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Accounting Equation [to] Accounts Receivable Turnover



ACCOUNTING EQUATION – double entry bookkeeping where there is an identity of debit and credit elements of a transaction. For each transaction, the total debits equal the total credits. For example, the payment of $100 to a creditor requires a debit to accounts payable and a credit to cash for $100. The accounting equation can also be expressed as: An increase (or decrease) in total assets is accompanied by an equal increase (or decrease) in liabilities and capital.

ACCOUNTING ERROR – inaccurate measurement or representation of an accounting-related item not caused by intentional FRAUD. An error may be due to NEGLIGENCE or may result from the misapplication of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Errors may take the form of dollar discrepancies or may be compliance errors in employing accounting policies and procedures. Errors can be minimized by diligently following accounting procedures and standards, and maintaining proper INTERNAL CONTROL.


ACCOUNTING EVENT – transaction entered in the accounting records of a business. It can be an external transaction that is, one with an outsider, such as recording a sale. It can also refer to an internal transaction such as making an adjusting entry (e.g., expense or revenue accrual).

ACCOUNTING HALL OF FAME – organization honoring individuals who have made significant scholarly contributions to accounting since the beginning of the twentieth century. The Hall of Fame was founded at Ohio State University in 1950.

ACCOUNTING HISTORIANS JOURNAL – publication of the ACADEMY OF ACCOUNTING HISTORIANS, which first appeared in 1977. All aspects relating to the history of accounting thought are covered in the journal.

ACCOUNTING INFORMATION SYSTEM (AIS) – subsystem of a MANAGEMENT INFORMATION SYSTEM (MIS) that processes financial transactions to provide (1) internal reporting to managers for use in planning and controlling current and future operations and for non-routine decision making; (2) external reporting to outside parties such as to stockholders, creditors, and government agencies.

ACCOUNTING INTERPRETATION – prepared by the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) while the ACCOUNTING PRINCIPLES BOARD was in existence (1959 to 1973). Interpretations gave guidance to practitioners about accounting issues. Unlike APB Opinions, Interpretations are not requirements subject to the AICPA Code of Professional Ethics.

ACCOUNTING MANUAL – handbook containing policy guidelines, procedures, and standards for accounts of a company or an individual. The chart (or classification) of accounts is part of the accounting manual.

ACCOUNTING MEASUREMENT – quantification of accounting values in the form of money or other units. Transactions are recorded in the accounts in dollars based on historical cost. Some accounting measurements have to be expressed in volume such as direct labor hours used to apply overhead in a cost accounting system.

ACCOUNTING PERIOD – time covered by financial statements, which can be for any length but is usually annual, quarterly, or monthly. The annual financial statements may be on a calendar or fiscal year basis. Quarterly (interim) financial statements are common and required of publicly owned companies.

ACCOUNTING POLICIES – reporting methods, measurement systems, and disclosures used by a specific company. The accountant should evaluate the appropriateness of accounting policies employed by management. A description of the company’s accounting policies should be presented in a separate section preceding the footnotes to the financial statements or as the first footnote. Disclosure of accounting policies should include ACCOUNTING PRINCIPLES and methods of application that involve: (1) a selection from generally accepted alternatives; (2) those peculiar to the industry or field of endeavor; and (3) unusual or different applications of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Examples of disclosures are basis of CONSOLIDATION, depreciation methods, and inventory pricing. Disclosure of accounting policies assists financial readers in better interpreting a company’s financial statements. Thus it results in fair presentation of the financial statements.

ACCOUNTING POSTULATE – basic assumption or fundamental proposition regarding the economic, political, or social environment that accounting operates in. Examples of postulates are accounting entity and continuity. A postulate is pertinent to developing an ACCOUNTING PRINCIPLE. Accounting postulates may relate to the environment of accounting, accounting entity, measurement process, and accounting objectives.

ACCOUNTING PRACTICE – manner in which accountants and auditors carry out their daily work. It is the day-to-day implementation of accounting policies. Accounting practice relates to the practical application of accounting to the financial accumulation and reporting needs of clients. Practice may differ from accounting theory.

ACCOUNTING PRINCIPLES – rules and guidelines of accounting. They determine such matters as the measurement of assets, the timing of revenue recognition, and the accrual of expenses. The “ground rules” for financial reporting are referred to as GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). To be “generally accepted,” an accounting principle must have “substantial authoritative support” such as by promulgation of a FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) pronouncement. Accounting principles are based on the important objectives of financial reporting. An example of an accounting principle is accrual.

ACCOUNTING PRINCIPLES BOARD (APB) – former authoritative body of the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA). It issued pronouncements on accounting principles until 1973. Of the 31 APB opinions, several were instrumental in improving the theory and practice of significant areas of accounting. The APB was replaced by the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).

ACCOUNTING PROCEDURE – method or technique used to uncover, record, or summarize financial data in the preparation of financial statements.

ACCOUNTING PROFITS – difference between the total revenue and the cost of producing goods or services.

ACCOUNTING RECORDS – various journals (e.g., cash receipts journal, general journal), ledgers (e.g., general ledger, subsidiary ledger), and the sources of information for these formal records such as sales invoices, checks, vouchers, and written agreements.

ACCOUNTING RESEARCH BULLETINS (ARB) – publications containing recommended accounting procedures. While the Bulletins were not binding on American Institute of CPAs members, the SECURITIES AND EXCHANGE COMMISSION (SEC) typically required their use by corporations under their jurisdiction. The Bulletins were issued by the COMMITTEE ON ACCOUNTING PROCEDURE of the AICPA. The Committee was replaced by the ACCOUNTING PRINCIPLES BOARD (APB) in 1959.

ACCOUNTING REVIEW, THE – publication of the AMERICAN ACCOUNTING ASSOCIATION (AAA) covering all aspects of accounting of a scholarly nature. Many articles deal with hypothesis testing and empirical work. It is published four times a year.

ACCOUNTING SERIES RELEASES (ASRS) – issued by the SECURITIES AND EXCHANGE COMMISSION (SEC) as official accounting pronouncements. Releases include accounting requirements, disclosure mandates, auditing policies, and Commission activities regarding CPA firms filing financial statements with the SEC for publicly traded companies. The Accounting Series Releases are now codified as Financial Reporting Releases (FRRs).

ACCOUNTING SOFTWARE – programs used to maintain books of account on computers. The software can be used to record transactions, maintain account balances, and prepare financial statements and reports. Many different accounting software packages exist, and the right package must be selected given the client’s circumstances and needs. An accounting software package typically contains numerous integrated modules (for example, spreadsheet and word processing abilities). Some modules are used to account for the general ledger, accounts receivable, accounts payable, payroll, inventory, and fixed assets. Reviews of accounting software packages can be found in the JOURNAL OF ACCOUNTANCY, PC Magazine, and Computers in Accounting, among other journals.

ACCOUNTING STANDARD – conduct to be followed by accountants as formulated by an authoritative body (e.g., AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA)) or law. See also ACCOUNTING PRINCIPLES ACCOUNTING STANDARDS COMMITTEE, committee with members from six accounting bodies in the United Kingdom and Ireland who draft and approve Statements of Standard Accounting Practice.

ACCOUNTING STANDARDS EXECUTIVE COMMITTEE (AccSEC) – committee whose members prepare Statements of Position on accounting issues not acted upon by the FASB. Since 1978, its promulgation functions have been integrated with those of the FASB.

ACCOUNTING SYSTEM – methods, procedures, and standards followed in accumulating, classifying, recording, and reporting business events and transactions. The accounting system includes the formal records and original source data. Regulatory requirements may exist on how a particular accounting system is to be maintained (e.g., insurance company).

ACCOUNTING TRENDS AND TECHNIQUES – annual publication of the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) containing a survey of the accounting and disclosure characteristics of corporate annual reports. It gives examples representative of financial reporting by 600 sampled companies (e.g., their treatment of leases and business combinations). Financial statistics are also given.

ACCOUNTING VALUATION – valuation of assets in accounting. Correct valuation is important. If, for example, an asset is valued incorrectly, it is impossible to draw accurate conclusions about a firm’s liquidity or its value in liquidation. Valuation is usually made in accordance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP).

ACCOUNTS PAYABLE – obligations to pay for goods or services that have been acquired on open account from suppliers. Accounts payable is a current liability in the balance sheet.

ACCOUNTS RECEIVABLE – amounts due the company on account from customers who have bought merchandise or received services. Accounts receivable are presented as a current asset in the balance sheet. See also ACCOUNTS RECEIVABLE TURNOVER; AGING OF ACCOUNTS.


ACCOUNTS RECEIVABLE TURNOVER – degree of realization risk in accounts receivable. The lower the turnover rate, the longer receivables are being held and the less likely they are to be collected. Also, there is an OPPORTUNITY COST of tying up funds in receivables for a longer period of time. The accounts receivable turnover equals: Assume annual credit sales are $100,000, beginning-of-year accounts receivable are $30,000, and end-of-year accounts receivable are $20,000. The turnover is: If sales vary greatly during the year, this ratio can become distorted unless proper averaging takes place. In such a case, quarterly or monthly sales figures should be used.

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