Basic Accounting Terms – A Quick Guide

If you’re starting to think about pursuing a career in accounting, your first step is to familiarize yourself with some of the basic accounting terms, acronyms, and abbreviations in the field.

It seems every industry has its own secret language. And knowing the lingo is an entry point into the inner circle—an indicator that you truly belong.

Because of the confusing credentials, different accounting myths, and these industry terms, it’s not uncommon for people to think working in accounting is inaccessible when really it just has its own unique language. Knowing how to “talk the talk” will allow you to focus less on accounting definitions and more on the important training you’ll need to launch a successful accounting career.

Some Basic Financial Accounting Terms

Variable Cost

Variable cost refers to expenses that change depending on the level of a business’s production. Variable costs go up when production increases and down when production decreases. In contrast to variable cost, fixed cost refers to expenses for a company that stays the same, regardless of production. Fixed costs may include insurance, rent, and interest payments.

Trial Balance

A periodical bookkeeping worksheet, a trial balance compiles the balance of ledgers into credit and debit columns that equal each other. Companies create trial balances to ensure the mathematical accuracy of their bookkeeping systems entries.

Single-Entry Bookkeeping

Single-entry bookkeeping is a type of accounting system that records the financial transactions of a business. The system uses one entry per transaction to record cash, taxable income, and tax-deductible expenses going in or out of the business.

Businesses can use accounting software or even simple tables to perform single-entry bookkeeping. Single-entry bookkeeping is much simpler than double-entry bookkeeping, which requires two entries per transaction.

Accounts Payable (AP)

Accounts Payable include all of the expenses that a business has incurred but has not yet paid. This account is recorded as a liability on the Balance Sheet as it is a debt owed by the company.

Accounts Receivable (AR)

Accounts Receivable include all of the revenue (sales) that a company has provided but has not yet collected payment on. This account is on the Balance Sheet, recorded as an asset that will likely convert to cash in the short term.

Accrued Expense 

An expense that has been incurred but hasn’t been paid is described by the term Accrued Expense.

Asset (A)

Anything the company owns that has monetary value. These are listed in order of liquidity, from cash (the most liquid) to land (least liquid).

Equity (E) 

Equity denotes the value left over after liabilities have been removed. Recall the equation Assets = Liabilities + Equity. If you take your Assets and subtract your Liabilities, you are left with Equity, which is the portion of the company that is owned by the investors and owners.

Inventory 

Inventory is the term used to classify the assets that a company has purchased to sell to its customers that remain unsold. As these items are sold to customers, the inventory account will be lower.

Liability (L) 

All debts that a company has yet to pay are referred to as Liabilities. Common liabilities include Accounts Payable, Payroll, and Loans.

Balance Sheet 

A financial document that reconciles all the company’s assets with their liabilities and equity.

Costs of Goods Sold 

The total money spent to produce goods and services, including production, labor, storage, and material costs.

Current Assets 

Capital that has immediate value (typically that which will be used within one year), including cash, sellable products, or accounts receivable.

Equity 

All capital currently invested in the company, including any profits that have been re-invested as retained earnings.

Expenses 

Any additional money spent operating the company that’s not associated with the production of sellable products and services. Examples of expenses include office supplies, lease for the place of business, and employee wages.

Fixed Assets 

Assets with long-term value, such as land and property, tools and machinery, or vehicles.

General Ledger 

Record of all financial transactions across all of a company’s accounts, which is maintained continuously for the entire life of the company.

Income Statement

All outstanding debts are owed by the company. This could include accounts payable, loans, liens on property, or other long-term investments.

Liabilities 

Outstanding payments the company is currently owned by all customers or clients. Basically, this is anything the company bills out.

Credit 

An entry on a balance sheet that decreases asset values and/or increases liability and equity values.

Debit 

An entry on a balance sheet that increases asset values and/or decreases liability and equity values (or incoming payments).

Return on Investment (ROI) 

Used to determine how much of the money spent producing goods and services was recouped in profits. You find ROI by calculating a ratio of a business’s net income to total assets.

Present Value (PV) 

The amount a future sum of money is currently worth today. Because a company can invest existing funds in order to collect interest or ROI in the future, a particular sum of money may not be worth the same thing now as it will be in the future.

Accountants may use present value calculations to determine the true value of sales to be paid in the future or to aid in investment decisions.

Bank statement

A bank statement is a periodic report a bank sends to an account holder showing the monthly balance in the account.

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.
Example: A business has $100 million in total assets and $80 million in total liabilities. Thus, the company’s book value is $20 million.

Shareholder Equity

A company’s total assets are less its total liabilities; owner’s equity; net worth. Shareholder equity comes from the start-up capital of the business plus retained earnings amassed over time.

Subsidiary Accounts

Accounts that are under a control account; must equal the main account balance. Examples of subsidiary accounts may be “Office Supplies,” or “Cleaning Supplies,” under the control account called “Supplies.”

Gross margin

Gross margin or profit is the total number of sales that have been made, subtracted by the associated costs, such as manufacturing costs, wholesales costs, material, and supplies.

Receipts

Receipts are the total amount of cash collected in business transactions over the course of one day. It does not include other revenue collected.

Revenue

Income and revenue are interchangeable, compromising the total amount of all income collected at one point in time. It may include cash sales, credit purchases, subscription fees, and interest income. It differs from receipts, as it can include monies that are not collected at the delivery time.

Trade discount

A trade discount is a percentage discounted from the purchase price and is based on the volume of goods ordered at one point in time. Higher discounts may be applicable to larger orders, with smaller discounts for lesser orders.

Leave a Comment