Accounting is all about performance, which means accountants must communicate their results lucidly and consistently. Many of the terms you’ll come across are useful day-to-day concepts that will help you with your work or understanding what others do so that they know they can trust you. However, others may be less self-explanatory – just like in any other profession – so it’s good to understand why they matter before you use them incorrectly (and look out of touch). Here is a guide to the most important 58 accounting terms you need to know.
1. Accrued income
This is money that is owed due to the passage of time. For example, if a client pays their invoice late, then interest charges are accrued until they’re paid (but you can’t recognize this as revenue till they are).
The process of recognizing expenses over time so that their impact will be spread evenly across your accounting period.
Something monetary or not that has value. This often relates to anything from cash, equipment, and office space to intellectual property and goodwill.
4. Asset turnover
The revenue ratio to a company’s assets determines how effectively a business uses its resources.
5. Bad debt
This is when an invoiced client fails to pay their account on time, and you have to write off the debt as a loss because they can’t or won’t pay.
6. Break-even point
This refers to the operating point where revenues equal costs or, in other words, when there are neither profits nor losses. This figure is useful regarding financial planning and determining how long it will take to become profitable.
7. Cash flow
This refers to the actual movement of cash through a business, typically involving the recording of inflows (when money comes in) and outflows (when money goes out).
8. Cash flow statement
This is an excerpt from your profit and loss account detailing all your cash movements during the accounting period. It’s usually presented as a series of columns illustrating cash flow changes over time.
9. Cost-benefit analysis
Used for capital budgeting, this refers to analyzing how much revenue you’ll bring in from an investment versus its cost.
10. Costing method
All accounting systems have a computational method for calculating costs. This is also known as your costing system.
11. Cost of goods sold
This covers expenses related to purchasing raw materials, production, and labor.
12. Accrued revenue
The amount of money that is owed to a company but has not been received; is an amount that has accrued but has not been received by the company.
13. Drawings account
An account in the balance sheet for any withdrawals from the company by its owners also called capital withdrawals
14. General ledger
One of the books into which the bookkeeper records transactions; is also called the book of original entry or journal voucher system
15. Bank charges
A charge the company pays to its bank to maintain a checking account, savings account, or other similar services
16. Bank overdrafts
The amount of money that is held in cash or on deposit at a bank but exceeds the amount that can be checked at any one time
17. Balance sheet
A statement showing the company’s liabilities and shareholder’s equity on side and assets on the other side.
18. Petty cash
A small amount of money used only for minor purchases or payments usually kept in a petty cash box
19. Cash disbursements journal (also check register)
A journal that records checks written to pay for goods, services, and other expenses.
20. Trial balance
A listing of accounts, balances, and equity in them at any time
21. Credit rating
How likely someone is to repay you when they borrow or use your money or goods; this score indicates how risky it is to lend them a sum.
Something money owed by someone who another party can call upon at some point in the future. The interest charged on this loan is the cost of debt.
Value reduction of an asset within a specified time because normal wear and tear.
Reducing the value of something to represent its present worth in terms of its future worth; is usually used when considering debts.
When a company distributes some – or all – of its profits to shareholders, usually annually.
26. Double-entry bookkeeping
The system is used by accountants to record financial transactions to maintain balanced books; in other words, every entry must have an offsetting debit or credit entry elsewhere.
27. Fixed asset
An asset that stays with a business for more than one year is used to run its operations; examples include machinery and computers.
This is the intangible value of a company’s reputation, brand recognition, etc.
29. Gross margin
The percentage of revenue you receive once revenue is offset by the cost of goods sold; this figure can be used to determine your profitability.
30. Income statement
A statement setting out your revenues, expenses, and net income for an accounting period.
Charges made by providers of borrowed money are used to cover the costs and potential losses associated with such loans.
32. Interest-free debt
When a company or individual doesn’t charge interest on a specific debt.
This includes all the raw materials, components, and finished goods used by your business over the accounting period. It can also include any goods used in trade to produce your products and services, such as office supplies and other materials.
34. Investment property
A measure of how much you’ve spent on land, buildings, and machinery owned but not currently being put to ongoing use.
35. Key Performance Indicators (KPIs)
Set targets that measure your performance concerning others in your industry or across business sectors.
36. Leverage ratio
This is the percentage of debt an organization uses to finance its assets and can be used as an indicator of how risky a company’s approach to financing is.
Something owed by one party, typically for some form of services provided or the return of borrowed money.
The ease with which a business can convert its assets into cash when required.
39. Net Income
The amount remaining after subtracting all expenses from total revenues.
40. Net worth
The value of your assets minus that of your liabilities.
41. Non-current assets
These items will be used to run a business for more than one year.
42. Payback period (or payback)
The time it takes to get your money back by repaying the principal and interest on a loan; is also called the debt service coverage ratio.
43. Profit margin
Representing how much profit you make on sales, assuming there are no costs other than those linked to selling (and no tax losses). This can be used to indicate how risky a company’s approach to selling is.
44. Rate of return
The rate at which interest or dividends are received is produced by dividing the annual income by the amount invested.
45. Rate of return analysis
An analysis of an investment’s potential growth before it is made to gauge whether it offers reasonable value for money and to highlight any risks.
46. Sales margin
A calculation that takes costs associated with selling into account to give you a figure for how much you will make per sale; this can be used as an indicator of how risky a company’s approach to selling is.
47. Sales turnover
Taking all your sales over an accounting period, subtracting the cost of goods sold, and dividing by two gives you your sales turnover. As with income, this figure can be used as an indicator of riskiness regarding how much risk is associated with making a sale.
48. Straight-line depreciation
A method of amortizing your assets over an agreed period, such as the asset’s useful life.
The charges levied by the government on you for using its services usually result in a reduction in your net income.
50. Tax loss carry forward
This is the amount you can offset the tax you have paid on your profits in previous years or those of other business entities; it enables you to use tax losses not already carried over to previous periods to reduce your current taxes.
51. Tax rate
The percentage of your profits taxed by the government (or other relevant authority).
52. Value Added Tax (VAT)
A tax you pay when you buy goods and services for use in your business is then paid over to the government; it’s charged in most European countries and some others too.
53. Working capital
A calculation representing a company’s net current assets minus its current liabilities. An alternative term is a working capital ratio. One can use it as an indicator of the effectiveness of a company’s financing methods.
54. Accounting period
The interval during which an organization accumulates its financial transactions; is usually one day, one week, or one month.
This is a security that represents a firm’s debt, which the company will pay back at some point with interest. Bonds are usually issued for up to 30 years and can be traded in secondary markets by investors.
56. Acid Test Ratio:
A company’s short-term liquidity is calculated by dividing its cash and cash equivalents by its current liabilities. A more conservative ratio would include all assets that could be converted into cash in thirty days. Also, referred to as the rapid test ratio.
57. Debt-to-Equity Ratio
The debt-to-equity ratio measures how much money a company owes to shareholders as an equivalent to how much cash it has in the account balance. For example, Apple (AAPL) has $180.6 billion in cash and cash equivalents but a debt of $260.9 billion for a debt-to-equity ratio of 0.7 ($260.9/180.6).
58. Accounting Software
Software designed to assist with bookkeeping, accounts receivable management, accounts payable management, and financial management more effectively than if done manually. Many companies offer accounting software for businesses, nonprofits, and individuals.
Accounting is a complicated field that requires a lot of terminologies. Knowing these terms is important if you want to know what your accountant is saying about your financial statements and other paperwork. So, before you sit down with an accountant and ask them to walk through your balance sheets, profit-and-loss statements, or tax returns in detail, take the time to familiarize yourself with some basic accounting terms.