51 Common Accounting terms with Definitions that every Accountant and Business Owner should know
Every industry seems to have its code language. Moreover, being familiar with the jargon gives you access to the elite group and serves as proof that you fit in. So, if you’re beginning to consider a career in accounting, your first step should be to acquaint yourself with some of the common accounting terms, acronyms, and abbreviations used in the industry.
People frequently believe working in accounting is inaccessible because of the ambiguous credentials, various accounting myths, and this industry terminology, but the truth is that it only has its particular language. Knowing how to “speak the talk” will enable you to concentrate more on the crucial training you’ll need to begin a successful accounting profession and less on accounting definitions.
1. Accounting Period
An accounting period, also known as an accounting cycle, is the period concerning which management accounts and annual reports are prepared.
2. Accounts Payable (AP)
Accounts Payable consists of all unpaid invoices. It is the debt owed by the company to its customers. It is recorded under Liability on the Balance Sheet.
3. Accounts Receivable (AR)
Account Receivables represent money owed to a business. They are recorded under Assets on the company’s Balance Sheet and are a source of short-term cash.
4. Accrual
Accrual refers to any type of financial transaction that has not yet been accounted for.
5. Accrued Expense
Accrue means to add up or accumulate. In accounting, accrued expenses describe an expense that has not yet been paid. The accretion method of accounting recognizes expenses as they are incurred, not as they are paid.
6. Allocation
Allocation is a word that represents the process of Assigning Funds to different people or things.
7. Asset
An asset is any property owned by an organization. Its primary function is to produce income. It can be tangible (such as buildings) or intangible (like patents). Tangible assets can be converted into cash through sale or lease. Intangible assets cannot be sold directly; instead, they must be leased. A common example of an intangible asset is intellectual property such as copyrights, trademarks, trade secrets, and patents.
8. Auditors
Auditors are professionals whose job is to examine an entity’s financial accounts and records. They do so by assessing whether those accounts and records accurately reflect the entity’s financial position.
9. Balance Sheet
A balance sheet is an accounting document that shows how much money a company has, what they owe, and what they own. It is also known as a statement of financial position.
10. Bank Statement
A bank statement is an annual report a bank sends to its customers showing the current balance in the customer’s account.
11. Bonds and Coupons
A coupon bond has coupons that the bondholder submits to the issuer on the dates when interest is payable. Interest payments are then paid to the bondholder. The coupons are normally due on a semi-annual basis.
12. Book Value
The book value shows how much an asset was worth before any depreciation or amortization took place. It also shows how much an asset lost value after being depreciated or amortized.
13. Business Entity
A business entity refers to the legal organization of an enterprise. Business entities include partnerships, corporations, LLCs, and sole proprietorships. Each type of business entity has distinct tax and regulatory requirements.
14. Capital
Capital is a financial instrument or its value, including money or goods. Working capital, which means the amount of money or goods that a company has on hand to pay for things such as raw materials, inventory, and wages, is calculated by subtracting current assets from current liabilities (debt).
15. Cash Flow
Cash flow (also known as cash receipts) is the amount of money received by an organization during a given period. Net cash flow is the difference between cash inflow and outflow. Cash flows can be positive or negative. Positive cash flows indicate that the organization has made money during the period; negative cash flows mean the organization lost money.
16. Closing Books
Closing books describe the process by a bookkeeper to close, or zero, a business’ revenue, expense, and income summaries. It occurs usually at year-end. It is the same thing as a closing date.
17. Cost of Goods Sold
The direct costs associated with producing the product. To calculate these costs, one must know how much raw material was needed to produce the product, and how much labor was used in its creation. For example, if a company produces widgets, then the direct costs would include the parts needed to make the widget, and the wages paid to workers who made those parts.
18. CPA (Certified Public Accountant)
A certified public accountant (CPA) is someone who prepares tax returns for people and companies. They help people and businesses manage their finances to meet their financial goals.
19. Credit
A credit represents an asset that has come into existence or an income that has been earned.
20. Debit
A debit represents an asset that has been sold or an expense that has been incurred.
21. Depreciation
Depreciation (also known as depreciation) is the decrease in the market value of an asset over its useful life. Assets with no significant value cannot be depreciated. In accounting, depreciation is recorded as an expense on an income statement and is treated as a non-cash expense because it reduces future earnings.
22. Diversification
Diversifying your portfolio is an effective way to reduce risks. By spreading out your money among various types of investments, you can protect yourself against losses in one area if another area suffers. For example, if stocks fall sharply, you may be able to offset those losses with gains in bonds or commodities.
23. Dividends
A dividend is the profit returned to shareholders after deducting the cost of capital. Dividends can be paid out as cash, stock, or property.
24. Enrolled Agent (EA)
An enrolled agent is a professional accountant who helps businesses file taxes in compliance with IRS rules.
25. Equity
Equity means the difference between what an organization owns (assets) and what it owes (liabilities). Owners’ equity refers to how much of the company’s shares are owned by the people who own the company.
26. Expense
Expenses are the costs associated with an activity or event.
27. Fixed Asset
Fixed assets are assets used for a long period, such as buildings and machinery.
28. Fixed Cost
Fixed costs are those that remain constant regardless of the level of output. Salaries and rents are examples of fixed costs; they do not vary depending on how much work needs to be done. Variable costs, however, rise as output rises. For example, if an office worker produces twice as much work as another, then his salary must double to pay for the extra hours worked.
29. General Ledger
A general Ledger is a complete record of a company’s financial transactions over some time. Transactions are posted into separate sub-ledgers according to a company chart Of Accounts.
30. Gross Margin
Gross margin describes how much money a business earns after deducting the costs associated with producing products. It’s calculated by dividing the total sales revenue by the total expenses incurred during the same period.
31. Gross Profit
Gross profit represents a company’s profitability without including any costs associated with running the business. It is calculated by subtracting the cost of goods purchased from revenue for the same period.
32. Income Statement
An income Statement is a financial statement that shows the difference in revenue, expense, gain, and loss over a specific period. The data is used to determine the net income of a company.
33. Insolvency
Insolvency is when a business or an individual cannot pay debts as they come due. Insolvency is one of the main reasons why businesses fail. To avoid insolvency, companies must make sure that they have enough money coming in to cover expenses. They also need to ensure that they have enough money going out to pay off creditors. When these two things do not match up, the company will go bankrupt.
34. Inventory
Inventory describes a company’s assets that it intends to offer to clients.
35. Journal Entry
A journal entry is a process of altering or updating a company’s financial records. It includes an identifier, a date, a dollar amount, an account code, and a debit/credit designator.
36. Liability
Liability refers to the debts a business owes. These can include accounts payable, loans, and payroll.
37. Liquidity
Liquidity describes how quickly a company can convert something into cash. In accounting and financial analyses, a company’s liquidity is a measure of its ability to meet its short-term financial obligations.
38. Material
Materiality is the term used to describe the extent to which something affects decision-making. In accounting, materiality is determined based on how much impact the item has on financial statements.
39. Net Income
Net income refers to how much money a company earns after subtracting any losses and costs. In commerce, it’s what a business has left over after paying salaries and wages, buying materials, and selling products.
40. Net Margin
Net Margins are the percentage of revenue that a business earns after deducting costs. They are calculated by taking net income and dividing it by revenue for a given period.
41. On Credit/On Account
On account refers to an agreement between two parties (a buyer and a seller) where the buyer pays money now and gets goods or services later.
42. Overhead
Overhead expenses are those costs associated with running your business. These include rent, salaries, and any other costs related to operating your company.
43. Payroll
Payrolls are accounts that show payments to employees’ salaries, wages, bonuses, and deductions. They often appear on balance sheets as liabilities because they represent money owed to employees.
44. Present Value (PV)
The current value of an investment is based on a specific rate. Present value helps us to understand how receiving $100 today is worth more than receiving the same amount next year, as money in hand can be invested at a higher interest rate.
45. Invoices
An invoice is a legal document that shows the amount owed for goods or services provided.
46. Return on Investment (ROI)
Return on Investment (ROI) measures how much money you make after investing your money into something. It is calculated by taking the amount invested, subtracting what you paid for it, dividing the difference by the amount invested, and multiplying it by 100.
47. Revenue
Revenue refers to the total amount of money a business earns during a specific period. Income is another word for revenue. The money comes from sales, service charges, fees, interest, and interest income. Revenue equals the price of products or services times the number of items sold. To calculate revenue, you must know how much each item costs and how many were sold.
48. Revenue
A trial balance is a report listing all the ending balances in a general ledger’s accounts, including debit and credits for assets, liabilities, equities, revenues, expenses, gains, and losses. When balanced, the credits must equal the debits.
49. Variable Cost
Variable cost refers to the cost incurred by a business based on how much output they produce. For example, if a business sells $10 worth of widgets per day, then variable costs would be the cost of producing those widgets (e.g., wages). On the other hand, fixed costs do not change no matter how much output is produced. These can include rent, utilities, and salaries.
50. Inflation
The gradual price increase is known as inflation.
51. Generally Accepted Accounting Principles (GAAP)
Accounting standards are guidelines used by accountants to ensure that financial statements adhere to generally accepted accounting practices (GAAP). GAAP is a set of rules that govern how companies record revenue, expenses, assets, liabilities, equity, taxes, and other key aspects of business operations.
Small business owners should know all the terms of accounting so that they can understand everything while availing the accounting and bookkeeping services.