6. Accounting Terminology
The professions of medicine and law have developed professional vocabularies by creating special terms with special meanings. This has not been the case with accounting. Accounting has taken general terms and assigned to them special or restricted meanings. This has caused considerable confusion for nonaccountants in the reading of accounting reports. A few of the terms which most frequently cause trouble are discussed in this section.
Reserve. In a general nonaccountants definition, a reserve is a supply held for future use, or something set apart for a special purpose. In accounting the tern has been used in several different ways: to indicate a deduction from an asset (a contra asset account) ; a liability, the exact amount of which is undetermined; or an earmarked portion of retained earnings. Sometimes it even indicates a separate group of accounts on the balance sheet. In an effort to reduce confusion, the AICPA recommends that finished googs, and supplies, in a manufacturing firm; and merchandise, in a sales organization.
Cost vs. Expense. These terms often are used interchangeably, sometimes because the differences are not recognized and sometimes through carelessness o custom.
Cost may be defined, for general purposes, as the amount paid or to be paid for anything, an outlay. For accounting purposes, cost and its measurement must be delimited more precisely. Cost is the “forgoing,” the sacrifice, or the giving of one thing for something else. It is the Exchange of cash or other assets or services or capital stock, or the incurrence of a liability in Exchange for an asset, a service, or the reduction of a liabilityi each being measured by a market value in monetary terms.
Expense can be defined most accurately and briefly as an expired cost. However, the value of goods or merchandise sold is referred to universally as a “cost” rather than an “expense.” Stri
y speaking, a cost was incurred when the goods were acquired, and it became an expense when they were sold. It is common also to speak of “matching revenue and costs”; technically, it would be beter to refer to “matching revenue and expenses.” The amount paid or agreed to be paid for a fixed asset represents its cost. The amount of depreciation charged off period by period represents an expense.
Expenditure. An expenditure is the disbursement of cash, the transfer of other property, the incurring of a liability, or the issuing of capital stock to acquire other goods or service sor to setle a loss.
An expenditure occurs when goods are bought; an expense is incurred when the goods are consumed or sold.
