Begrippen Accounting & Control: the language of business

Accounting: The information system that measures business activities, processes the data into reports and communicates the results to decision makers.
Financial accounting: Accounting for external decision makers such as investors, creditors and tax authorities; follows GAAP or IFRS and focuses on the past.
Managerial accounting: Accounting for internal decision makers (managers, employees); not bound by GAAP, detailed and future-oriented.
GAAP: Generally Accepted Accounting Principles: the rules that financial accounting must follow so statements are reliable and comparable.
IFRS: International Financial Reporting Standards, published by the IASB and used in more than 166 jurisdictions, including the EU for listed companies.
Economic entity assumption: The business is a separate unit from its owners; only the business's own transactions are recorded.
Cost principle: Acquired assets and services are recorded at their actual historical cost, the price actually paid.
Going concern assumption: The entity is assumed to keep operating for the foreseeable future, so assets are not valued at liquidation prices.
Faithful representation: A fundamental quality of useful information: complete, neutral and free from error. The other is relevance.
Asset: An economic resource expected to benefit the business in the future, such as cash, inventory, land or equipment.
Liability: A debt owed to creditors resulting from a past event; often has 'payable' in its name.
Equity: The owners' claim on the assets: assets minus liabilities. Consists of contributed capital and retained earnings.
Retained earnings: Equity earned through profitable operations and kept in the business rather than paid out as dividends.
Dividends: Distributions of earnings to stockholders; they reduce equity but are not an expense.
Account: The detailed record of all increases and decreases in one item (asset, liability or equity) during a period.
Debit and credit: The left (debit) and right (credit) side of an account. Assets, expenses and dividends increase with a debit; liabilities, equity and revenues with a credit.
Double-entry accounting: Every transaction is recorded in at least two accounts with equal debits and credits, so the accounting equation stays in balance.
Journal: The chronological record of all transactions, with the accounts, amounts and an explanation.
Ledger: The collection of all accounts with their balances; journal entries are posted to it.
Trial balance: A list of all ledger accounts and their balances at a point in time, used to check that total debits equal total credits.
Unearned revenue: A liability for cash received before the goods or services have been delivered; also called deferred revenue.
Accrual basis accounting: Revenues are recorded when earned and expenses when incurred, regardless of cash; required by GAAP.
Revenue recognition principle: Revenue is recognised when a performance obligation to the customer is satisfied, following a five-step process.
Matching principle: Expenses are recorded in the period they are incurred and matched against the revenues of that period.
Adjusting entry: An end-of-period entry that assigns revenues and expenses to the correct period and updates the related asset or liability; never involves cash.
Deferred expense: An advance payment for a future expense (prepaid rent, insurance, supplies); an asset until used.
Accrued expense: An expense incurred but not yet paid or recorded, such as salaries or interest payable at year end.
Accrued revenue: Revenue earned but not yet received or recorded; recorded as a receivable.
Depreciation: Allocating the cost of a plant asset (except land) to expense over its useful life.
Accumulated depreciation: Contra asset account with the total depreciation recorded so far; reduces the asset to its book value.
Book value: Cost of a depreciable asset minus its accumulated depreciation.
Classified balance sheet: A balance sheet that groups assets and liabilities into current and long-term categories, assets in order of liquidity.
Current assets: Assets that will be converted to cash, sold or used up within one year or the operating cycle, if longer.
Operating cycle: The time from spending cash on goods and services, to selling them, to collecting cash from customers.
Closing entries: Entries at the end of the period that set revenues, expenses and dividends to zero and transfer their net effect to retained earnings.
Temporary accounts: Accounts closed at the end of each period: revenues, expenses, dividends and Income summary.
Permanent accounts: Accounts that are not closed and carry their balances to the next period: assets, liabilities, common stock and retained earnings.
Post-closing trial balance: Trial balance after closing, listing only permanent accounts.
Accounting cycle: The sequence of steps from beginning balances through journalizing, posting, adjusting, statements and closing to the post-closing trial balance.
Statement of cash flows: Statement of cash receipts and payments for a period, split into operating, investing and financing activities.
Accounts receivable: Amounts due from customers for goods or services sold on account; usually collected within 30 to 60 days.
Direct write-off method: Bad debts expense is recorded only when a specific account is found uncollectible; violates the matching principle.
Allowance method: Bad debts are estimated each period and recorded with a contra asset, Allowance for bad debts; required by GAAP.
Net realizable value: The amount of receivables expected to be collected: accounts receivable minus the allowance for bad debts.
Percent-of-sales method: Income statement approach: bad debts expense is a percentage of net credit sales.
Aging-of-receivables method: Balance sheet approach that applies higher loss percentages to older groups of receivables to find the target allowance.
Note receivable: A written promise to pay a principal plus interest on a maturity date.
Dishonored note: A note the maker fails to pay at maturity; its maturity value is moved to accounts receivable.
Acid-test ratio: (Cash + short-term investments + net current receivables) / current liabilities; a strict liquidity measure.
Property, plant and equipment: Long-lived tangible assets used in operations, such as land, buildings, equipment and vehicles.
Land improvements: Fences, paving, lighting and similar additions to land; a separate asset that is depreciated.
Residual value: The expected value of a depreciable asset at the end of its useful life.
Units-of-production method: Depreciation based on usage: depreciable cost per unit times the units used in the year.
Double-declining-balance method: Accelerated depreciation: book value at the start of the year times twice the straight-line rate.
Depletion: Allocating the cost of a natural resource to expense as it is extracted, using units-of-production.
Amortization: Allocating the cost of an intangible asset with a definite life to expense over its useful life.
Impairment: A loss that is recorded when an asset's fair value falls below its book value.
Goodwill: The amount paid for an acquired company above the market value of its net assets; not amortized but tested for impairment.
Patent: An intangible asset giving an exclusive 20-year right to produce and sell an invention; amortized over its useful life.
Trading debt investment: A debt security the investor plans to sell in the very near future; at fair value with unrealized gains and losses in net income.
Held-to-maturity investment: A debt security the investor intends and is able to hold until maturity; reported at amortized cost.
Available-for-sale investment: A debt security that is neither trading nor held-to-maturity; at fair value with unrealized gains and losses in other comprehensive income.
Equity method: Method for 20 to 50% ownership: the investment rises with the investor's share of the investee's net income and falls with dividends received.
Consolidation: Combining the statements of a parent and its subsidiary when the parent owns more than 50% of the voting stock.
Unrealized holding gain or loss: A change in fair value of an investment that has not yet been sold.
Comprehensive income: The change in equity from all sources other than owner investments and dividends: net income plus other comprehensive income.
Current liability: An obligation due within one year or the operating cycle, such as accounts payable or salaries payable.
Sales tax payable: Tax collected from customers on behalf of the government; a liability, not an expense.
Current portion of long-term debt: The part of a long-term debt that must be repaid within the next year; reported as a current liability.
Net pay: Gross pay minus all withholdings: the amount the employee takes home.
Withholding deductions: Amounts kept back from gross pay (income tax, social security, insurance) that the employer must pay on; liabilities until paid.
Estimated liability: A liability that exists but whose amount must be estimated, such as warranties, bonuses and vacation pay.
Contingent liability: A potential liability that depends on a future event; recorded only if probable and estimable, otherwise disclosed or ignored.
Mortgage payable: A long-term debt secured by specific property, usually repaid in equal monthly payments of interest and principal.
Amortization schedule: A table showing for each loan payment the interest, the principal repaid and the remaining balance.
Bonds payable: Long-term debt issued to many lenders (bondholders), usually in units of $1,000.
Stated interest rate: The rate printed on a bond that determines the cash interest paid.
Market interest rate: The rate investors demand when the bond is issued; also called the effective rate.
Discount on bonds payable: Contra liability that arises when bonds are issued below face value (stated rate below market rate); amortized into interest expense.
Premium on bonds payable: Adjunct liability that arises when bonds are issued above face value (stated rate above market rate); reduces interest expense.
Carrying amount of bonds: Bonds payable minus the discount or plus the premium.
Debentures: Unsecured bonds backed only by the creditworthiness of the issuer.
Corporation: A business organised as a separate legal entity, owned by stockholders with limited liability.
Authorized, issued and outstanding stock: The maximum shares allowed, the shares actually issued, and the issued shares still held by stockholders (issued minus treasury).
Preferred stock: Stock with priority over common stock for dividends and in liquidation, usually without voting rights.
Par value: An arbitrary legal amount per share; the par value goes to the stock account and the excess to paid-in capital in excess of par.
Treasury stock: The company's own previously issued stock that it has bought back; a contra equity account recorded at cost.
Cumulative preferred stock: Preferred stock whose skipped dividends (arrears) must be paid before common stockholders receive dividends.
Stock dividend: A distribution of the company's own shares to stockholders; shifts retained earnings to paid-in capital without changing total equity.
Stock split: An increase in the number of shares with a proportional decrease in par value per share; only a memorandum entry.
Earnings per share: (Net income − preferred dividends) / weighted average common shares outstanding.
Planning, directing and controlling: The three managerial functions: setting goals and plans, running daily operations, and comparing results with the plan.
Line and staff positions: Line positions deliver goods or services to customers directly; staff positions support them.
Cost object: Anything for which managers want a separate measurement of cost, such as a product, job or department.
Direct cost: A cost that can be traced to a cost object easily and cost-effectively.
Indirect cost: A cost that cannot be traced to a cost object easily or cost-effectively, such as factory utilities.
Manufacturing overhead: All indirect manufacturing costs: indirect materials, indirect labour, plant depreciation, rent, utilities and insurance.
Conversion costs: Direct labor plus manufacturing overhead: the cost of converting materials into products.
Product costs: Costs of making or buying a product (DM, DL, MOH); held in inventory until the product is sold.
Period costs: Non-manufacturing costs such as selling and administrative expenses; expensed when incurred.
Cost of goods manufactured: The manufacturing cost of the goods completed in a period: beginning WIP + manufacturing costs − ending WIP.
Triple bottom line: Measuring a company's economic, social and environmental impact: profit, people and planet.
Job order costing: A cost system that accumulates costs per job; used for unique products or batches.
Job cost record: The document that collects the direct materials, direct labor and allocated overhead of one job.
Predetermined overhead allocation rate: Estimated overhead divided by the estimated quantity of the allocation base, computed before the period.
Allocation base: The measure used to assign overhead to jobs, ideally the primary cost driver (labour hours, labour cost, machine hours).
Underallocated overhead: Actual overhead exceeds allocated overhead; corrected by increasing cost of goods sold.
Overallocated overhead: Allocated overhead exceeds actual overhead; corrected by decreasing cost of goods sold.
Process costing: A cost system that accumulates costs per process or department; used for identical units produced in large volumes.
Equivalent units of production: Partly completed units expressed as a number of fully completed units, per cost category.
Production cost report: Report of a process showing physical units, equivalent units, cost per equivalent unit and the assignment of costs.
Weighted-average method: Process costing method that combines beginning WIP costs and current costs into one pool to compute the cost per EUP.
FIFO method (process costing): Process costing method that treats beginning WIP separately and computes the cost per EUP with current period costs only.
Transferred-in costs: Costs incurred in an earlier process that are carried into a later process as part of the product's cost.
Activity-based costing (ABC): Allocating indirect costs through the costs of activities, each with its own allocation base.
Activity-based management (ABM): Using activity-based cost information for decisions on pricing, product mix and cost management.
Single plantwide rate: One predetermined overhead rate with one allocation base for the whole plant; the simplest, traditional approach.
Target cost: The maximum full cost that still earns the desired profit at the price customers will pay: target price − desired profit.
Just-in-time (JIT): A system that produces just in time for customer demand and keeps inventories minimal.
Prevention costs: Quality costs incurred to avoid poor quality, such as training and preventive maintenance.
Appraisal costs: Quality costs incurred to detect poor quality, such as inspection and testing.
Internal failure costs: Costs of correcting defects before delivery, such as rework and rejected products.
External failure costs: Costs of defects found after delivery, such as warranty costs, returns and lost profits.
Lean management: A systematic method, from the Toyota Production System, to minimise waste without sacrificing productivity.
Muda: The seven types of waste in lean: overproduction, waiting, transport, extra processing, inventory, motion and defects.
Kaizen: Continuous improvement through small, incremental changes.
Variable cost: A cost that changes in total in proportion to volume but is constant per unit.
Fixed cost: A cost that stays the same in total within the relevant range; its cost per unit falls as volume rises.
Mixed cost: A cost with a fixed and a variable part, such as a phone subscription plus a fee per minute.
Relevant range: The range of volume within which total fixed costs and variable cost per unit stay constant.
High-low method: Splitting a mixed cost into variable and fixed parts using the highest and lowest activity levels.
Contribution margin: Sales revenue minus variable costs: the amount available to cover fixed costs and provide operating income.
Breakeven point: The sales level at which operating income is zero.
Margin of safety: Expected sales minus breakeven sales: how far sales can fall before a loss occurs.
Operating leverage: The effect of fixed costs on the change in operating income when sales change; measured by CM / operating income.
Cost stickiness: Costs rise more when volume increases than they fall when volume decreases.
Absorption costing: Costing method in which all manufacturing costs, including fixed overhead, are product costs; required by GAAP.
Variable costing: Costing method in which only variable manufacturing costs are product costs and fixed overhead is a period cost.
Contribution margin income statement: Income statement that subtracts all variable costs from sales to get the contribution margin, then all fixed costs.
Business segment: An identifiable part of a company with its own financial information, such as a product line, region or customer group.