earlier years and higher cash payments for income taxes in later years. To learn more, see Explanation of Depreciation.

A record in the general ledger that is used to collect and store similar information. For example, a company will have a Cash account in which every transaction involving cash is recorded. A company selling merchandise on credit will record these sales in a Sales account and in an Accounts Receivable account.




accounting equation

Assets = Liabilities + Owner's Equity. For a corporation the equation is Assets = Liabilities + Stockholders' Equity. Because of double-entry accounting this equation should be in balance at all times. The accounting equation is expressed in the financial statement known as the balance sheet.






accounting net income flows

The amounts reported on the income statement. Because of accrual accounting the net income flows will be different from the cash flow.

accounting principles

The standards, rules, guidelines, and industry-specific requirements for financial reporting.








Accounting Principles Board (APB)

This group preceded the current Financial Accounting Standards Board (FASB). The APB members served in a part-time capacity to determine the accounting standards from 1962 to 1973. The accounting rules established by the APB were titled Opinions and remain as part of the generally accepted accounting principles (unless superseded by standards issued by the FASB



accounting rate of return

An indicator of profitability that is measured by dividing the accounting net income by the amount invested.

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accounts payable

This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. This account is often referred to as trade payables (as opposed to notes payable, interest payable, etc.)

accounts receivable

A current asset resulting from selling goods or services on credit (on account). Invoice terms such as (a) net 30 days or (b) 2/10, n/30 signify that a sale was made on account and was not a cash sale.








accounts receivable - net

The combined amount of the debit balance in the current asset account Accounts Receivable and the credit balance in the contra asset account Allowance for Doubtful Accounts. The difference between the balances in these two accounts is an approximation of the amount of the accounts receivable that is likely to turn to cash (be collected).

accounts receivable turnover ratio

The financial ratio which indicates the speed at which a company collects its accounts receivable. If a company's turnover is 10, this means the company's accounts receivable are turning over 10 times per year. It indicates that the company, on average, is collecting its receivables in 36.5 days (365 days per year divided by 10)



accrual basis of accounting

The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service).

Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in Cash (if the expense was paid at the time the expense was incurred), an increase in Accounts Payable (if the expense will be paid in the future), or a decrease in Prepaid Expenses (if the expense was paid in advance).




accrual-type adjusting entry

An adjusting entry made at the end of the accounting period in order to report (1) revenues that have been earned but have not yet been entered into the accounting records, (2) expenses that have been incurred but have not yet been entered into the accounting records, (3) revenues already recorded that involve more than the current accounting period, or (4) expenses already recorded that involve more than the current accounting period



ccrual-type adjusting entry

An adjusting entry made at the end of the accounting period in order to report (1) revenues that have been earned but have not yet been entered into the accounting records, (2) expenses that have been incurred but have not yet been entered into the accounting records, (3) revenues already recorded that involve more than the current accounting period, or (4) expenses already recorded that involve more than the current accounting period.




accrue

To report a revenue or expense that has occurred, but has not yet been entered in the accounting records as of the end of the accounting period.



accrued expense

An expense that has occurred but the transaction has not been entered in the accounting records. Accordingly an adjusting entry is made to debit the appropriate expense account and to credit a liability account such as Accrued Expenses Payable or Accounts Payable



accrued expenses payable

A liability account that reflects the estimated amount a company owes for expenses that occurred, but have not yet been paid nor recorded through a routine transaction.



accrued liability

The amount a company owes for expenses or losses incurred that have not yet been paid nor recorded through a routine transaction



accrued revenue

Revenue that has been earned but not yet invoiced to the customer



accumulated deficit

The term used in place of retained earnings when a corporation has a negative (debit) balance in its account Retained Earnings.

accumulated depletion

The cumulative amount of depletion expense pertaining to the natural resources shown on the balance sheet. The account has a credit balance and will be reported on the balance sheet as a contra asset.




accumulated depreciation

The amount of a long term asset's cost that has been allocated to Depreciation Expense since the time that the asset was acquired. Accumulated Depreciation is a long-term contra asset account (an asset account with a credit balance) that is reported on the balance sheet under the heading Property, Plant, and Equipment.




accumulated depreciation - buildings

This is a contra long-term asset account which is credited for the depreciation associated with Buildings. Since it is a balance sheet account, the accumulated depreciation account balance does not close at the end of each year; therefore, its credit balance will increase each year. However, its balance cannot become greater than the cost of the buildings.

When the credit balance in Accumulated Depreciation - Buildings is netted with the cost in the Buildings account, the result is the book value or carrying value of the buildings.

Depreciation Expense - Buildings is the income statement account that is debited when Accumulated Depreciation - Buildings is credited.






accumulated depreciation - equipment

The contra asset account which accumulates the amount of Depreciation Expense taken on Equipment since the equipment was acquired. As a contra asset account it will have a credit balance.

accumulated depreciation - land improvements

This account is a contra long-term asset account which is credited for the depreciation associated with land improvements. As an asset account, the accumulated depreciation account balance does not close at the end of each year; therefore, its credit balance will increase each year. However, its balance cannot become greater than the cost shown in the Land Improvements account.

When the credit balance in Accumulated Depreciation - Land Improvements is netted with the cost of land improvements, the result is the book value or carrying value of the land improvements.

Depreciation Expense - Land Improvements is the income statement account that is debited when Accumulated Depreciation - Land Improvements is credited.

ccumulated other comprehensive income

A separate line within stockholders' equity that reports the corporation's cumulative income that has not been reported as part of net income on the corporation's income statement. The items that would be included in this line involve the income or loss involving foreign currency transactions, hedges, pension liabilities, and the unrealized gains and losses on certain investments. To learn more about this go to www.FASB.org, select Accounting Pronouncements from the left panel, and then select Statement of Financial Accounting Standards

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