In this compilation, we highlight some of the most commonly used accounting terms, with precise and very easy-to-understand definitions. Go through this list of TOP-60 of basic accounting terminologies.
You can find the most recurring basic accounting terms and definitions with examples in the list.
Account
A section of General Ledger with similar entries. Its entries are in words, numbers, currency, and other units of measurement. It is a record of resources, claims of resources, transactions, and other events that alter the total of the claims and resources of a transacting entity.
Accounts Payable (AP)
Accounts Payable commonly known as AP refers to all accrued expenses in a business that has not been cleared yet. Since it’s a debt, it is recorded on the debit side of the balance sheet.
Accounts Receivable (AR)
When a business offers sales without receiving payment upon supply, it is recorded in accounts receivable. On the balance sheet, these sales are recorded on the assets’ side since they will be converted to cash upon payment.
Accounts Receivable – Net
In a business, the Accounts Receivable – Net is the total debt owed to it, minus the total debt that may not be paid. For instance, if the company sales total $100, but $2 may not be paid, its net receivables will be equal to $98.
Accounts Receivable Turnover Ratio
The Accounts Receivable Turnover Ratio is calculated by dividing the net sales over a period, by the average accounts receivable over the same period. The ratio should be close to 1, if the business was able to recover most of the debt it’s owed.
Accounting Period
This is the period that appears in all financial documents, usually a specified time frame like 6 months or 1 year.
It can be a calendar year or a fiscal year. Moreover, its duration can vary from a week, month, quarter, or year. Accounting periods are used for reporting and analyzing financial transactions.
Moreover, accounting periods use accrual accounting methods, where funds are recorded when they are earned instead of when they are paid or received. This helps to make the accounting method more accurate and easy to analyze.
Accounts Written Off
An Accounts Written Off is a debt that the business considers irrecoverable, and therefore counts it as a loss. If an account is written off, it won’t appear on the credit report anymore. A customer, with a written-off account, may not receive credit anymore from the business.
Accounting Net Income Flows
The Accounting Net Income Flows are the amounts reported in a business’s income statement. They are different from the business’s cash flow because of the recorded expenses.
It is also different from a net cash flow, which is the amount of cash a business gains or losses over an accounting period. The accounting net income flow is carried over from an income statement and is entered as the first item of a cash flow statement.
Allocation
Allocation is the process of distributing funds to different departments or sections for a given period. The process involves the identification, aggregation, and assignment of costs to cost objects. The process is used to assign a cost to goods produced and sold or inventory assets in financial statements.
Allocated
Allocated is a term that refers to costs that a business divides and assigns different products, departments, periods, services, etc. For instance, with regard to an asset depreciation, it is the cost assigned to each year that the asset was in use.
Auditor
The one who examines and advises accordingly on financial accounts ensuring they are per the required policies.
Their primary job is to report whether financial accounts are accurate and the accounting processes are functioning as planned. They also report whether the financial statements presented by an organization are a true representation of its financial and operational results.
Audited Financial Statements
These are examined financial statements by an independent auditor, which includes the auditor’s report of the examination. The report includes any disclosures the auditor wants to make, about the fairness of those financial statements.
Audit Trail
An audit trail is the tracking of all transactions from their source.
Transactions that are traceable to a source are clean or legal. That is why an audit trail or audit log is used to verify important transactions such as accounting transactions and brokerage trades. It is used to validate or invalidate accounting entries.
Asset
This refers to all valuable property, material, or immaterial owned by a business and which are recorded from the most liquid to the least liquid.
A business can use an asset to generate cash flow in the present or in the future. And cash is a current asset because it can be used as cash in the present. It is the most liquid type of asset, and a business can easily use it to buy other assets.
Accrued Expense
An accrued expense is that expense a business incurs but is yet to be paid for. An accrued expense is a current liability because it has to be paid within 12 months, and it has to be recorded in the company’s balance sheet.
It is recorded in the company balance sheet as a short-term liability and must be closely monitored to avoid taking too much debt.
Balance Sheet
This is a document that contains all records of business assets, liabilities, and equity. It must be balanced in that the sum of all assets must be equal to the sum of liabilities and equity put together i.e (A= L+ E).
Balance Sheet Account
A company uses its balance sheet account (real or permanent accounts) to store and sort transactions of its liabilities, assets, and shareholders’ equity. You may also call them permanent accounts or real accounts because they remain open at the end of the financial year.
Bank Reconciliation
A bank reconciliation statement summarizes a business’s financial activities, by reconciling its financial records with its bank account balance. In that regard, the bank reconciliation statement gives a confirmation of a business’s processed payments, collected cash, and bank account deposits.
Book Value (BV)
Book value states the original/ initial value of a given asset before it depreciates. You can calculate it by subtracting the non-current liabilities and current liabilities from total assets. BV is also equal to the share capital plus surplus and reserves.
Business (or Legal) Entity
This is a commercial establishment. This is a business or organization that has legal rights and responsibilities, such as filing and paying taxes. It can sue, and it can be sued. However, since it is not a living person, it has to be represented by its decision-makers.
Cash Flow (CF)
This term refers to the total amount of cash coming in and out of the business. In other words, it’s the sum of all revenues and expenses within a given accounting period. A higher cash flow indicates that an entity is able to finance its operations.
It also indicates a company can pay its debts and dividends and continue to finance its growth. It is among the financial metrics that investors look at before they invest in a business.
Cash Flow Net of Tax
A Cash Flow Net of Tax is the cash amount a business receives, after deducting the related income taxes, and the cash amount a business pays, after it deducts the cash saved, if the cash amounts qualify for an income tax deduction.
Cash Flow Statement
The Cash Flow Statement or statement of cash flows is a report of a business’s sources and uses of cash during a specified period. It details how the business uses its cash flow to finance its activities, and it includes some supplemental information for periods specified on the cash flow statement’s heading.
Cost of Goods Sold (COGS)
This is the total cost incurred in producing a product or service but does not include maintenance costs. COGS include costs such as labor, manufacturing overhead, and materials. It measures the same thing as Cost of Sales (COS).
Credit
A credit is an entry in the right-hand column of books of accounts and depicts an increase in revenue, equity or liability.
Creditor
A creditor is a business entity that has given credit to another entity. For instance, if you get a loan from a bank, the bank becomes the creditor. If a supplier delivers goods or services on credit, the supplier becomes the creditor.
Current Year Earnings
This is the profit/loss accounted for in the current financial year
Debit
A debit is an entry on the left side of the account and depicts an increase in expenses and assets. It usually specifies the money or payments owned. In addition, a debit entry is created on the left side of the financial ledger as a convention. In most cases, a business may use a dual entry system. When this happens, two accounts are presented for debit and credit activities.
Debtor
The debtor is the person that owes another person or entity money (receives credit). Therefore, if you get a loan from a bank, you become a debtor. You will also become a debtor if you get goods or services on credit.
Depreciation (Dep)
This is the loss of value of a company’s asset over a given period. Assets such as machinery and vehicles lose value after a given period from their book value.
Dividends
These refer to profits that a company gives to shareholders. In general, such profits are shared periodically depending on the convention in a company. As such, dividends can be paid quarterly, biannually, or yearly. The amount given to each investor depends on the amount of money they invest.
Entry
An amount recorded in an Account as debit or credit. Similarly, an entry may be referred to as a journal entry. This type of entry is mostly created when an accounting duration is over. The usual duration is primarily a physical year.
Equity (E)
Part of the company can be owned by investors, and this forms the equity of a company. This is what remains after subtracting liabilities from assets; (Assets- Liabilities= Equity).
Expense (Cost)
Any expenditure by the business is referred to as an expense. For an expense to occur, money must flow out of a business. It usually involves paying for goods or services from one entity to another.
Financial Year
It is a 12- month period in accounting terms and is used when preparing financial statements and for tax reporting. Not necessarily similar to a normal calendar year.
Fixed Cost (FC)
This is a business cost, like rent, that does not vary with changes in output or sales. Fixed cost is also referred to as overhead or indirect cost. In any case, it recurs regularly within a fixed timeframe. As such, the capital cost can sometimes be included as a fixed cost.
General Ledger (GL)
A general ledger is a record of all debit and credit transactions. As an accounting document, it allows for the recording of all liabilities, assets, revenue, equity, and expenses. Therefore, a general ledger is an essential tool for effective cash management.
Gross Margin (GM)
This is the difference between the cost of goods and revenue expressed in percentile form. It is obtained by dividing gross profit and revenue i.e. GP/Rev
Gross Profit (GP)
Gross profit is the total profit obtained by a business. It is the difference between net sales or revenue and the cost of goods sold i.e. Net Sales- COGs = Gross profit
Income Statement (Profit and Loss) (IS or P&L)
This is a financial statement that shows the company’s profit and loss over a financial period. It’s a summary of the difference between all the expenses and the revenues.
Interest
Interest refers to the amount paid for obtaining a given sum of money on credit. It is normally expressed as a fraction of the borrowed sum.
Inventory
This is a detailed list of company assets that are in the store waiting for buyers. The list decreases as items are sold out to customers.
Journal Entry (JE)
A journal entry is a record of all transactions in business as they occur. Each entry is recorded with a special code to differentiate it from the rest.
Liability (L)
This is an unpaid debt that is owed to a company. Depending on the agreement between the parties involved, liability can be paid in the form of goods, services, or money. Sometimes liability can be settled after the transfer of assets.
Liquidity
Liquidity is a term used to describe the rate at which something can be converted into cash. For instance, the land is considered less liquid since it can take more time to sell than stock.
Loan
This is a sum of money obtained from an individual or financial institution to be repaid at an agreed date, usually with interest. The person who collects a loan effectively incurs a debt as a liability. As such, the person will continue to be liable for the money until they pay back the creditor in cash or any other means agreed in the loan agreement.
Net Income (NI)
This is the income after taxation. It is obtained by getting the difference between Gross profit and operating expenses and taxes.
Net Margin
Net Margin is the profit a business makes after deducting all expenses including tax, expressed in percentage form. It is also referred to as net profit margin. In addition, this term is primarily calculated as a ratio between the net profit and the revenue of a company. Although this term is used as a percentage, many experts use it as a decimal. After it is calculated, the net margin allows a business to know the exact profit it has made within a time frame.
Note
This is a document that shows that someone owes a certain amount of money to someone else and promises to pay. As a legal document, a note can be presented in court if any of the parties involved violates the terms of their agreement. A note is similar to a bond. Therefore, a holder of a note can receive interest.
Overhead
Overheads are those costs incurred to run the business but do not include production or delivery costs. This amount is usually included in a budget to ensure profit at the end of a fiscal year. Likewise, a business must account for it by including it in the cost of its goods or services.
Payroll
This is a list of all employees, their wages, and the salaries due to each one of them. This document is prepared and managed by professionals in the field of human resources or accounting. However, the payroll of a small company is mostly managed by the business owner.
Posting
Posting is the act of recording entries in a ledger.
Receipts
A receipt is a written acknowledgment showing that payment has been made or a given sum of money received. Likewise, it serves as evidence that something valuable has exchanged hands from one person to another. A receipt can be issued to an individual or a business by a seller or supplier.
Retained Earnings
This is an entry on Profit/Loss taken from the previous financial year. We enter this amount on the balance sheet. These earnings are the money not paid to shareholders. Instead, the amount is retained and reinvested by the company. Therefore, the amount of retained earnings increases or reduces depending on the profit of a business.
Return on Investment (ROI)
Return on investment is the benefit a business gains from an investment.
Revenue (Sales) (Rev)
Revenue is all income a business generates.
Trial Balance (TB)
One of the most basic terms of accounting, a trial balance depicts the balance of accounts in all nominal ledgers. The total sum of the debit side should balance with that of the credit side, hence the name trial balance.
That’s the end of our accounting dictionary that might be helpful for both beginner and advanced accountants. Hopefully, these financial accounting terms and definitions were useful. Check more articles under Banking & Finance, or Tax & Accounting.
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