What Are Some Common Accounting Terms and Their Meanings?


Quick Answer

One common accounting term is materiality, which is the measure of how significant a piece of information is to the important financial decisions within a company. Material information includes any relevant information regarding business decisions, and accountants must include all material information on financial statements.

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Another common accounting term is the conservatism principle. To record a company's transactions using the conservatism principle, an accountant records the company's debts and liabilities as the company accrues the liabilities. The account does not record revenues and income until the company receives the revenue.

Similarly, the accrual principle of accounting instructs accountants to record and disclose transactions when they occur, rather than when the company receives cash flow associated with the transaction. An example of this is if the company enters into a contract, but the terms of the contract do not require the company to pay a sum of money until the next financial quarter. The accrual principal of accounting requires the company to disclose the transaction in financial records when the transaction happens, so as to provide a clear financial picture of the company's transactions during the relevant period.

Monetary unit assumption is another common accounting term. In accounting, the monetary unit assumption creates the presumption that all transactions occur in U.S. dollars. The monetary unit assumption ignores the effect of inflation on the dollar and inflation's effect on the dollar's purchasing power. For accounting purposes, the economic entity assumption means that a business and its owner are separate entities for accounting purposes. Although the owner and business are one entity for legal purposes, the accounting term economic entity assumption means that the business and its owner must account for financial transactions separately.

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