1.2 Accounting Quick Reference and Terms

Accounting IS NOT a math class.  Accounting IS a language class.  EVERYONE has learned the rules of the English language.  EVERYONE is ready to learn the rules of accounting or the language of business.

If you were going on a vacation to a country that spoke a different language, you would make sure you understand basic words to find the bathroom, get transportation, and order food.  In accounting are basic words are assets, liabilities, owner’s equity, revenue, and expenses.  Understanding these basic words is the beginning to understanding the accounting language.

Five Accounting Classifications

There are five basic classifications were all accounting accounts can be placed.  You can think of these accounts as belonging to a class.  Instead of a class of students, it is class of words.

• Assets—items the organization owns, controls, or has a claim to.
• Liabilities—amounts the organization owes or is liable to pay others (also called creditors).
• Equity—the net worth (or net assets) of the organization.  This can be called Stockholders’ Equity or Owner’s Equity.
  • Investment by owners—cash or other assets provided to the organization in exchange for an ownership interest.
  • Distribution to owners—cash, other assets, or ownership interest (equity) provided to owners.
• Revenue—value of goods and services the organization sold or provided.
  • Gains—gains are similar to revenue but relate to “incidental or peripheral” activities of the organization.
• Expenses—costs of providing the goods or services for which the organization earns revenue.
  • Losses—losses are similar to expenses but related to “incidental or peripheral” activities of the organization.

These words are easier to understand if you visually look at the handout and listen to me talk about each word.  I will only ask you to print ONE page in this entire class.  It is encouraged that you print this handout so you have it easily available for our entire accounting class.  It will also help in your finance class.

Accounts

Each classification has many accounts. Accounts are used to track individual amounts.  An accounting professional is responsible for assigning each account to a classification.

An example of an asset account is accounts receivable.  An example of an expense account is rent expense.

Financial statements are discussed briefly in this video but will be taught in depth in the next parts of Chapter 1.

Accounting Classification Simplified (Excel file will download)

In accounting systems, students assume that systems will put each account into the correct classification.  In reality, a human tells the computer accounting system how to classify each account.  The most common classification errors are inventory being classified as an expense and appearing on the income statement and payroll expense being classified as a liability and appearing on the balance sheet.  These errors cause problems on financial statements and often cause small businesses to not have accurate financial statements for need investor or bank funding.

Licensing and Attribution: 

LO 1.2 is original content by JoAnn Wood featured in Accounting, The Language of Business.  It is licensed under CC BY-NC-SA.

Additional content featured in this chapter includes the following open resource(s):

Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal, and Dixon Cooper licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License