Basic Accounting Terms:

 Accounts Payable - Accounts payable refers to the money a business owes to its
suppliers, vendors, or creditors for goods or services bought on credit. A short-term
debt that must be paid back quickly to avoid default, accounts payable shows up as a
liability on an organization's balance sheet. An example of accounts payable includes
when a restaurant receives a beverage order on credit from an outside supplier.
Accounts payable acts as an IOU (I owe you) to another company
 Accounts Receivable- Essentially the opposite of accounts payable, accounts receivable
refers to the money owed to a business, typically by its customers, for goods or services
delivered. An example of accounts receivable includes when a beverage supplier
delivers a beverage order on credit to a restaurant. While the restaurant records that
transaction to accounts payable, the beverage supplier records it to accounts receivable
and a current asset in its balance sheet.
 Accounting Period- An accounting period refers to the span of time in which a set of
financial statements are released. Businesses and investors analyze financial
performance over time by comparing different accounting periods. Accounting cycles
track accounting events from when the transactions first occur to when they end, all
within given accounting periods. Publicly held companies must report to the Security
and Exchanges Commission every three months, so they go through four accounting
periods per year. Other organizations use different accounting periods, but no matter
the length, accounting periods should remain consistent over time.
 Accruals- A type of record-keeping adjustment, accruals recognize businesses' expenses
and revenues before exchanges of money take place. Accruals include expenses and
revenues not yet recorded in companies' accounts. Accruals affect businesses' net
income and must be documented before financial statements are issued. Types of
accrual accounts include accrued interest, accounts receivable, and accounts payable.
Companies note accrued expenses before receiving invoices for goods or services.
Businesses indicate accrued revenue for goods or services for which they expect to
receive payment later on.
 Accrual Basis Accounting- Accrual basis accounting deals with anticipated expenses and
revenues by incorporating accounts receivable and accounts payable. In contrast, cash
basis accounting focuses more on immediate expenses and revenues and does not
document transactions until the company pays or receives cash. Most people find cash
basis accounting easier, but it does not offer as accurate a portrayal of an organization's
financial health as accrual basis accounting.
 Assets-Assets are resources with economic value which companies expect to provide
future benefits. These can reduce expenses, generate cash flow, or improve sales for
businesses. Companies report assets on their balance sheets. Asset types include fixed,
current, liquid, and prepaid expenses. Assets may include long-term resources like
buildings and equipment. Current assets include all assets a company expects to use or
sell within one year. Liquid assets can easily convert to cash in a short timeframe.
Prepaid expenses include advance payments for goods or services a company will use in
the future.
 Balance Sheet- Balance sheets are financial statements providing snapshots of
organizations' liabilities, assets, and shareholders' equity at specific moments in time.
Balance sheets represent one type of financial statement used to evaluate companies'
financial health and worth. Accountants use the accounting equation, also known as the
balance sheet equation, to create balance sheets: "Assets = Liabilities + Equity."
 Capital- Capital refers to a person's or organization's financial assets. Capital may
include funds in deposit accounts or money from financing sources. Working capital
refers to a business's liquid capital, which the owner can use to pay for day-to-day or
ongoing expenses. A company's working capital indicates its overall health and ability to
meet financial obligations due within a year.
 Cash Basis Accounting-Cash basis accounting is an accounting method that does not
incorporate transactions until the business receives or pays cash for goods and services.
This method focuses on immediate revenues and expenses. Alternatively, accrual basis
accounting includes future revenues and expenses, documenting accounts payable and
accounts receivable.
 Cash Flow- cash flow is the total amount of money that comes into and goes out of a
business. Net cash flow refers to the sum of all money a business makes. Cash flow
statements are financial statements, and they include all cash a business receives from
its operations, investments, and financing.
 Chart of Accounts- An index of the financial accounts in a company's general ledger, a
chart of accounts (COA) provides a snapshot of all the financial transactions a company
has conducted in a specific accounting period. COAs help companies organize their
finances and provide insight into organizations' financial health for investors and
stakeholders. COAs can include assets, liabilities, and shareholders' equity.
 Closing the Books- Referring to when accountants used physical ledger books to track
transactions, closing the books means accounting for all financial transactions within a
certain period. This helps ensure the accuracy of companies' reports for given time
periods, including their income statements and balance sheets. Closing the books is
simple for organizations using cash basis accounting, but it's more complicated for those
employing accrual basis accounting. Accountants refer to closing the books at the end of
the year as year-end closing.
 Cost of Goods Sold- The total cost of producing the goods sold by a business is called
cost of goods sold (COGS). COGS includes the direct costs of creating goods, including
materials and labor, and it excludes indirect costs, such as distribution expenses.
 Credit- Accountants using double-entry bookkeeping systems record numbers for each
business transaction in two accounts: credit and debit. Credits are accounting entries
that either increase an equity or liability account or decrease an expense or asset
account. Credits are made on the right side of an account. Debits must equal credits for
an account to be in balance.
 Debit- The opposite of a credit, a debit is an accounting entry made on the left side of an
account. Used in double-entry bookkeeping systems, debits either increase expense or
asset accounts or decrease equity or liability accounts.
 Depreciation- The depreciation accounting method determines the decreasing value of a
tangible asset over its lifetime. A business can make money from a depreciating asset by
 expensing or deducting part of the asset each year it is in use, for accounting and tax
purposes. The Internal Revenue Service (IRS) requires companies to spread out the cost
of depreciating assets over time.
 Diversification- A risk management strategy, diversification mixes many different
investments and assets in one portfolio, allowing individuals or businesses to spread out
risk and protect themselves from financial ruin if any investments or assets fail. Many
financial experts think diversified portfolios boast better performance in the long term,
but short-term growth may prove slower.
 Dividends- Dividends consist of company earnings, or profit, which a business pays to its
shareholders as a reward for their investment in its equity. Companies may distribute
dividends as cash or additional shares of stock. Shareholders may receive regularly
scheduled or special one-time dividends. Exchange-traded funds and mutual funds also
pay dividends
 Double-entry bookkeeping- A type of bookkeeping system that keeps the accounting
equation ("Assets = Liabilities + Equity") in balance, double-entry bookkeeping requires
every entry to an account to have an opposite, corresponding entry in another account.
Every transaction impacts at least two accounts in double-entry bookkeeping, including
liability, asset, revenue, equity, or expense accounts. Credits and debits make up the
two types of entries, with credits entered on the left side and debits entered on the
right. A much more simplified system, single-entry bookkeeping records only one entry
per transaction.
 Expenses- Expenses refer to costs of conducting business. Companies can deduct some
eligible expenses from their taxes. Types of expenses include fixed, variable, accrued,
and operation expenses. Fixed expenses do not change from month to month, including
rent, salaries, and insurance payments. Variable expenses do change monthly, and they
may include discretionary or unpredictable but necessary costs. Accountants recognize
accrued expenses when companies incur them, not when companies pay for them.
Primarily necessary and unavoidable, businesses incur operating expenses (often
abbreviated as OPEX), like rent, marketing, and payroll, through their normal
operations. The IRS allows companies to deduct operating expenses.
 Equity- Equity, often called stockholders' equity or owners' equity, is the amount of
money left over and returned to shareholders after a business sells all assets and pays
off all debt, represented by the equation "Equity = Assets - Liabilities." An indicator of a
company's financial health, equity can consist of both tangible (buildings, cash, land)
and intangible (copyrights, patents, brand recognition) assets. It exists as a record on a
company's balance sheet. Sole proprietorships only use the term owners' equity,
because there are no shareholders.
 Fixed Cost- A type of expense, fixed costs do not change from month to month. Fixed
costs include things like payroll, rent, and insurance payments. Variable costs, on the
other hand, change each month and may include discretionary spending or
unpredictable expenses.
 General Ledger- Accountants use a general ledger to record financial transactions and
data for companies. Employed by companies that use double-entry bookkeeping,
general ledgers include debit and credit account records. Companies use the
 information in their general ledgers to prepare financial reports and understand their
financial performance and health over time.
 Gross Profit- Gross profit, also called gross income or sales profit, is the profit businesses
make after subtracting the costs related to supplying their services or making and selling
their products. Accountants calculate gross profit by subtracting the cost of goods sold
from revenue. Gross profit considers variable costs, not fixed costs. Analysts can look at
gross profit as indicative of a company's efficiency at delivering services or producing
goods.
 Gross Margin- Gross margin refers to businesses' net sales revenue after subtracting the
costs of goods sold. It represents the revenue companies keep as gross profit. An
indicator of financial health, higher gross margins typically mean that a company can
make more profit on its sales. Lower gross margins may mean a business needs to
reduce production costs. The formula for gross margin is "Gross Margin = Net Sales -
Cost of Goods Sold."
 Income Statement- Also known as statements of revenue and expense or profit and loss
statements, income statements provide information about businesses' expenses and
revenue in specific periods of time. Along with balance sheets and statements of cash
flows, income statements offer insight into companies' financial health.
 Inventory- Inventory refers to a company's goods and raw materials used for making the
goods it sells. It appears on a balance sheet as an asset. Inventory includes finished
goods, raw materials, and works-in-progress. Generally, companies should avoid holding
large amounts of inventory for long periods of time, due to the risk of obsolescence and
storage costs.
 Journal Entry- A journal entry refers to a business transaction recorded in a business's
general ledger. A journal entry may include the journal entry date and number, account
name and number, debit, and credit. The recorder may also include a description or
miscellaneous information about the entry.
 Liabilities- A liability is when someone owes someone else money. Someone can fulfill
the obligation of settling a liability through the transfer of money, services, or goods.
Types of liabilities can include loans, mortgages, accounts payable, and accrued
expenses. Short-term liabilities conclude in less than a year, while businesses may
expect long-term liabilities to take longer than a year to resolve.
 Liquidity- Liquidity relates to how easily an individual or business can convert an asset to
cash for its full market value. The most liquid asset, cash, can easily and quickly convert
to other assets. Accounting liquidity measures how easily someone can pay for things
using liquid assets. Market liquidity refers to how easily a market (such as a housing
market or stock market) facilitates the transparent buying and selling of assets at stable
prices.
 Net Income- Also called net earnings or net profit, net income is the amount an
individual or business earns after subtracting deductions and taxes from gross income.
To calculate the net income of a business, subtract all expenses and costs from revenue.
Sometimes called the bottom line in business, net income appears as the last item in an
income statement. Investors and shareholders look at net income to assess companies'
financial health and determine businesses' loan eligibility.
 On Credit- On credit, also called on account, is an agreement for an individual or
company to pay for a good or service at a later date. Using credit cards is one way of
buying on credit.
 Overhead- Overhead refers to the ongoing costs of doing business, other than those
related to directly creating a good or service. Companies must understand the cost of
overhead to figure out how much they need to charge for their goods or services and
make a profit. Income statements include information about overhead expenses.
 Payroll- Human resources and accounting departments typically handle payroll, the total
compensation a company pays its employees for a specific time period. Determining
payroll includes keeping track of hours worked, distributing payments, and separating
out money for Social Security and Medicare taxes.
 Present Value - Money today is typically assumed to be worth more than the same
amount of money received in the future. This is due to the assumed rate of return and
inflation. Present value is the current value of money in the future, with a specific
assumed interest rate that could accrue over that period of time.
 Profit and Loss Statement- A profit and loss statement, also called an income statement,
shows the expenses, costs and revenues for a company during a specific time period.
This financial statement, along with the cash flow statement and the balance sheet,
provides information about a business's financial health and ability to generate profit.
 Receipts- Receipts are written notices acknowledging that one party received something
of value from another. An acknowledgement of ownership, receipts are proof of a
financial transaction. The IRS requires small businesses to hold onto some receipts to
document tax deductible expenses.
 Retained Earnings- Retained earnings, also called an earnings surplus, refers to the
amount of net income left for a business to use after paying dividends to its
shareholders. A company's management typically decides whether to keep the earnings
or give them to shareholders.
 Return on Investment- Return on investment (ROI) measures the efficiency of an
investment, including the amount of return on an investment relative to its cost.
Accountants can also use ROI to compare the efficiency of more than one investment.
To calculate ROI, subtract the cost of investment from the current value of investment,
and divide that by the cost of the investment. A popular metric, ROI helps investors
choose the best investment opportunities.
 Revenue- Revenue, also called sales, is the gross income a business makes through
normal business operations. To calculate sales revenue, multiply sales price by number
of units sold. Accrual accounting and cash accounting methods calculate revenue
differently. When using the accrual accounting method to calculate revenue,
accountants include sales made on credit. Those who use the cash accounting method
only count sales as revenue once the business receives payment.
 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.
 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.
 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 stay the same, regardless of production. Fixed costs may include
insurance, rent, and interest payments.