Accounting: the language of business. It is the process of aggregating information to produce financial statements for internal and external users.

Accounting Equation: sometimes called the Fundamental Accounting Equation and defined as Assets = Liabilities + Equity. It ensures that our accounts balance, that errors are caught, and accounts are complete.

Accounting policy: company-specific choices on how to calculate and account for accounting transactions where accounting standards allow for alternative methods. Examples are half-year proration, depreciation method, or use of the allowance method for Accounts Receivable.

Accounts payable: a current liability account that tells financial statement users how much a company is obligated to pay suppliers for past inventory purchases.

Accounts receivable (A/R): a current asset account that tells financial statement users how much a company expects to receive from customers for past sales. Also known as credit sales.

Accrual accounting: the practice of recording revenue, expenses, and dividends in a different period than the cash was received or paid. GAAP requires that the Statement of Financial Position, Income Statement, and Statement of Changes in Equity use accrual accounting. Accrual accounting refers to both accruals and deferrals. See also: Adjusting journal entries, Periodicity.

Accrued expenses: costs of generating revenues are recorded as expenses on the income statement in the period the company benefits from the cost, regardless of whether the cost has been settled in cash.

Accrued liabilities: current liability accounts that represent expenses recorded in advance of cash payment. Examples include accrued salaries (also called salaries payable) and accrued interest (also called interest payable).

Accumulated depreciation: the cumulative depreciation on an asset or asset class over the life of the asset(s). Accumulated depreciation is a contra-account that offsets a related asset cost account to yield the asset’s net book value (NBV).

Adjusting journal entries: these change-makers adjust balances at period-end for timing issues. See also: Accrual accounting, Periodicity.

Allowance for doubtful accounts: the amount of A/R that is not expected to be collected. This contra-account reduces the balance of A/R from the total amount owed to the estimated amount collectible.

Allowance method: the practice of maintaining an allowance for doubtful accounts contra-account to reduce A/R to its estimated collectible amount. See also: Allowance for doubtful accounts, A/R aging summary.

Amortization table: a tool designed to track contractual cash flows and accounting adjustments required for loans over the debt term. An amortization table includes columns for opening balance, interest paid, total cash paid, principal repayments, and closing balance. See also: blended interest-principal loan, principal plus interest loan.

A/R Aging Summary: a detailed account of accounts receivable (A/R) that reports the aggregate balance of receivables due within 30 days and overdue accounts (invoiced within 31-60 days; 61-90 days; and 91+ days). The A/R aging summary provides information to help companies accelerate receipt of A/R and estimate the collectible portion of A/R due from customers. See also: Allowance method.

A/R turnover: describes how many times the entire accounts receivable (A/R) balance was collected during the fiscal year and is calculated as credit sales divided by the average A/R balance during the year. See also: Days in A/R.

ASPE: Accounting Standards for Private Enterprises. These standards are available to Canadian private companies and govern financial statement preparation and presentation. ASPE are simpler standards than their counterpart IFRS, but the two sets of standards have remarkable overlap. See also: IFRS.

Asset: what is owned. An asset is (1) a resource controlled by an entity (2) as a result of past events and (3) from which future economic benefits are expected to flow to the entity.

Balance per bank: the unadjusted or adjusted bank account balance at the reconciliation date. The source document for balance per bank is the bank statement, investment statement, or credit card statement. See also: Bank reconciliation, Balance per books.

Balance per books: the unadjusted or adjusted financial account balance taken from the trial balance at the reconciliation date. Required to reconcile bank accounts, investment accounts, and credit card balances. See also: Bank reconciliation, Balance per bank.

Bank reconciliation: checks a company’s bank accounts against the bank statements, and provides a listing of differences between a company’s records and the bank’s records. If it reconciles, the company can be confident that their accounting records are complete and error-free. See also: Balance per bank, Balance per books.

Blended interest-principal loan: consists of set cash payments each period that are partly loan interest, and partly repayments of loan principal. As the loan term continues, interest constitutes a smaller percentage of the cash loan payment. Mortgages are designed as blended interest-principal loans. To contrast, see Principal plus interest loan.

Business model: explains how a company creates value in the marketplace. A business model includes the type of business a company engages in (e.g., retail sales, manufacturing, service) and how it differentiates from its competitors. A company’s business model tends not to change quickly over time.

Cash: physical cash (petty cash, cash in registers, and cash in a safe) and cash in bank accounts (chequing and savings accounts).

Cash equivalents: short-term investments that are not subject to market fluctuations such as short-term treasury notes or Guaranteed Income Certificates (GIC). Cash equivalents are combined with cash on the Statement of Financial Position in the line item: Cash and cash equivalents. See also: Cash

Closing entries: there are two closing entries. The first closes income statement accounts to retained earnings, the effect is that income statement accounts are set to zero and retained earnings is adjusted for net income (loss). The second entry closes dividends declared to retained earnings (DR retained earnings; CR dividends declared).

Common shares: capital contributed by common shareholders. Common shares are subordinate to debt and preferred shares. Also called ordinary shares.

Contra-account: a sub-account that exists to reduce the book value of a related account. Allowance for doubtful accounts and accumulated depreciation accounts are examples of contra-accounts.

Cost: the historical purchase price of an asset. For long-lived asset such as PPE, cost includes all cash outlays to purchase the asset and prepare it for use.

Cost of goods available for sale (COGAS): calculated as opening inventory plus inventory purchased/produced during the period. Cost of goods available for sale is part of the calculation of cost of goods sold in a periodic inventory system.

Cost of goods sold (COGS): The cost of inventory sold during the period indicated on the Income Statement.

Credit: Right-hand side of a journal entry or T-account. Liabilities, Equity, and Revenue/Income/Gain accounts increase with a credit. Assets and Expenses/Losses decrease with a credit.

Current asset: an economic benefit that meets the criteria of an asset and will be settled within one year or within the company’s accounting cycle, whichever is longer. Cash, A/R, inventory, and pre-paid expenses are current assets.

Current liability: an obligation that meets the criteria of a liability and will be settled within one year. Credit card balances, A/P, and accrued liabilities are current liabilities.

Current portion of long-term debt: the principal repayments of debt expected within one fiscal year. This re-categorization is a financial statement presentation issue and does not affect the balance of debt in the company’s trial balance.

Current ratio: a liquidity ratio that communicates the ability of a company to repay its liabilities in the short term. Calculated as current assets divided by current liabilities. A higher current ratio indicates that a company is highly liquid. Typically, a good ratio would be around 2, but it depends on a variety of factors.

Days in A/R: an efficiency ratio interpreted as the average number of days that an amount remains in A/R before being received by customers. Calculated as 365 divided by A/R turnover. Also called average days in A/R. See also: A/R turnover.

Days in inventory: an efficiency ratio interpreted as the average number of days that inventory remains in the inventory account before being sold. Calculated as 365 divided by Inventory turnover. Also called average days in inventory.

Debit: Left-hand side of a journal entry or T-account. Assets and Expenses/Losses accounts increase with a credit. Liabilities, Equity, and Revenue/Income/Gain decrease with a credit.

Debt: cash raised on the debt/bond market or from a bank that results in contractual cash flows of interest and principal paid by the company over the term of the debt.

Debt covenant: agreements between the lender and borrower specifying financial statement ratios that a company must maintain. If debt covenants are not met, the lender can make the borrowing company repay the debt immediately.

Debt-to-equity: a leverage ratio that communicates the percentage of contributed capital held as debt. Calculated as total liabilities divided by total equity. A higher debt-to-equity ratio indicates that a company is highly leveraged.

Debt-to-total-assets: a solvency ratio that communicates the ability of a company to repay its liabilities in the long-term. Calculated as total assets divided by total liabilities. A lower debt-to-total-assets ratio indicates that a company is highly solvent. Typically, a good debt-to-assets ratio would be around 0.5, but it depends on a variety of factors.

Declining balance method: the systematic allocation of asset cost over its useful life calculated as an asset’s net book value (NBV) multiplied by the straight-line rate and a multiplier. Also called diminishing balance or reducing balance.

Depreciable amount: the total amount of depreciation to be taken on an asset over its useful life. Calculated as asset cost less its expected residual value.

Depreciation: the systematic allocation of an asset’s cost over its useful life. Depreciation reduces the value of an asset over time while simultaneously creating an expense to offset revenue for the periods in which the asset creates value.

Direct method: presents the operating section of the cash flow statement by sources and uses of cash. Examples include cash from customers, cash paid to suppliers, and cash paid to employees. This method presents more useful information than the indirect method and is therefore preferred by accounting standard setters and financial statement users.

Dividends declared: a dividend has been approved by the board of directors. Shareholders may or may not have received cash. Dividends are recorded when declared as DR Dividends declared and CR Dividends payable

Dividends payable: a current liability account that shows an obligation to pay shareholders. Dividends remain in the dividends payable current liability account until paid via cash or transfer of additional common shares. Payment of dividends is recorded as DR Dividends payable and CR Cash or common shares.

Earnings per share (EPS): gives shareholders feedback on how much value has been created on each common shares during the period. Calculated as income attributable to common shareholders divided by weighted average number of shares outstanding.

Entity: A company, group of companies, unincorporated business ( sole proprietor or partnership), or individual participating in business activities.

Equity: the residual interest in the assets of an entity after deducting all of its liabilities. Equity = Assets – Liabilities. Shareholders own this residual interest.

External accounting information: publicly accessible information on a company. This information is standardized so that users can compare current operations to previous years or benchmark performance against competitors. One example of external company information is the annual report.

Financial statements: the primary method used to communicate financial information to internal and external users. Financial statements are the starting point for income tax calculations, and publicly listed companies are required to publish full financial statements at least once per year. The full suite of financial statements: Statement of Financial Position, Income Statement, Statement of Changes in Equity, and Statement of Cash Flows.

Financing activities: a section on the Statement of Cash Flows. This section includes transactions involving debt and equity. For example, dividends paid, taking on a loan, or repaying loan balances.

First-in first-out (FIFO): a method of inventory costing. Upon sale of goods, the company’s accounting system transfers the cost from the oldest inventory batch purchased to cost of goods sold. Once costs from the oldest batch have been transferred, the company moves on to the next oldest batch, and so forth. Therefore, the inventory account is held at the most recent cost of inventory, because older costs have been transferred to the income statement.

Fiscal year: Companies have a year-long reporting cycle that is similar in nature to the January to December calendar year, but companies get to choose what day their year will end on. This reporting period is referred to as a fiscal year.

FOB (freight on board) destination: the seller takes responsibility for the product during transit. If the goods are lost, stolen, or damaged in shipping, the seller is responsible for replacing them. The customer takes possession of the goods when they are delivered.

FOB (freight on board) shipping point: the customer takes responsibility for the product during transit. The seller has no obligation after the goods leave their warehouse. If the goods are lost, stolen, or damaged in shipping, it’s the customer’s loss.

GAAP: Generally Accepted Accounting Principles. In Canada, GAAP are IFRS and ASPE.

Gross margin: the percentage of sales leftover after paying cost of goods sold. Gross margin is calculated as gross profit divided by sales.

Gross pay: calculated as the number of hours worked multiplied by hourly pay. Gross pay is recorded on an employee’s T4 as annual taxable employment income.

Gross profit: defined as sales revenue less cost of goods sold. Also referred to as mark-up on inventory.

Half year rule: a company policy that dictates proration of depreciation. For straight-line and declining balance methods, this means recording half the calculated annual depreciation in the year an asset was purchased, and another half in the year of disposal. No adjustment is necessary for activity-based depreciation methods like units-of-production. See also: Accounting policy.

IFRS: International Financial Reporting Standards. These standards govern financial statement preparation for all Canadian publicly listed companies (and in most countries around the world). Any Canadian privately owned company can also opt into these standards rather than ASPE. See also: ASPE.

Impairment: The process of reducing the carrying value of an asset to its Net Realizable Value (NRV). See also: Obsolescence, Write-off.

Income attributable to common shareholders: used as the numerator to calculate Earnings per Share (EPS). Any income that is payable as dividends to preferred shareholders, that income is not available to the common shareholders. Calculated as net income less preferred share dividends declared. See also: Earnings per share

Income before taxes: Calculated as operating income less peripheral items (other income and expenses; gains and losses). Income before taxes includes all income statement items except for income tax expense, and is the starting point for a company’s tax return.

Income Statement: one of the four financial statements prepared by companies in their reporting cycle. It tells users how much value has been created by the company through profits during the period. Also called Statement of Income, Profit and Loss Statement, P&L, Statement of Earnings, and Statement of Financial Performance. See also: Single-step and Multiple-step Income Statement.

Income: profit-increasing peripheral items such as interest income. Also used to describe calculated net amounts on the Income Statement, where the amount is positive, such as operating income and net income.

Indirect method: presents the operating section of the cash flow statement as an equation, starting with net income and followed by a series of adjustments for non-cash items and changes in working capital accounts. The indirect method can be contrasted with the direct method, which is preferred by accounting standard setters and financial statement users.

Interest payment: a contractual cash flow paid by a borrower to a lender. Interest is designed to fairly compensate the debtholder for loaning their money. Interest payments are calculated as the loan principal multiplied by the annual interest rate specified in the loan agreement. For semi-annual or monthly payments, the annual interest rate must be prorated.

Interest rate: the rate used to calculate interest payments on loans: principal owing x interest rate. The interest rate on a loan is expressed as an annual rate. If interest is paid semi-annually or monthly, a company first has to prorate the interest rate on the same basis. For example, a 12% (annual) interest rate can be expressed as 6% semi-annually (12% x 6/12 months) or 1% monthly (12% x 1/12 months).

Internal accounting information: a company arranges information for management’s decision-making purposes. Internal accounting looks different in each company and depends on the decisions a particular company is trying to make. Also called management accounting. Contrast with external accounting.

Internal controls: company processes designed to keep assets safe by avoiding theft and misuse, including physical controls (cashing out, video surveillance, and maintaining maximum bank balances) and HR controls (separation of duties and job rotation).

Inventory costing: describes how a company calculates the cost of their inventory. Methods include specific identification, first-in first-out (FIFO), and weighted average costing.

Inventory system: a method for recording inventory. Methods include perpetual and periodic inventory systems which differ in timing of inventory adjustments and accounts used.

Inventory turnover: an efficiency ratio that describes the number of times inventory is completely refreshed during the period. Calculated as cost of goods sold divided by average inventory balance. See also: Days in inventory.

Investing activities: a section on the Statement of Cash Flows. This section includes transactions involving non-current assets such as financial investments and PPE. For example, purchases of long-term investments, sale of investments, buying land, buying equipment, or selling a building.

Journal entry: the format required to make changes to financial accounts. A journal entry requires at least one debit and one credit, and debit entries must equal credit entries. This debit and credit information is then posted to the accounts to change the account balances.

Leverage: the portion of capital in the company that comes from debt sources. Highly leveraged companies have high levels of debt compared to equity. Commonly evaluated using the debt-to-equity ratio. Also called gearing.

Liability: what is owed. A liability is (1) a present obligation of the entity (2) arising from past events, (3) the settlement of which is expected to result in an outflow of the entity’s resources.

Liquidity: a company’s ability to pay current obligations as they come due. Evaluated using the current ratio or quick ratio.

Manufacturer: a company with a business model of building inventory and selling it. For example, Yamaha Corporation manufactures musical instruments, audio equipment, motorcycles, and snowmobiles.

MD&A: Management Discussion and Analysis. The MD&A is included in a company’s annual report. It comes after management’s opening letter to shareholders and precedes the audited financial statements. See also: Narratives.

Multiple-step Income Statement: A company defines gross profit and operating income using their business model, then adjusts for peripheral items (other income and expenses; gains/losses. Lastly, income tax expense is deducted. This method is preferred by standard setters because it uses the business model to classify income and expenses, which gives financial statement users insight into how the company earns profit. To contrast, see Single-step Income Statement.

Narratives: A section in a company’s annual report where management shares their perspective on how the company performed and what their goals are for the next year. Narratives accompany and give context to financial statements. See also: MD&A.

Net Book Value (NBV): an asset’s NBV is its carrying amount on the financial statements. The NBV of long-lived asset is calculated as cost less accumulated depreciation.

Net income: profit generated by a company over a period of time, after deducting all expenses. Calculated as operating income less peripheral items (other income and expense; gains and losses) and income tax expense. Also called net profit.

Net pay: the amount of cash received by an employee for their work. Net pay is calculated as gross pay less amounts withheld for income taxes, union dues, Canada Pension Plan (CPP), Employment Insurance (EI) and other deductions. To contrast, see Gross pay.

Net Realizable Value (NRV): the amount at which a company expects to settle an account. In the context of A/R this means the estimated amount of cash a company expects to receive from its customers in payment of past sales on accounts. For inventory, NRV is the amount for which inventory can be sold.

Non-current asset: an economic resource that meets the criteria of an asset, and that will not be settled within one year. PPE are non-current assets.

Non-current liability: an obligation that meets the criteria of a liability, and that will not be settled within one year. Debt is a non-current asset, valued as the aggregate principal repayments expected to be paid on debt, and presented on the Statement of Financial Position net of the current portion of long-term debt.

Obsolescence: an asset is obsolete when it is out of date, most often due to advances in technology or science. In the case of obsolescence, an asset’s book value is likely overstated and should be written down due to impairment. See also: Impairment, Write-off.

Opening balance: balance in an account before transactions are journalized. Usually an opening balance is the balance at the beginning of a period: month, fiscal quarter, or fiscal year.

Operating activities: a section on the Statement of Cash Flows. This section includes all transactions the company engages in that fit its business model. For example, companies that purchase and resell goods would record cash from sales to its customers, payments for inventory, and wages paid to employees as operating activities in the Statement of Cash Flow.

Operating income: net profit generated by operating a company’s business model. Calculated as gross profit less operating expenses.

Operating margin: the percentage of sales that remains in operating income. Operating margin is calculated as operating income divided by sales.

Pattern of use: describes how a long-lived asset, like PPE, wears out over time: linearly, rationally, or through use in production.

Periodic inventory system: the inventory account is adjusted periodically. Usually, adjustments take place at the end of every month or year, so the balance in the inventory account reflects past inventory levels and is not up to date. Periodic inventory systems use a temporary account called purchases to keep track of increases to inventory. Cost of goods sold is not recorded until period end dates and is calculated as cost of goods available for sale less the value of ending inventory. To contrast, see Perpetual inventory system.

Periodicity: a problem arising from artificially splitting a company’s lifespan into shorter periods. See also: accrual accounting, adjusting journal entries, revenue recognition.

Peripheral income statement items: Income and expenses, and gains and losses, from transactions that are outside of the company’s operating incomes, as described in their business model. Examples include gains and losses from sales of property, interest income from investments, and interest expenses from loans.

Perpetual inventory system: the inventory account increases every time inventory is received and decreases with every sale. The balance in the inventory and cost of goods sold accounts are always up to date. To contrast, see Periodic inventory system.

Post-closing trial balance: a listing of company accounts after closing entries are made. This means that all income statement accounts and dividends declared are zero.

PPE: property, plant and equipment (PPE) are long-lived physical assets, such as land, buildings, furniture, and vehicles that a company uses to create value.

Preferred shares: capital contributed by preferred shareholders. These shares are subordinate to debt but have a higher claim on company resources than common shares. Preferred shares are usually non-voting. Also called preference shares.

Prepaid Expenses: a current asset representing costs paid in advance for products or services that a company has not used. Rent and insurance are often paid in advance, for example. Prepaid expenses are a deferral of expenses to a future period.

Principal plus interest loan: consists of contractual cash flows for interest paid over time plus payment of the loan principal at the end of the loan term. Corporate bonds are an example of this type of loan. To contrast, see blended interest-principal loan.

Principal: the loan amount borrowed that must be repaid. The principal on a bond is called face value.

Private company: a corporation that is not listed on a stock exchange. Private companies are usually closely held, meaning that (1) there are few shareholders, and (2) owners tend to oversee day-to-day operations. Also called a privately held company or private enterprise.

Profit margin: the percentage of sales that remains in net income and therefore belongs to shareholders. Profit margin is calculated as net income divided by sales.

Profit: what is leftover when expenses are deducted from revenue. See also: gross profit, operating income, net income.

Prorate: to make an adjustment for the time an asset was held, or a liability was outstanding. Adjustments for prepaid expenses, depreciation, interest revenue, and interest expense may require proration. Weighted average number of common shares also requires proration for any shares issued and repurchased during the period.

Public company: a corporation whose shares are traded on an exchange like the Toronto Stock Exchange (TSX). Public companies have a large and dispersed shareholder base. These shareholders can buy and sell shares of the company – exchange with other investors – without affecting the company’s accounting. Also called publicly held company.

Quick ratio: a liquidity ratio that communicates the ability of a company to repay its liabilities in the short-term using highly liquid assets. Highly liquid assets are commonly defined as current assets less inventory and prepaid expenses. The quick ratio is calculated as highly liquid assets divided by current liabilities. A higher quick ratio indicates that a company is highly liquid. Also called an acid test.

Reconciliation: an accounting term that means ”make to equal” or “find out the difference”.

Reporting period: the span of time covered by a set of financial statements, typically one year.

Residual value: the amount an asset is expected to be worth at the end of its useful life. This is typically the expected selling price of the asset less costs of disposal, whether the asset will be sold to another person or put into salvage (recycled).

Retailer: a company whose business model is selling inventory to the final customer. A retailer will often sell a variety of products and brands. For example, St. John’s Music is a retailer of Yamaha products, but they also sell Fender and Roland brand equipment.

Retained earnings statement: An abridged version of the Statement of Changes in Earning that includes only the retained earnings column. This simplified option is only available to private companies reporting under ASPE. Also called a Statement of Retained Earnings.

Retained earnings: returns on capital contributed by shareholders. For a typical company, retained earnings is calculated as net income less dividends, accumulated over the life of the company to date.

Return on assets (ROA): a ratio measuring efficiency of asset use in generating profit. Calculated as net income divided by average total assets.

Revenue recognition: determination of the period in which revenue is to be recorded, as governed by relevant GAAP. Revenue is recognized when, or as, it is earned. For inventory, revenue is earned when the risks and rewards of inventory ownership have transferred to the customer.

Revenue: profit-increasing items arising from the business model, like sales or service revenue. See also: income

Sales revenue: value generated by selling inventory to customers. Sales revenue appears at the beginning of the Income Statement in the calculation of gross profit.

Share issuance: an economic transaction whereby a company transfers shares in exchange for cash.

Share repurchase: an economic transaction whereby a company buys their own shares off the market (if publicly listed) or from existing shareholders (if publicly listed).

Shares: ownership interest in a company. Includes common shares and preferred shares. Share capital, the amount paid for shares, is categorized as Equity and found on the Statement of Financial Position.

Single-step Income Statement: All income and revenue accounts are grouped, followed by expense accounts. Net income is simply the difference between the two groups: income less expenses. To contrast, see Multi-step Income Statement.

Solvency: a company’s ability to pay its liabilities in the long-term. Evaluated using debt-to-total-assets ratio.

Specific identification: a method of inventory costing that assigns a unique number to each unit of inventory. Companies with high-value unique inventory, such as custom home builders, car dealerships, or machinery manufacturers, tend to use specific identification.

Statement of Cash Flows: One of the four financial statements prepared by companies in their reporting cycle. This statement tells financial statement users about the sources and uses of cash. It is a reconciliation of cash and cash equivalents from the beginning to ending balance where changes in cash and cash equivalents are grouped by activity: operating, investing, and financing.

Statement of Changes in Equity: One of the four financial statements prepared by companies in their reporting cycle. It details transactions recorded during the period that affected equity balances. Transactions affecting common shares include share issuances and repurchases. Retained earnings is affected by net income (or loss) and dividends declared. The ending account balances from the Statement of Changes in Equity are presented as Equity on the Statement of Financial Position.

Statement of Financial Position: One of the four financial statements prepared by companies in their reporting cycle. It tells users what the company owns, what it owes, and the ownership stake of shareholders. The Statement of Financial Position paints a picture of assets in place to create value through the company’s business model, as well as claims on value created by suppliers, debtholders, and shareholders. Also called a Balance Sheet.

Straight-line depreciation: systematic allocation of an asset’s cost over its useful life calculated as the asset’s depreciable amount divided by its useful life.

Strategy: describes how a company intends to operationalize their business model in the short-, medium-, and long-term. Strategy is nimble and adapts quickly to internal (HR, cultural, processual, procedural) and external (supply, demand, market) factors.

T-account: A representation of a financial statement account in the form of a T. The account name appears just above the T. Debits are entered on the left-hand side of the T, and credits are entered on the right-hand side.

Times interest earned: an interest coverage ratio that indicates a company’s ability to pay interest as it comes due. Times interest earned is interpreted as the number of times interest can be paid with operating income and is calculated as operating income divided by interest expense.

Transaction: an economic activity engaged in by an entity. Accountants record transactions and aggregate their effects on the entity’s financial statements. In this way, accountants tell the truth about the economic reality of entities.

Trial Balance: a list of company accounts organized by financial statement starting with the Statement of Financial Position, then the Income Statement. Accounts are listed in order as seen on the financial statement: current asset, non-current asset, current liability, non-current liability, equity, sales revenue, cost of goods sold, operating expenses, peripheral expenses, income tax expense. The trial balance is exactly what it sounds like: a trial to test if all the debits and credits balance. See also: Post-closing trial balance.

Unearned revenue: a current liability account that holds cash payments until revenue is earned. Typically, these are deposits paid by customers for future sales or services. The journal entry to increase unearned revenue is DR Cash and CR Unearned revenue. When revenue is earned, unearned revenue decreases as DR Unearned revenue and CR sales revenue.

Useful life: the length of time a company expects to use the asset, or the number of units a company expects the asset to produce while they own it.

Weighted average cost of inventory: This inventory costing method averages the cost of all units purchased. This average cost is assigned to all units in inventory. It is a moving average that increases or decreases depending on whether the unit cost of inventory purchased is higher or lower than the current average cost of inventory. Cost of goods sold is calculated using average cost of inventory per unit at the time of sale.

Weighted average number of common shares outstanding: calculated as beginning number of common shares outstanding plus prorated common share issuances, less prorated common share repurchases. This is the denominator in Earnings per Share (EPS).

Wholesaler: a company with a business model of selling inventory to a retailer. The role of a wholesaler is as a distribution center for products.

Write-off: to reduce the net book value of an asset to its net realizable value (NRV). See also: Impairment, Obsolescence.

Zero-out an account: entering a journal entry to deliberately set the balance of an account to zero. For example, closing entries zero-out income statement accounts to retained earnings at the end of a period. See also: Closing entries.