119 Crucial Accounting Terms Every Business Owner Should Know

Understanding accounting is crucial for every business owner. This glossary provides clear definitions for 119 key accounting terms, empowering you to navigate your finances and communicate effectively with your accounting team.

General Accounting Terms

Accounting:

A system for recording, classifying, summarizing, and interpreting financial transactions for decision-making.

Account:

A detailed record of financial activity relating to a specific asset, liability, equity, revenue, or expense.

Accrual Basis Accounting:

Records revenues when earned and expenses when incurred, regardless of cash flow.

Accumulated Depreciation:

The total depreciation expensed for an asset over its life.

Amortization:

Spreading an intangible asset’s cost over its useful life.

Assets:

Resources owned by a company with future economic value.

Balance Sheet Terms

Balance Sheet:

A financial statement showing a company’s assets, liabilities, and equity at a specific point in time.

Book Value:

An asset’s value on the balance sheet (cost – depreciation).

Capital:

Financial resources used to fund operations and growth.

Capital Stock:

Ownership shares issued by a corporation.

Cash Flow:

Movement of cash in and out of a business.

Consolidated Financial Statements:

Combined financials of a parent company and its subsidiaries.

Contra Account:

Reduces a related account’s balance (e.g., accumulated depreciation).

Credit:

An entry that increases liabilities, revenue, and equity; decreases assets and expenses.

Creditor:

A person or entity to whom money is owed.

Credit Agreement:

A contract outlining loan terms between borrower and lender.

Current Asset:

Asset expected to be converted to cash within one year.

Current Liability:

Liability due within one year.

Income Statement Terms

Cost of Goods Sold (COGS):

Direct costs of producing goods sold.

Days Payable Outstanding (DPO):

Average time to pay suppliers.

Debit:

An entry that increases assets and expenses; decreases liabilities, revenue, and equity.

Depreciation:

Allocation of an asset’s cost over its useful life.

Deferred Income:

Payment received for goods or services not yet delivered.

Discount:

A reduction in price.

Distributions:

Allocation of assets or profits to owners.

Disbursement:

Payment of money from a fund.

Diversification:

Spreading investments across different assets.

Double-entry Bookkeeping:

Each transaction affects two accounts (debit and credit).

Due Diligence:

Thorough investigation before a transaction.

Accounts Payable Terms

Accounts Payable (AP):

Money owed to suppliers for goods/services.

AP Automation:

Automating AP processes.

Credit Memo:

Reduces the amount owed to a vendor.

Debit Memo:

Increases the amount owed to a vendor.

Early Payment Discount:

Discount for paying invoices early.

Goods Receipt:

Verification that goods have been received.

Immediate Payment:

Payment due upon receipt.

Invoice:

Bill for goods or services.

Net 15/30/90:

Payment due within 15/30/90 days.

Payment in Advance (PIA):

Payment before delivery.

Payment Processing:

Handling and executing payments.

Purchase Order (PO):

Formal document authorizing a purchase.

Purchase Requisition:

Internal request for goods/services.

Recurring Invoice:

Invoice sent regularly.

Terms of Sale:

Agreed-upon payment terms.

Three-way Matching:

Verifying PO, invoice, and goods receipt before payment.

Vendor Credit:

Credit from a vendor.

Auditing Terms

Adverse Opinion:

Auditor’s opinion that financials are misstated.

Analytical Procedures:

Evaluating financial data relationships.

Audit:

Independent examination of financial records.

Audit Engagement:

Formal agreement for an audit.

Auditor’s Report:

Report summarizing audit findings.

Compilation:

Presenting financial data without assurance.

Control Risk:

Risk of internal controls failing.

Special Report:

Audit report for specific financial presentations.

Taxation Terms

Casualty Loss:

Sudden, unexpected property loss.

Earned Income:

Income from employment or self-employment.

Estate Tax:

Tax on an estate’s value after death.

Exclusions:

Specific income types not subject to taxation.

Exemption:

Portion of income not subject to tax.

Expenditure:

Outflow of money or resources.

Fiscal Year:

12-month period for accounting.

Income Tax Basis:

Starting point for calculating taxable gain.

Internal Revenue Service (IRS):

U.S. federal tax agency.

Tax:

Mandatory contribution to government revenue.

Taxation:

Process of imposing taxes.

Withholding:

Deducting taxes from payroll.

Investment & Finance Terms

Annuity:

Series of payments over time.

Bonds:

Debt securities issued by corporations or governments.

Capital Gain:

Profit from selling an asset.

Common Stock:

Equity ownership in a company.

Compensatory Balance:

Required bank balance for a loan.

Default:

Failure to repay a debt.

Derivatives:

Financial instruments deriving value from an underlying asset.

Financial Forecast:

Prediction of future financial performance.

Financial Projection:

Forecast based on hypothetical scenarios.

Financial Statements:

Formal records of a company’s financial activities.

Foreclosure:

Legal process of reclaiming property due to loan default.

Fund Accounting:

Separating resources based on intended use.

General Ledger (GL):

Record of all financial transactions.

Generally Accepted Accounting Principles (GAAP):

Standard accounting framework.

Goodwill:

Intangible asset reflecting a company’s reputation and value.

Guaranty:

Promise to fulfill another party’s obligations.

Income:

Inflow of funds over a specific period.

Insolvent:

Liabilities exceed assets.

Installment:

Single payment in a series.

Interest:

Charge for borrowing money.

Internal Control:

Processes to safeguard assets and ensure accuracy.

Investment:

Allocation of resources for future benefit.

Joint Venture:

Collaborative business arrangement.

Junk Bonds:

High-yield, high-risk bonds.

Letter of Credit:

Guarantee of payment by a bank.

Liabilities:

Obligations owed by a company.

Liquidation:

Selling assets to pay debts.

Liquidity:

Ease of converting assets to cash.

Loss:

Expenses exceed revenue.

Management Accounting:

Accounting for internal decision-making.

Matching Principle:

Matching expenses with related revenues.

Merger:

Two companies combine into one.

Mortgage:

Loan secured by real estate.

Net Assets:

Assets minus liabilities.

Net Income:

Revenue minus expenses.

Net Sales:

Gross sales less returns and discounts.

Net Worth:

Assets minus liabilities (for individuals).

Operating Cycle:

Time from acquiring inventory to collecting cash from sales.

Option:

Right to buy or sell an asset at a specific price.

Overhead:

Indirect business expenses.

Partnership:

Business owned by two or more people.

Payroll:

Employee compensation and deductions.

Perpetual Inventory:

Real-time inventory tracking.

Present Value:

Current value of a future sum.

Premium:

Amount paid for insurance or bond above face value.

Pro Forma Financial Information:

Financials adjusted for hypothetical events.

Profit and Loss (P&L):

Same as income statement.

Promissory Note:

Written promise to pay a debt.

Prospective Financial Information:

Forecasts and projections.

Pro Rata:

Proportional distribution.

Prospectus:

Document for potential investors.

Public Company Accounting Oversight Board (PCAOB):

Oversees audits of public companies.

Refinancing Agreement:

Replacing an existing loan with new funding.

Research and Development (R&D):

Activities to develop new products.

Return on Investment (ROI):

Profitability of an investment.

Revenue:

Income generated by a business.

Risk Management:

Identifying and mitigating potential risks.

Safe Harbor Rule:

Protection from liability if guidelines are met.

Sarbanes-Oxley Act (SOX):

Law for corporate financial reporting.

SEC Filings:

Documents submitted to the SEC.

Security:

Financial instrument with monetary value.

Short Sale:

Selling an asset before owning it.

Spread:

Difference between two prices.

Start-up Costs:

Initial expenses of starting a business.

Stock Option:

Right to buy or sell stock at a specific price.

Tangible Asset:

Physical asset with value.

Trust:

Arrangement for managing assets for a beneficiary.

Valuation:

Determining the worth of an asset.

Variance:

Difference between budgeted and actual amounts.

Venture Capital:

Funding for startups.

Working Capital:

Current assets minus current liabilities.

Yield:

Return on an investment.

Other Essential Terms

Accountant’s Report:

Report on financial statements, distinct from an auditor’s report.

Accounting Change:

Change in accounting methods.

Accounting Principles Board (APB):

Predecessor to FASB.

Additional Paid-in Capital:

Excess paid for stock over par value.

Combined Financial Statement:

Merged financials of related entities.

Comparative Financial Statement:

Financials showing data from multiple periods.

Consistency Principle:

Using consistent accounting methods.

Certified Public Accountant (CPA):

Licensed accounting professional.

Cash Basis Accounting:

Recording transactions when cash changes hands.

Cost Accounting:

Tracking and analyzing production costs.

Deficit:

Liabilities exceed assets.

Disclosure:

Providing relevant information in financial statements.

Enterprise Resource Planning (ERP):

Integrated business management software.

External Reporting:

Reporting to external stakeholders.

Fair Market Value (FMV):

Price an asset would sell for in a fair market.

Financial Accounting Standards Board (FASB):

Sets GAAP standards.

Fixed Asset:

Long-term tangible asset.

Forensic Accounting:

Investigative accounting for legal disputes.

Fraud:

Intentional deception for personal gain.

Other Essential Terms

Enterprise Resource Planning (ERP):

Integrated business management software.

Estate Tax:

Tax on an estate’s value after death.

Ethics (in accounting):

Moral principles guiding accounting practices.

Exclusions (tax):

Specific income types not subject to taxation.

Exemption (tax):

Portion of income not subject to tax.

Expenditure:

Outflow of money or resources.

External Reporting:

Reporting to external stakeholders (e.g., investors).

Fair Market Value (FMV):

Price an asset would sell for in a fair market.

Financial Accounting Standards Board (FASB):

Sets GAAP standards.

Financial Forecast:

Prediction of future financial performance.

Financial Projection:

Forecast based on hypothetical scenarios.

Financial Statements:

Formal records of a company’s financial activities (balance sheet, income statement, cash flow statement).

Fiscal Year:

12-month period for accounting, not necessarily aligned with the calendar year.

Fixed Asset:

Long-term tangible asset (e.g., property, plant, and equipment).

Foreclosure:

Legal process of reclaiming property due to loan default.

Forensic Accounting:

Investigative accounting for legal disputes.

Fraud:

Intentional deception for personal gain.

Fund Accounting:

Separating resources based on intended use (common in nonprofits and government).

GAAP (Generally Accepted Accounting Principles):

Standard accounting framework used in the U.S.

General Ledger (GL):

Central record of all financial transactions.

Goods Receipt (GR):

Document verifying that goods have been received.

Goodwill:

Intangible asset reflecting a company’s reputation and value beyond its tangible assets.

Gross Margin:

Percentage of revenue remaining after deducting COGS.

Gross Profit:

Revenue minus COGS.

Guaranty:

Promise to fulfill another party’s obligations if they default.

IFRS (International Financial Reporting Standards):

A set of global accounting standards.

Immediate Payment:

Payment due upon receipt of goods or services.

Income:

Inflow of funds over a specific period. Includes revenue and gains.

Income Statement:

Financial statement showing revenue, expenses, and profit/loss over a period.

Income Tax Basis:

Starting point for calculating taxable gain on an asset.

Insolvent:

Liabilities exceed assets; unable to pay debts.

Installment:

Single payment in a series of payments for a debt.

Intangible Asset:

Non-physical asset with value (e.g., patents, trademarks).

Interest:

Charge for borrowing money; also earnings on investments.

Internal Control:

Processes to safeguard assets, ensure accurate reporting, and comply with regulations.

Internal Revenue Service (IRS):

U.S. federal tax agency.

Inventory:

Goods held for sale or used in production.

Investment:

Allocation of resources for future benefit, expecting a return.

Invoice:

Bill for goods or services provided.

Other Essential Terms

Joint Venture:

A business arrangement where two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity.

Junk Bonds:

High-yield, high-risk bonds issued by companies with poor credit ratings.

Letter of Credit:

A guarantee of payment by a bank on behalf of a buyer, ensuring the seller receives payment as long as specified conditions are met.

Liabilities:

Obligations owed by a company to others.

Liquidation:

The process of selling off assets to pay debts, often during bankruptcy or business closure.

Liquidity:

How easily assets can be converted to cash.

Loss:

When expenses exceed revenues, resulting in a negative net income.

Management Accounting:

Accounting used for internal decision-making within a company.

Matching Principle:

An accounting principle requiring that expenses be recognized in the same period as the revenues they help generate.

Merger:

When two companies combine to form a single entity.

Mortgage:

A loan secured by real estate.

Net Assets:

Total assets minus total liabilities; also known as equity or net worth (for businesses).

Net Income:

Total revenue minus total expenses.

Net Loss:

The result when total expenses exceed total revenue.

Net Present Value (NPV):

The difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Net Sales:

Gross sales minus returns, allowances, and discounts.

Net Worth:

Total assets minus total liabilities (for individuals).

Other Essential Terms

Operating Cycle:

The time it takes for a business to purchase inventory, sell it, and collect cash from the sale.

Operating Expenses:

The costs incurred in running a business’s core operations (e.g., salaries, rent, utilities).

Operating Income:

Revenue minus cost of goods sold and operating expenses. A measure of profit from core business operations.

Option:

A contract giving the right, but not the obligation, to buy or sell an asset at a specific price within a specific time period.

Overhead:

Indirect costs of running a business (e.g., rent, utilities, administrative expenses).

Partnership:

A business owned by two or more individuals.

Par Value:

The nominal or face value of a stock or bond.

Payroll:

The total amount paid to employees, including wages, salaries, and deductions.

Payment in Advance (PIA):

Payment for goods or services before they are delivered or rendered.

Perpetual Inventory:

An inventory system that continuously updates inventory records in real time.

Present Value:

The current value of a future sum of money, discounted to reflect the time value of money.

Preferred Stock:

A type of stock that gives holders priority over common stockholders in receiving dividends and assets upon liquidation.

Premium (Finance):

The amount paid for a bond or other security above its face value.

Premium (Insurance):

The amount paid for an insurance policy.

Pro Forma Financial Information:

Financial statements that show the effects of a hypothetical event or transaction, as if it had already occurred.

Profit:

The financial gain resulting from revenues exceeding expenses.

Profit and Loss Statement (P&L):

Another name for the income statement.

Promissory Note:

A written promise to pay a specified sum of money at a future date.

Prospective Financial Information:

Financial information about expected future events, such as forecasts and projections.

Pro Rata:

Proportional allocation or distribution.

Prospectus:

A legal document describing a company and its securities offered for sale to the public.

Proxy:

Authorization given by a shareholder to another person to vote their shares.

Public Company Accounting Oversight Board (PCAOB):

A U.S. organization that oversees the audits of public companies.

Purchase Order (PO):

An official document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services.

Refinancing:

Replacing an existing loan with a new one, often to get better interest rates or terms.

Research and Development (R&D):

Expenditures incurred to develop new products, processes, or services.

Return on Investment (ROI):

A measure of the profitability of an investment, calculated as (Gain from Investment – Cost of Investment) / Cost of Investment.

Revenue:

Income generated from a company’s main business activities, such as sales of goods or services.

Risk Management:

The process of identifying, assessing, and mitigating potential threats to an organization.

Other Essential Terms

Tangible Asset:

A physical asset that can be touched, such as property, plant, and equipment.

Tax:

A mandatory contribution to state revenue, levied by the government on workers’ income and business profits or added to the cost of some goods, services, and transactions.

Taxation:

The process of levying and collecting taxes by a government.

Terms of Sale:

The conditions under which a sale is made, including payment terms, delivery terms, and any warranties or guarantees.

Three-Way Matching:

In accounts payable, the process of matching the purchase order, invoice, and receiving report to ensure accuracy before payment is made.

Trial Balance:

A summary of all the debit and credit balances in a company’s general ledger at a specific point in time, used to ensure debits equal credits.

Trust:

A legal arrangement in which one party (the trustee) holds and manages assets for the benefit of another party (the beneficiary).

Valuation:

The process of determining the economic worth of an asset or company.

Variance:

The difference between actual results and budgeted or expected results.

Venture Capital:

Funding provided by investors to startup companies and small businesses with high growth potential.

Wages:

Compensation paid to employees based on an hourly rate.

Withholding Tax:

Tax deducted from an employee’s paycheck and remitted directly to the government by the employer.

Working Capital:

Current assets minus current liabilities. A measure of a company’s short-term financial health and its ability to meet immediate obligations.

Yield:

The return on an investment, expressed as a percentage.