The document defines key accounting terms including credits, debits, accounting periods, accounts payable, accounts receivable, depreciation, accrual basis accounting, accruals, assets, equity, balance sheets, capital, dividends, cash basis accounting, cash flow, certified public accountants, cost of goods sold, and closing the books. It provides brief descriptions of each term and highlights their relevance and use in accounting.

1. Credits
Credits are accounting entries that increase liabilities
or decrease assets. They are the functional opposite
of debits and are positioned to the right side in
accounting documents.
Debits
Debits are accounting entries that function to
increase assets or decrease liabilities. They are the
functional opposite of credits and are positioned to
the left side in accounting documents.
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2. Accounting Period
An accounting period defines the length of time covered by a financial
statement or operation. Examples of commonly used accounting periods
include fiscal years, calendar years, and three-month calendar quarters.
Some organizations also use monthly periods. Each accounting period
covers one complete accounting cycle. An accounting cycle is an step
system accountants use to track transactions during a particular period.
Accounts Payable
Accounts payable (AP) tracks money owed to creditors. Examples
include bank loans, unpaid bills and invoices, debts to suppliers or
vendors, and credit card or line of credit debts. Rarely, the term "trade
payables" is used in place of "accounts payable." Accounts payable
belong to a larger class of accounting entries known as liabilities.
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3. • Accounts receivable
Accounts Receivable ( AR) tracks the money owed to a person or
business by its debtors. It is the functional opposite of accounts
payable.
Accounts receivable are sometimes called "trade receivables." In most
cases, accounts receivable derive from products or services supplied on
credit or without an upfront payment. Accountants track accounts
receivable money as assets.
• Depreciation
Depreciation (DEPR) applies to a class of assets known as fixed assets.
Fixed assets are long-term owned resources of economic value that an
organization uses to generate income or wealth. Real estate,
equipment, and machinery are common examples. Fixed assets can
decline in value. Accountants record those declines as depreciation.
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4. Accrual basis accounting
• Accrual basis accounting (or simply "accrual accounting") records
revenue- and expense-related items when they first occur. For
example, a customer purchases a $2,000 product on credit. Accrual
accounting recognizes that $2,000 in revenue on the date of the
purchase. The method contrasts with cash basis accounting, which
would record the $2,000 in revenue only after the money is actually
received. In general, large businesses and publicly traded companies
favor accrual accounting. Small businesses and individuals tend to use
cash basis accounting.
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5. Accruals
• Revenues and expenses recognized by a company but not yet
recorded in their accounts are known as accruals (ACCR). By
definition, accruals occur before an exchange of money resolves the
transaction.
• For example, a company that hired an external consultant would
recognize the cost of that consultation in an accrual. That cost would
be recognized regardless of whether or not the consultant had
invoiced the company for their services. Accounts payable and
accounts receivable are accrual types. Others include accrued costs
(costs incurred but not resolved during a particular accounting
period) and accrued expenses (expenses or liabilities incurred but not
resolved during a particular accounting period).
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6. • Assets
Assets are items of value, or resources that a business owns or controls. More
technical and precise definitions specify two technicalities: First, assets result from
past business activities. Second, they will or are expected to generate future
economic value. Assets come in many types and classes. Types include current and
noncurrent, operating and non-operating, physical, and intangible. Classes include
broad categories such as cash and equivalents, equities, commodities, real estate,
intellectual property, and fixed income, among others.
• Equity
At a basic level, equity describes the amount of money that would remain if a
business sold all its assets and paid off all its debts. It therefore defines the stake in
a company collectively held by its owner(s) and any investors. The term "owner's
equity" covers the stake belonging to the owner(s) of a privately held company.
Publicly traded companies are collectively owned by the shareholders who hold its
stock. The term "shareholder's equity" describes their ownership stake.
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7. Balance Sheet
• A balance sheet (or "statement of financial position") is a standard
financial statement. It specifies the business' current state regarding
its assets, liabilities, and owners' equity. Some sources abbreviate the
term as BAL SH. Accountants use multiple formats when creating
balance sheets: classified, common size, comparative, and vertical
balance sheets. Each format presents information as line items that
combine to provide a snapshot summary of the company's financial
position.
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8. Capital
In common usage, capital (abbreviated "CAP.") refers to any asset or resource
a business can use to generate revenue. A second definition considers capital
the level of owner investment in the business. The latter sense of the term
adjusts these investments for any gains or losses the owner(s) have already
realized. Accountants recognize various subcategories of capital. Working
capital defines the sum that remains after subtracting current liabilities from
current assets. Equity capital specifies the money paid into a business by
investors in exchange for stock in the company. Debt capital covers money
obtained through credit instruments such as loans.
Dividends
In corporate accounting, dividends represent portions of the company's
profits voluntarily paid out to investors. Investors are often paid in cash, but
may also be issued stock, real property, or liquidation proceeds. In most
cases, dividends follow a regular monthly, quarterly, or annual payment
schedule. However, they can also be offered as exceptional one-time
bonuses.
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9. • Cash Basis Accounting
Cash Basis Accounting records revenues and expenses when the money
involved in each transaction officially changes hands. It contrasts with
accrual basis accounting. Accrual accounting recognizes revenues and
expenses when they occur without regard to whether the associated
funds have been exchanged.
Cash Flow
Cash flow (CF) describes the balance of cash that moves into and out of
a company during a specified accounting period. Accountants track CF
on the cash flow statement.
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10. • Certified Public Accountant
Certified public accountant (CPA) is an accounting professional specially
licensed to provide auditing, taxation, accounting, and consulting services.
CPAs work for both businesses and individual clients.
To obtain CPA licensure, a candidate must meet eligibility criteria and pass a
demanding four-part standardized exam. Eligibility standards include at least
150 hours of higher education covering related coursework.
Cost of Goods Sold
Cost of goods sold (COGS) describes the total costs a company incurred in
creating a product or providing a service. With products, the associated costs
fall into three broad categories: materials, labor, and overhead. With
services, costs include expenses related to employee compensation,
materials, and equipment. Accountants sometimes use the alternative term
"cost of sales. "Accountants use the following basic formula to calculate
COGS over a specific accounting period: Initial Inventory + Purchases - Ending
Inventory.
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11. • Closing the Books
The informal phrase "closing the books" describes an accountant's
finalization and approval of the bookkeeping data covering a particular
accounting period. When an accountant "closes the books," they
endorse the relevant financial records. These records may then be used
in official financial reports such as balance sheets and income
statements.
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