Glossary of Accounting Terms
Accounting is a specialized field, and like any professional, you will have lots of specialized words, or jargon to learn. This Glossary provides all the accounting terms you’ll need in one place. Keep this document to use throughout your course, degree, and career!
Accounting Principles
| Term | Definition | Example |
|
Accrual accounting |
Accrual basis accounting is the process of recording financial transactions when they occur rather than when the buyer pays |
A company pays a sales tax before it receives the cash for sale. |
| Cash basis accounting |
Cash basis accounting is one of the most common methods of business accounting. Since it focuses on cash transactions, it doesn’t recognize accounts payable or receivable. |
A business pays cash for office supplies, recording it as a business expense and reduction in its cash balance. |
| Accepted accounting principles |
Accepted accounting principles are rules accountants must follow while performing their duties. The principles provide a standardized framework for assessing an entity's financial reports. |
The chief financial officer (CFO at Company XYZ follow GAAP standards when preparing financial reports for the national company. |
| Materiality principle |
Materiality principle describes the information that can influence a company's decision-making process. The information, size, and nature of transactions are considered material if the omission or error of it could potentially lead to decisions by its users. In accounting practices, a business must disclose all material considerations in its financial reports. There is no rule available to determine the materiality of an amount. However, most accountants consider an amount immaterial if it is less than 2 or 3 percent of net income. |
A large company has a building destroyed in a hurricane and after insurance reimbursement, it reports a loss of $10,000. Since the company has a net income of $10 million, the loss is immaterial since the loss is only .1% of its net come. |
Audit
| Term | Definition | Example |
| Audit | A professional analysis of a company's finances and its overall performance. An audit reviews accounting documentation to ensure accuracy. Certified public accountants (CPA) perform a audit. | https://www.youtube.com/watch?v=cODdJvE1RCE |
| Auditors | Auditors are professionals who assess an entity's financial condition by examining the accuracy of its financial accounts and records. | A business hires an auditor to review its financial records to ensure their accuracy for shareholders. |
| Accounting Period | An Accounting period refers to a span of time reported in a financial statement. | A stakeholder summary includes quarterly financial statements. They cover three months of the business’s financial activities. |
| Allocation | Allocation is a term that represents the process of assigning funds to different accounts or periods. | A clothing manufacturer gives certain amount of its advertising budget to multiple departments or divisions. |
| Annual Percentage Rate (APR) | Dictates the amount of interest paid for the use of someone else's money | https://www.youtube.com/watch?v=W9IW58koYJs |
| Annual Percentage Yield (APY) | The amount of interest gained from keeping your money in an account for a predetermined period that your bank chooses. | |
| Bank Reconciliation | Comparing a bank account to the bank's records for accuracy and the same information on both records. | https://www.youtube.com/watch?v=6pt67pLpVcw |
| Bankruptcy | When a person or business cannot pay off debts and goes through the legal process of partial or full loan forgiveness. | https://www.youtube.com/watch?v=8WB6yYsSvpE |
| Bank statement | A bank statement is a periodic report a bank sends to an account holder showing the monthly balance in the account. | A company receives a bank statement each month documenting deposits, withdrawals and account balance. |
| Base market value | The determined value of securities when considering the current market. | https://www.youtube.com/watch?v=--WQc6Y_jKA |
| Disclosure | Sharing financial information in an easier way to understand. | |
| Fraud | Criminal or unlawful behavior regarding money for personal financial benefit. | |
| Internal audit | An internal audit is an audit performed by a company’s staff rather an independent CPA). | Management at 123 requested an internal audit to review its organization’s finances. The company deposits its money in a bank insured by the Federal Deposit Insurance Corporation (FDIC) in case of bank failure o theft. |
| Negligence | When a person is misguided or misinformed about financial information and as a result, suffered consequences. |
Balance Sheet
| Term | Definition | Example |
| Accounts Payable | Accounts payable consists of all unpaid business expenses. It i the debt the company owes and is recorded under liability on its balance sheet. | A restaurant receives lettuce on credit from its supplier and is billed for the amount owed. |
| Accounts receivable | Account receivable represents money others owe to a business It is recorded under assets on the firm's balance sheet and is a source of short-term cash. | A lettuce supplier bills a restaurant for delivered produce. |
| Accrued Interest | Accumulated money owed on a loan that has not been paid off Accrued interest begins on the first date the loan is borrowed. | https://www.youtube.com/watch?v=UKqnVgJVBOk |
| Acquisition | A company purchasing all or most of another company with either cash or stocks. As a result, the company "acquires" a portion of the other company. A company often considers acquisition when wanting to expand their business. |
https://www.youtube.com/watch?v=618graZiXCQ |
| Asset | An asset is any company possession with monetary value. Assets can reduce expenses, generate cash flow, or improve sales. Asset types include fixed, current, liquid, and prepaid expenses. Liquid means how quickly a business can convert the asset into spendable revenue without losing value. The most liquid asset is cash while land is the least. |
A company considers its equipment, inventory, and advance payments for supplies as assets. |
| Balance sheet | A balance sheet is a financial report that summarizes all a firm's assets (possessions), liabilities (debts) and shareholder or owner equity. It follows the equation: asset + liabilities + equity. It is one of the two most common financial statements prepared by accountants. | A manufacturer may use a balance sheet as a financial statement to show the company’s worth. |
| Book value |
The book value shows the original value of an asset minus its accumulated depreciation or liability. It shows how an asset loses value. |
A business has $100 million in total assets and $80 million in total liabilities. Thus, the company’s book value is $20 million. |
| Cost of goods sold | Cost of goods sold is an accounting term that describes the expenses incurred to produce goods or services that a business sell. They are considered direct costs. When COGS are subtracted from revenue, it helps determine a company’s gross profit. The value may include the cost of raw materials and labor. | A company sells widgets online It can list the widget’s raw materials as part of its COGS, which helps reduce the company’s taxable income. |
| Depreciation | Depreciation is the decrease in the value of an asset over time Only assets with substantial value can be depreciated. Depreciation is recorded as an expense under an income statement and is considered a non-cash expense. |
A delivery company buys a new truck for $50,000 to use for five years. It estimates the truck will depreciate by $20,000 each year. |
|
Disbursement |
When money earned is distributed or released to another entity or person. | |
|
Discount |
A percentage of the price removed from the original market price. | |
| Ending inventory | Remaining inventory at the end of the fiscal year. | |
| Fair market value | Value agreed upon in equal and honest circumstances. | |
|
Fixed asset |
Fixed asset is an asset used for a long period, such as building and equipment. | ABC Produce Company sells produce to local groceries. The delivery trucks it owns are use are fixed assets. |
| Interest | Extra money owed to the lender after a set period when you borrow money from a person or bank | |
|
Interest Rate |
An additional percentage charged for borrowing money. | |
| Inventory | Inventory describes a company's assets that it intends to sell to clients. | When the shoe store checked its inventory before a sale, it found there were only 40 pairs of slippers in stock. |
| Investment | An object or service you pay for that you believe will increase in value over time and eventually earn you more money than you initially paid | |
|
Last in, first out |
Last in, first out is an accounting method for valuing inventory where the costs of the last goods acquired are the first costs charged to expense records. | Company X has 10 widgets that cost $100 each and arrived five days ago. Five more arrive the next day and cost $200 each. Based on the LIFO method, the last ones received are the first to be sold. |
| Liability | Liability describes the debts a company has yet to pay. Liabilities include accounts payable, loans and payroll. | Like most businesses, a local bookstore organizes liabilities on its balance sheet under two separate headings: current liabilities (debts to pay in 12 months) and long-term liabilities (debts not due for more than 12 months). |
|
Liquid assets |
Readily available money such as cash. | |
| Liquidity | Liquidity describes how quickly a business can convert something into cash without losing value. In accounting and financial analysis, a company’s liquidity is a measure of how easily it can meet its short-term financial obligations. | A company’s balance sheet shows asset liquidity from most to least, starting with cash, stocks and bonds and finally property, plant and equipment (PP&E). |
|
Loan |
Money that you borrow that must be paid back, usually with interest | |
|
On credit |
Overhead or “on account” describes a purchase that will be paid later but that the buyer can use immediately. | Tony’s Taco Truck buys produce on credit. He uses the lettuce and tomatoes but doesn’t pay for them until 30 days later. |
| Outstanding | An amount that has not yet been paid. | Gurmit has a choice: receive. $1,000 today or $1,000 in five years. He decides to take the money now based on interest/return rate and inflation/purchasing power. |
|
Present value |
Reconciliation describes the present value of an asset. Present value assumes inflation makes cash lose value over time. In other words, it compares the buying power of cash in the future to the purchasing power of today. | |
|
Promissory note |
Also referred to as "note payable," is a document outlining the borrower's responsibility to the lender. | |
| Proprietorship | The ownership of a business that fully controls its functions. | |
| Receivables | Money owed to a business for goods or services received but not paid for. | |
|
Term loan |
A loan is provided for a certain amount of time. | |
| Value | Value is how much money something is worth. In accounting, value is the monetary worth of an asset, business, goods sold, services rendered, or liability/obligation acquired. | Joe owns an air-conditioning repair service with assets of $2,000. However, since he brings in a revenue of $100,000, the business is valued much higher than just its assets. |
| Valuation | Deciding on the value of a good or service according to the market interest rate. | |
|
Write-off |
A write-off is an action that businesses use to account for unpaid loan obligations, receivables or losses on stored inventory. It basically is an action to help lower an annual tax bill. | Metro Hospital accountants knew certain accounts would never be paid, so they decided to write them off. |
Cash Flow
| Term | Definition | Example |
| Break-even point | When the total money spent equals, total money gained. At this point, no money is lost or earned, but at an even state. | https://www.youtube.com/watch?v=r8BIz5I-aDc |
| Budget |
A written plan for how you will use your money effectively |
https://www.youtube.com/watch?v=IXsb3aoXbVk |
| Budgeting |
Budgeting involves creating and maintaining a financial plan to control cash flow. |
A company hires an accountant to create a budget for travel expenses, so salesmen know their spending limits. |
| Cash flow |
Cash flow is the expense or revenue a company expects to generate from its business activities over a certain period. Net cash flow refers to the sum of all money a business makes. Cash flow statements include all the cash a business receives from its operations, investments, and financing. |
A car dealership shares its cash flow statement with investors to show money made through its operations, investment, and financing. |
| Insolvency | Insolvency is when a business or individual cannot meet debt obligations with lenders. There are two forms of insolvency cash-flow insolvency and balance-sheet insolvency. Cash-flow insolvency can usually be solved by negotiation while balance- sheet insolvency may end with bankruptcy. | Tom’s company owns a warehouse and two trucks, but it did not have enough cash on hand to pay salaries. When Bee’s Bonnets sold its first hat in 1980, it cost $10 to make and sold for $25. Twenty years later, it costs $100 to make and sell for $2,500 due to inflation. |
|
Petty cash |
A small account of cash money easily available to the company | |
|
Unequal cash flow |
Varying amount of cash delivered from year to year. |
Financial Statements
| Term | Definition | Example |
| Chart of accounts |
A chart of accounts (COA) is an index of the financial accounts in a company’s general ledger. |
A publishing company uses a chart of accounts to organize financial information for investors. |
| Closing the books | Closing the books describes the process by an accountant to close, or zero out, a business’s revenue, expense, and income summary reports. It occurs usually at the end of the year. It is the same as a “closing date.” | An advertising company accountant closes the books t signal the beginning of a new fiscal year. |
| Control Risk | The potential misinformation or inaccuracies in financial statements. This is a result of the lack of "control" over these documents. | |
| Fiscal year | A year's length identified for accounting and finances. A fiscal year is determined differently according to the country. | |
| Report release date |
Single-entry bookkeeping is the date that a company releases its financial statements. |
Company ABC releases its quarterly financial statements on the first Monday of every fourth month. |
| Return on investment |
Taxable earnings (ROI) measure the financial performance of an investment. It is calculated by subtracting the initial value o the investment from the final value of the investment (which equals the net return), then dividing this new number (the net return) by the cost of the investment, and, finally, multiplying it by 100. |
John invested $1,000 in You Bake Corp. in 2017 and sold the shares for $1,200 one yea later. To calculate the return o his investment, he divided the net profits ($1,200 - $1,000 = $200) by the investment cost ($1,000), for a ROI of $200/$1,000, or 20%. |
| Return on sales (ROS) | A ratio is determined by dividing profit by expense. Often presented as a percentage, a return on sales evaluates a company's revenue performance. | |
| Single-entry bookkeeping | Trial balance is an accounting method that records financial transactions on one entry rather than the debit and credit entries used in double-entry bookkeeping. This is a cash-based bookkeeping method that tracks incoming and outgoing cash i a journal, making it useful for new businesses or those with few or uncomplicated transactions. | IC Snow Cones uses single- entry bookkeeping to record income and expenses. A cash book is maintained to record transaction dates, descriptions value (debit or credit) and a running balance. |
| Trial balance | Variable cost is a report listing the ending balance in all a general ledger’s accounts, including debit and credit balances for assets, liabilities, equity, revenue, expenses, gains and losses. When balanced, the debits must equal the credits. | A company’s accountant explains to the owner that a trial balance only shows account totals, not each separate transaction, and helps detect mathematical errors in the general ledger. |
General Accounting and Business Terms
| Term | Definition | Example |
| Accounting | Accounting tracks a business's financial records. It also reports, analyzes, and summarizes financial information for tax, investment, and other official purposes. | A real estate company using accounting to prepare financial statements for its investors. |
| Accountant | An accountant is a person skilled in the recording and reporting of financial transactions. Depending on the company’s need, the person may be required to have specific certifications as proof of expertise. | A company employs a college graduate with an accounting degree to document its financial activity. |
| Accountants report | An accountants’ report is a financial document prepared by an independent accountant including financial statements, review reports agreed-upon procedures reports, compilation reports and attestation reports. An accountants’ report is not produced as the result of an audit. | A business reviews an accountants’ report to help determine the company’s financial health. |
| Business entity | Business entity refers to the legal structure of a business. Company business structures include partnership, S corporation, C corporation, limited liability company and sole proprietor. Each legal entity has distinct tax and legal requirements. | Two businesspeople form a partnership, a business entity with specific rules and regulations. |
| Bylaws | Rules are created and written in an official contract for a company. Some bylaws include how positions within the company are chosen an how the company runs. | https://www.youtube.co m/watch?v=N_AfzjW29hs |
| Business entity | Business entity refers to the legal structure of a business. Company business structures include partnership, S corporation, C corporation, limited liability company and sole proprietor. Each legal entity has distinct tax and legal requirements. | Two businesspeople form a partnership, a business entity with specific rules and regulations. |
| Certified Public Accountant | A Certified Public Accountant is an accounting professional who has passed a standardized exam by the American Institute of Certified Public Accountants and can audit public companies and sign tax returns. | Susan recently completed CPA certification testing, earning her a job promotion. |
| Checking and Savings Account | A bank account that a customer can withdraw money from by using a check or a debit card | https://www.youtube.co m/watch?v=ku52Pb7fFT8 |
| Collateral | An asset or assets offered in exchange for a loan. Collateral comes in many forms including real estate, bank accounts and inventory. | https://www.youtube.co m/watch?v=sDnMwbEu3cM |
| Contract | A document used to hold two parties accountable and responsible. | |
| Conversion | The exchange of one form of asset to another. | |
| Credit Score | A numerical "grade" based on your bill-paying history, unpaid debt, loa accounts, available credit, credit applications, and other factors. This score is used to predict how likely you are to pay money back on time. | |
| Currency | An accepted form of money, such as coins or paper money, that the government circulates and that can be exchanged for goods and services | |
| Debit Card | A plastic card with a magnetic strip and microchip that can be used to deduct money directly from a checking account. Debit cards don't put you into debt like credit cards can because they draw money from the balance you already have in the bank. | |
| Defalcation | To intentionally use money improperly. | |
| Deflation | The general decrease in the price of products and services. Often seen as a negative due to the lowering of value. | |
| Demand function | the relationship between the price of a good and the quantity demanded of this good. | |
| Departmental accounting | Departmental accounting is a term for financial records showing the income, expenses, and net profit of individual departments. | A department store has several areas of sale such as cosmetics, groceries, and medicine. Departmental accounting shows the profit and loss for each sales area. |
| Direct Deposit | A direct money transfer from the payer's account to the recipient's account. Direct deposit eliminates the need for a paper check and a trip to the bank to cash it. | |
| Diversification | Diversification is a risk-reducing investment strategy that allocates a company's or individual’s capital across diverse assets. A mix of assets and investments help limit the risk of any single asset or risk. This way the performance of individual assets will not affect the results of others. | A group of investors wan to diversify their holdings so they buy real estate, stocks, bonds, and treasury bills. |
| Economy | The sum of wealth and resources in a local, regional, or national community. The economy includes everyone, from individuals to corporations, and is ever evolving, since it is swayed by culture, laws, history, and geography. | |
| Economic regulation | specific industries with monopolistic characteristics | |
| Enrolled agent | Enrolled agent is a professional accounting title assigned to individual who have passed and demonstrated expertise in personal and business tax practices. Enrolled agents help companies file taxes in compliance with Internal Revenue Service rules. | Anna's accountant is an enrolled agent and represents her floral shop during an IRS audit. |
| Escrow | When a third-party holds onto money until finalization such as a contract, is completed. When money is in escrow, you and the seller are unable to interact with any funds. | |
| Equilibrium | the intersection of supply and demand | |
| Fee | A payment made to a professional person or business in exchange for services | |
| Firm | A professional business with the primary objective of earning profits (for-profit). | |
| Going private | When a public company privatizes its shares. | |
| Going Public | When a company begins sharing stocks with the public for capital gain | |
| Guaranty | A document stating a person will willfully pay the debts owed by another person. | |
| Hedge | An investment is made to offset another investment to minimize potential financial loss. | |
| High-low method | The high-low method in accounting is a common and simple way to separate variable costs from fixed costs. It involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level. | Will’s Widgets sells widgets for 12 months. It sold the most—125 in October for $5,550—and the least—50—in August. The accountant used the high-low method to determine the total costs for each level. |
| Inflation | Inflation is the rising costs of goods and services over time. | When Bee’s Bonnets sol its first hat in 1980, it cost $10 to make and sold for $25. Twenty years later, it costs $100 to make and sell for $2,500 due to inflation. |
| Insured account | An insured account is an account at a bank, savings and loan association, credit union or brokerage firm covered by a federal or private insurance organization. | A company deposits its money in a bank insured by the Federal Deposit Insurance Corporation (FDIC) in case of bank failure or theft. |
| Joint return | An Internal Revenue Service (IRS) tax return for a married couple filing their taxes together. | |
| Labor burden rate | Additional labor and expenses needed to onboard and keep employees. For example, training, benefits, and paid time off. The labor burden rate excludes the base income the employees make. | |
| Layoff | When an employer lets go of an employee either temporary or permanently. Layoffs are common when a business is undergoing significant change. | |
| Law of Demand | The law of demand states that the quantity of a product that a consumer is willing and able to buy increases as the price of the product decreases. | |
| Law of Supply | the quantity supplied of a given product increases if the price of the product increases and the quantity supplied decreases if the price of the product decreases. | |
| Market | A mechanism in which assets such as stocks exchange, and monetary transactions occur. | |
| Mobile Banking | Using your bank through their website or phone app to pay your bills, move money between accounts, or check your balance | |
| Mobile Deposit | A way to deposit a paper check into your account by taking a picture of the check and sending it to the bank using their mobile banking app | |
| Monopoly | the exclusive possession or control of the supply of or trade in a commodity or service. | |
| Monopolistic Competition | a market structure that has many firms and low barriers to enter or exit the market and has product differentiation | |
| Mortgage | An agreement between creditor and borrower over a property in which the borrower pays long-term loans to buy the property. | |
| Oligopoly | characterized by a small number of firms that produce most of the industry output. | |
| Outsourcing | A company purchasing and receiving goods or services from another company. | |
| Passive Income | Money earned with little effort and participation because of previous set-up and preparation. Examples of passive incomes include blogging, becoming a business owner, and real estate. | |
| Payroll | Profit is an account that records employee salaries, wages, bonuses and deductions. | John’s first duty on Fridays is to prepare the payroll. ln addition t paying for raw materials to make its cakes, ABC Bakery has monthly overhead costs such as rent, administrative cost, utilities and insurance. |
| Pension | Benefit offered by an employer, most often a retirement plan. | |
| Price range | The lowest and highest amount of money for the price. | |
| Production Possibilities Curve | graphically describes the best level of production of goods and services an economy can achieve given its available resources | |
| Pure monopoly | a market structure in which only one firm produces a product in a given market with substantial entry barriers into the industry. | |
| Quarter | Every three months of the year. | |
| Rebate | A refund to a payer for the overpaying of the amount due. A rebate is also possible by providing credit for future payments. | |
| Risk | The possibility of an investment not succeeding and the company losing money. | |
| Risk management | A company actively avoiding risk and or failure by implementing systems and procedures to maintain the company's financial integrity. This includes using financial tools and computer programs to assess and protect the company's status. | |
| Routing Number | A nine-digit number usually listed at the bottom of your personal checks that identifies the bank you use | |
| Saving | Putting aside money you've earned or received for later instead of using it right away | |
| Savings bonds | Optional government bond used for federal expenses. The lender will receive their money back with interest over time. | |
| Social Regulation | aims at improving the quality of life through reduced pollution, safer products, and improved safety and health in the workplace. | |
| Soft inquiry | A lender examining someone's credit history to determine their credit score. This is especially common for credit card companies to do on interested borrowers. A soft inquiry does not impact one's credit score. | |
| Start-up costs | Necessary money is needed to begin a business. | |
| Supply function | the relationship between the price of a product and its quantity supplied. | |
| Tax identification number (TIN) | A taxpayer identification number containing nine numbers. This number is used during tax returns and listed on Internal Revenue Service (IRS) documentation. | |
| Taxable earnings | Unearned income is the amount of an employee’s earnings subject to a tax. Taxable earnings may include wages, salary, tips, bonuses and commission, net self-employment income, alimony payments. Employees pay taxes to federal, state or local agencies based on their wages, withholding preferences and tax filing status | Company A’s cost of sales for the month is $400,000 and it carried $100,000 in inventory. The turnover rate is 4, meaning the company will sell its entire inventory four times each year. |
| Taxable income | Value is the portion of a person’s gross income that’s subject t taxation. Deductions, such as student loan payments or individual retirement account (IRA) contributions, are subtracted from gross income to determine taxable income. | Joe Smith earns $50,000 in wages in $10,000 from investments. His gross income is $60,000. He claims deductions of $15,400, making his taxable income $44.600. He will pay taxes on that amount. |
| Trade | The exchange of goods or services. | |
| Trend | An identified pattern created over time. | |
| Wholesale | A sale of a high quantity of goods. | |
| Wire Transfer | Electronically transferring money to another person | |
| 401(k) | Retirement benefits are provided to the employee by the employer. Funds are taken from earned income and contributed to the 40(1)k benefit over an extended period of time. |
Income Statements
| Term | Definition | Example |
| Accruals | An accrual is an expense or revenue that has occurred but has not yet been recorded. | An insurance company’s employees earned bonuses in 2020, but they will not be paid out until 2021. |
| Accrued expense | Accrued expense describes a business expense that has not been paid. The accrual method of accounting recognizes expenses when they are incurred, not when they are paid. | An art store adds a delivery of pen and paper to its stocks before it pays for the shipment |
| Expenditure | Funds are spent to obtain a good or service. The four types of expenditures are investments, net exports, government, and consumption. | |
| Gross margins | Gross margins describe a company's profitability after subtracting the cost of goods sold. It is calculated by dividing the same period of gross profit by revenue for the same period | A company reported a quarterly gross margin of 35%, meaning that it retained 35 cents from each dollar of generated revenue. |
| Gross profits | Gross profits represent a company's profitability without adding overhead expenses. It is calculated by deducting the cost of goods sold (COGS) from revenue for the same period. | Sue’s Sewing Supplies has $10,000 in revenue and $4,000 in COGS. The company’s gross profit is $6,000. |
| Income | Cash or other compensation received from work, investments, dividends, or interest. Most forms of income can be taxed by the government. | |
| Income statement | An income statement is a financial statement that shows the difference in revenue, expenses, gains, and losses over a specific time span. The data is used to determine a company’s net income. | The accountant at Company XYZ prepares an income statement using the equation of (Revenue + Gains) - (Expenses + Losses). |
| Invoice | An invoice is a document that shows the amount of money payable for goods or services that a company provides clients. | A company asks for a new invoice template that includes company name, address and contact information and room for customer information, description of charges, date of sale, amount charged, and total amount owed. |
| Lease | A contract that outlines the legal ownership of an asset for a certain period. A lease is usually regarding a property and between a landlord and tenant. | |
| Markup | An increase in the lowest price of a product or service to the price presented to customers for a business to gain profit. | |
| Net income | Net income is the amount earned in profits. It is revenue minus taxes, expenses, depreciation and interest. | A floral wholesaler has revenues of $1 million and expenses of $900,000. Using the equation above, the accountant determines the business has a net income of $100,000. |
| Net margin | Non-operating income is a percentage of a company's profit relative to its revenue. It is also called “net profit margin.” Net margin is calculated by dividing net income by total revenue and multiplying by 100 to yield a percentage of income that remains after all expenses. |
A large manufacturer has $61 billion in revenue and $13.8 billion in net income. Using the formula above, its net profit margin is 23%. For every dollar generated in sales, the company keeps $0.23 as profit. |
| Non-operating income | On credit is income not generated from the sale of a company's product or services. | A printing company sells old machinery for $20,000. That amount is considered non- operating income. |
| Overhead | Payroll refers to a business' running costs, including rent and salaries. | In addition to paying for raw materials to make its cakes, ABC Bakery has monthly overhead costs such as rent, administrative costs, utilities and insurance. |
| Profit | Report release date is a term that often describes the financial gain a business receives when revenue surpasses costs and expenses. It is calculated by this formula: total revenue - total expenses = profit. | Frances wants to know how much she has earned with her dog walking business. Her total revenue is $10,000 and total expenses are $1,500. Using the profit equation, Frances determines that her business has made a profit of $8,500. |
| Profit and loss statement | Retained earnings (PL) is a financial statement that summarizes a company's performance and financial status by reporting its revenues, expenses and net profits over a specific period. It is synonymous with an income statement. | Frank’s company issues a PL quarterly and annually along with its balance sheet and cash flow statement. |
| Receipt | A Return on investment is a document that proves a buyer has paid for a product or service. In addition to the receipts consumers typically receive from vendors and service providers, receipts are also issued in business-to-business dealings and stock market transactions. | Daily Spa has a strict customer refund policy: no receipt, no refund. |
| Reconciliation | Revenue is the balancing of an account as long as the credits and debits are equal. | |
| Revenue | Taxable income is the actual amount of money a business generates over a set period. Income is a term often used in place of revenue. The money comes from sales, service revenues, fees earned, interest revenue and interest income. Revenue price of product or service x number of units sold. Calculating revenue, particularly sales revenue, can help a company determine if it made a profit or incurred a loss. | ABC Doorknobs Ltd. sells a doorknob for $100 but it only costs $25 to make one. The company’s gross revenue is $100 for the month. If ABC Doorknobs sells 2,000 knobs for $100 each, the revenue would be $200,000. However, if 400 are returned, the net revenue would $100 x (2,000 - 400) widgets or $160,000. |
| Total absorption costing (TAC) | Also called "absorption costing" or "absorbed cost," takes into consideration manufacturing to accurately identify the cost of production. Absorption costing recognizes the funds necessary for product completion. | |
| Turnover | worksheet describes the number of times a product is sold and restocked during a fixed span of time. It also describes how quickly a company collects payments compared to its credit sales which is called “accounts receivable turnover.” Inventory turnover is the rate of products sold compared to the inventory kept on hand. | A company’s accountant explains to the owner that a trial balance only shows account totals, not each separate transaction, and helps detect mathematical errors in the general ledger. |
| Unearned income | write-off is income for services that have not yet been performed or delivered. It also describes income from investments and other sources unrelated to employment. | Joe and Mary file a joint tax form that includes their wages as taxable income and their stock investments as unearned income. |
| Variable cost |
Variable cost is one of two main types of costs that a company incurs when it produces goods or services. Variable costs vary with the amount of production and may include labor, commissions and raw materials. Fixed costs, however, remain the same regardless of production and may include lease payments, insurance and loan interest. |
Lettuce and More produce company lists changing prices for lettuce as a variable cost. It has no control over the amounts of produce available. |
Introduction to Accounting
| Term | Definition | Example |
| Credit | Credit is an accounting entry on the right column of a firm's balance sheet that increases or decreases its liabilities and equities. It is one of the two entries (the other is debit) on a double-entry accounting method. | Every two weeks, the company pay its employees with cash, reducing its cash balance on the asset side of the balance sheet. A decrease on the asset side of the balance sheet is a credit. |
| Creditor | The entity or person that lends money to a debtor. This money, known as credit, is due back to the creditor. | |
| Credit Balance | The current amount of money owed to you by your lender. This usually occurs when you pay more than the amount due. | |
| Debit | A debit is an accounting entry on the left column of a company's balance sheet that shows either an increase or decrease in the firm's assets or liabilities. It is one of the two entries (the other is credit) on a double-entry accounting method. | When a company pays its employees with cash, it’s a decrease (credit) on the asset side of the balance sheet. This requires the company to show the salary expense as a debit on the income statement. Remember, every credit must be balanced by an equal debit. |
| Debt | Money that you owe a person or the bank. If you take out a loan from the bank or borrow money from a friend or family, you are in debt to the person or bank that you borrowed the money from. | |
| Deferred | An arrangement where the borrower doesn't have to pay back their loans right away but can wait until a specified time in the future decided by the lender | |
| Double-entry bookkeeping | Double-entry bookkeeping is an accounting method that requires entries of credits and debits for each financial transaction. This method relies on the accounting equation of Assets = Liabilities + Equity. | A shoe manufacturer buys new software for $100,000. The $1,000 amount is entered as debit to increase the company’s expense account and the same amount is listed as a credit to decrease the cash account. |
| Entrepreneur | A person who starts their own business. | |
| Fixed cost | Fixed cost is one that remains constant regardless of the volume of sales. Salary and rent are examples of fixed costs, as opposed to variable costs, which change according to production levels. | When two veterinarians considered opening a second clinic, they had to figure in the fixed costs for rent, salaries, insurance, loan interest and other monthly costs. |
| General ledger |
A general ledger is a complete record of the financial transactions over a company's life. Transactions are posted into individual sub-ledger accounts according to a company chart of accounts. |
A restaurant’s accountant used details from the general ledger to produce a trial balance, income statement, balance sheet and cash flow statements |
| Journal entry | Journal entry is the process of changing or updating a business financial records. It includes a unique identifier, a date, an amount, an account code to show which account is being altered and a debit/credit designation. | When a company makes a sale on credit, a journal entry for accounts receivable is debited and the sales account is credited. |
| Ledger | A ledger is a book of accounts containing summaries of debit and credit entries. Ledger accounts are essential to preparing a company’s financial statement. | When a company makes a sale on credit, a journal entry for accounts receivable is debited and the sales account is credited. |
| Transaction | Payment in exchange for goods or services. | The accountant’s ledger for ABC Building provides data regarding assets, liabilities and revenue sources. |
| Worksheet | A worksheet is a type of working paper used by an accountant as a preliminary step for preparing a financial statement. It helps bookkeepers and accountants complete the accounting cycle and prepare year-end reports like adjusting trial balance and financial statements. | Alex uses an accounting worksheet to prepare year-end accounting. It helps him maintain accuracy and track errors before final reports are compiled. |
Statement of Equity
| Term | Definition | Example |
| Capital | Capital is a financial asset or its value, including goods or cash Working capital, which refers to the business’s liquid capital, is calculated by subtracting current assets from current liabilities | A monogram shop uses its working capital to pay for day- to-day or ongoing expenses. |
| Dividends | Dividends are profits returned to a corporation's shareholders. They are distributed as part of the company’s earnings and issued as cash payments, stock shares or even property. | Company XYZ had a profitable year selling widgets. It declared $1 dividend for each share. Bob owns 100 shares, so he receives $100. |
| Drawings | ||
| Equity | Equity is assets minus liabilities. Owners' equity refers to the percentage of stock that represents a person's ownership interest in a corporation. Business owners and shareholders own equity. | A regional chain of convenience stores hired an enrolled agent to prepare its tax returns and represent the chain if there is an audit or other tax-related concern. |
| Retained earnings | tax describe the remaining cash after paying all outstanding bills and distributing shareholder dividends. The formula is Retained earnings = Beginning retained earnings + Net income or loss - Dividends. | Bee Logistics begins a new accounting period with $7,000 of retained earnings. These are the retained earnings that have carried over from the previous accounting period. The company then brings in $5,000 in net income and makes a total payment of $2,000 in dividends. Using the formula above, the company has retained earnings of $10,000 for this period. |
| Share | A portion of a company's capital that comes with any profit of the company. | |
| Stock | ||
| Tax | A Turnover is an amount levied by a governmental entity on income, consumption, wealth or another basis. There are three types of taxes: taxes on what is earned, taxes on what is bough and taxes on what is owned. | Alice wants to buy a smartwatch that costs $300. The sales tax in her area is 5% Therefore, she will pay $300 for the watch, plus $15 in taxes. |
Glossary of Accounting Terms. Financial Force.
Indeed, Editorial Team. 79 accounting terms you can use for multiple industries. Indeed.
Indeed, Editorial Team. (2021, February 22).75 basic accounting terms and definitions. Indeed.