Business 102: The Simplest Accounting Dictionary Ever

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The Basics Of Accounting

Account – a standard record that represents a single categorized financial part of a business

Accounting Period – the period financial statements cover, usually every month, quarter or year

Accounting – the process of recording and reporting financial transactions

Accounts Payable – outgoing amount owed but not paid for something

Accounts Receivable – incoming amount due that wasn’t paid

Accrual Method – a system most businesses use that record revenues and expenses when the transaction happens, as opposed to the Cash Method when the money exchanges

Accruals – unpaid expenses incurred like salaries or interest on a loan which are usually included in accounts and adjusted after getting the invoice

Acquisition – a company absorbed into another company

Aging – sorting accounts receivables by age to analyze overdue money

Amortization – regularly repaying an asset’s loan over fixed time periods

Annual Report – a shareholder report that shows a company’s annual statements, cash flows, and any other relevant financial information

Appreciation – when an asset increases in value, the opposite of depreciation, only happens in unusual circumstances

Arrears – unpaid bills due

Assets – things with value a business either owns or are due to own and can include physical items, money, and legal rights

Audit – the process of reviewing financial records to verify accuracy and completeness, which include within an organization (internal auditing) and by an outside party (independent audits)

Average Cost Method – inventory method that averages out the total value of all inventory purchased to determine Cost of Goods Sold

 

Bad Debt – unpayable debts, which are usually tax-deductible expenses for lenders

Balance Sheet – an annual statement that shows the financial position of a business and summarizes its assets and liabilities

Bankrupt – when a person or group has more liabilities than assets, the term is “insolvent” for LLC’s

Bond – a loan that only needs to be paid off after a determined number of years, also known as a debenture or loan stock

Book Value – the lower value of the original cost paid for an asset (Historical Value) or its current value (Fair Market Value)

Bookkeeping – the profession of capturing financial transactions and posting them to the General Ledger

 

Capital – money business owners invest in assets to start operating, also known as start-up costs

Capital Allowances – deductions from taxes a company has to pay, usually based on something the company has to do, also known as a tax credit

Capital Gains Tax – tax an asset sold for a profit, subject to adjustments from inflation, allowances, and other factors

Cash Accounting – system usually used by businesses that only account for paid invoices, as opposed to the Accrual Method that tracks when transactions incur

Cash Flow – money flowing through a business during an accounting period, usually shown on a Statement of Cash Flows

Cash Flow Forecast – prediction of cash flows in an upcoming financial period

Chart of Accounts – extensive list of every account a business organizes and records financial transactions with

Charge Back – canceling a credit or debit card transaction before it processes, which often still charges a fee to the seller

Cost, Insurance, and Flight (CIF) – an international contract where the seller agrees to pay shipping, insurance, and freight charges before delivering the item

Circulating Assets – assets like manufacturing materials and inventory that convert from cash to goods and then back to cash again

Closing the Books – making final entries that bring profit and loss accounts to zero for the next period and close out the transactions from that period, followed by Opening the Books

Cost Of Goods Sold (COGS) – the reported cost of items sold

Common Stock – share of a company that allows shareholders a portion of the Dividend, usually the highest risk and highest rewards

Compensating Error – two mistakes that somehow canceled each other out

Compound Interest – interest accrued on both principal and interest every period, as opposed to Simple Interest

Consolidated Financial Statements – combined financial statements of a parent company and all its subsidiaries

Consolidation – combining all a company’s accounts into one parent company

Cost Accounting – accounting that values assets at their current market value instead of their historical cost, also known as Current Cost Accounting

Cost-Based Pricing – pricing method where companies base fees on the price of manufacturing

Cost Center – the parts of a business like accounting or custodial which maintain the company but doesn’t generate profit, as opposed to a Profit Center

Creative Accounting – an underhanded way of changing how appealing accounts appear to shareholders, considered fraud by many accountants

Credit – any record-keeping that lowers assets, lowers expenses, increases liability or increases capital (in bookkeeping) or when a supplier lets the buyer pay after receiving goods or services, the opposite of a Debit

Credit Note – document sent to a customer that cancels their debt, usually for defective goods or poor service

Creditors – Suppliers a business owes money to

Current – within the next 12-month cycle

Current Assets – assets which can quickly convert to cash including money in banks, money owed, petty cash, raw materials, and stock, also known as Convertible Assets

Current Liabilities – anything owed within the next 12 months including essential day-to-day operating debts like bank overdrafts, short-term loans, and suppliers’ lines of credit

Cut-off Procedures – methods that separate transactions into different accounting periods

 

Debit – any record-keeping that increases assets, increases expenses, decreases capital or decreases liability, the opposite of a Credit

Debtors – customers who owe money

Default – when a business can’t meet a financial obligation

Deferred Expenditure – expenses treated as a future expense that can’t apply to the present accounting period

Deferred Income – receiving or recording income before earning it

Deficit – when income or liabilities are more than assets

Depreciation – systematically lowering an asset’s value over time to reflect how it slowly becomes worthless, usually calculated yearly as a percentage

Disclosure – transparency about accounting information to make financial statements understandable

Discounted Cash Flow – method of adjusting the cash flows based on time for investors to ensure they’re receiving desirable returns

Dividend – profit transferred to a shareholder

Double-Entry Bookkeeping – universal accounting system that records all transactions twice as both a debit and credit

Drawing – non-wage money a company owner takes out for personal use

 

Earned Income – cash or equivalents received as compensation for goods or services

Earnings Per Share –  the total profit of a company divided by its number of shares

EBIT – Earnings Before Interest and Tax

EBITA – Earnings Before Interest, Tax, and Amortization

EBITDA – Earnings Before Interest, Tax, Depreciation, and Amortization

Encumbrance – money put aside for a necessary purpose

Entry – information put into a Journal or Ledger

Equity – total incomes and assets minus total expenses and liabilities

Escrow – assets a third party holds until both parties meet specified conditions

Exclusions – income excluded from gross income like gifts and inheritances, also known as Excluded Income

Exemption – non-taxed income, sometimes refers to a specific amount or item

Expense – something purchased for a business like inventory or salaries, also known as Expenditure

 

Fair Market Value (FMV) – price a reasonable person would pay for something assuming they know everything relevant to it

Financial Accounting Standards Board (FASB) – a group that sets standards on accounting practices, sometimes varies from the IASB

First In, First Out (FIFO) – inventory method that values sold inventory by costs of the earliest purchased inventory

Financial Statements – documents like the Balance Sheet, Income Statement, and Cash Flow Statement that show financial information

Financing Activities – one of the three Cash Flow Statement financial activity categories alongside Operating Activities and Investing Activities that refer to managing debts and company stock

Finished Goods – processed inventory made from Raw Materials

Fiscal Year – A 12-month period that can start on any day of the year

Fixed Assets – assets a business owns like land, buildings, machinery, vehicles and other long-term investments that last longer than a year that affects day-to-day operations if converted to cash, also known as Non-Current Assets

Fixed Cost – costs like salaries and rental agreements that remain about the same each period

Forecast – predicting future company finances with concrete numbers based on past performance

Fraud – intentionally misusing a company’s resources

Flow of Funds – report that shows how balance sheets have changed across accounting periods

Future Value – the value of something in the future after adjusting for inflation and the inability to spend it during that time, as opposed to Present Value

 

Generally Accepted Accounting Principles (GAAP) – a century-old standard for how accountants should think and work

General Ledger – a company’s complete accounting information that financial statements pull from, also known as the Book of Entry

Goodwill – the difference between the Book Value and Fair Market Value of an asset, which includes overpaying for a company because of reputation and rewarding customers for their loyalty

Gross – total profits before making deductions or discounts, also known as Gross Income

Gross Margin – the difference between Costs of making or getting something and Revenue from selling it

Growth and Acquisition – How a business grows, either by building and expanding operations or buying other companies

 

Historical Cost – something’s original price

 

International Accounting Standards Board (IASB) – a group that sets standards on accounting practices, sometimes varies from the FASB

Impairment – the decreased value of an asset that can’t depreciate any further

Impersonal Accounts – accounts only held by a company and not by any other person or entity

Imprest System – method of restoring an account, usually petty cash, to its original value when it drops

Income – Revenue minus Expenses, also known as Turnover or Yield

Income Statement – a financial statement that summarizes revenue, expenses, and profit, also known as a Profit and Loss Account

Incorporation – the date a business legally establishes

Intangible Assets – non-physical assets with value like patents, copyrights, trademarks, and licenses

Interest – accrued additional Accounts Payable to a lender, usually a percentage of the Principal

Inventory – goods manufactured for sale or purchased for resale

Inventory Obsolescence – obsolete inventory like out-of-style clothing or rotten food which become unsaleable

Inventory Shrinkage – non-selling reasons such as theft, loss or damage that reduce inventory

Inventory Turnover Rate – the number of days inventory stays stored before getting sold, also known as Stock Holding Period

Investing Activities – one of the three Cash Flow Statement financial activity categories alongside Financing Activities and Operating Activities that refer to buying things that can help the company expand or benefit in the long-term

Investment – buying goods or services likely to increase profit

Investors – people or businesses who invested money to be part-owner

 

Journal – a system that records chronological business transactions that post to the General Ledger

Joint Venture – capital combined to provide products or services, usually as business partnerships where everyone involved is fully responsible for it

 

Key Performance Indicators – business performance measured with numbers

 

Last In, First Out (LIFO) – inventory method that values sold inventory by costs of the latest purchased inventory

Leasing – rental agreement which lets someone use an asset for a set time

Ledger – a financial record that tracks business transactions posted from Journal Entries

Leveraging – borrowing against an asset to do something productive, also known as Gearing

Liabilities – Things an entity owes for money, goods or services, also known as Debts

Limited Liability Company (LLC or LTD) – company which legally limits owners’ liability to how much they’ve put into the company

Limited Liability Partnership (LLP) – a Limited Liability Company partnership

Liquidation – payment of a Bankrupt company’s Debts by selling Assets

Listed Company – company bought and sold on the stock market

Listing Requirements – rules for companies who want to buy and sell on the stock market

Long-Term – generally anything beyond the next 12-month cycle

Long-Term Asset – an asset like a factory machine or a car expected to exist over a year

Long-Term Liabilities – Things like mortgages and bonds owed but not due for more than a year

Loss – the opposite of a Profit where expenses are more than revenue

 

Management Accounting – the profession of making specialized reports that fit needs for company decisions

Matching – combining sales and expenses in an accounting period

Maturity – date a liability is first due

Merger – two organizations share Assets and liabilities and combine into one organization without becoming a third entity

Money Laundering – the process of moving money obtained illegally through accounts to make it appear legal, usually alongside or inside legal transactions

Moving Average – method of displaying trends with data on graphs that average out numbers to make smooth lines instead of jagged points

 

Negligence – when someone fails to maintain a responsibility

Net Worth – “true” worth of something by adding together all incomes and assets and subtracting all expenses and liabilities, also called Net, Net Worth or Net Profit

Net Assets – all Assets minus all Liabilities

Nominal Value – the value of a share when it’s first issued, also called Initial Public Offering (IPO)

Not-For-Profit Organization (NPO) – a company where income goes to a specific purpose outside the company and trustees and shareholders receive no financial benefits

Opening the Books – the beginning of recordkeeping for the next period after Closing the Books

Operating Activities – one of the three Cash Flow Statement financial activity categories alongside Financing Activities and Investing Activities that refer to day-to-day operations of the company

Operating Cycle – the average amount of time between something bought and delivered or fulfilled

Operating Risk – where fixed Operating Costs are high enough to hurt profits

Option – the rights to buy (Call) or sell (Put) a Stock or Asset for a period

Overhead – business costs not tied directly to production or sales

 

Parent Company – company that controls at least one subsidiary

Partnership – an agreement between at least two people to conduct profitable business together hold liability for a company’s debts

Pay on Delivery – an arrangement where customers only pay for goods and services after delivery or fulfillment

Profit-Equity Ratio (PE Ratio) – an equation that measures how confident shareholders are of profits

Perpetual Inventory – inventory system which updates inventory balance after every transaction

Petty Cash – small account companies use for small purchases which have become mostly obsolete with bank/credit cards

Plug – a small number that corrects rounding errors on financial statements

Point of Sale – place where businesses conduct transactions

Preferred Stock – type of share that allows the shareholder to choose to receive a Dividend before declaring Common Share Dividends

Premium – the amount paid on a stock over face value

Prepayment – things like insurance or rent paid in advance, usually for the coming year

Present Value – current value of something for analyzing investment opportunities, as opposed to Future Value

Price-Sensitive Information – knowledge that would change a company’s stock value if the public knew it

Principal – The original or remaining balance of a loan

Profit – the opposite of a Loss where revenue is more than expenses, sometimes called Gain or Margin

Profit Center – part of a business that generates profit for a company, as opposed to a Cost Center

Profit Margin – percentage difference between product or service costs and the price it sells for, also known as Markup

Projection – hypothetical assumptions which estimate future financial statements

Prospectus – a document that advertises shares to an investor, usually contains Financial Statements and detailed supporting information

Provisions – money set aside for covering future Liabilities

 

Qualified Opinion – an accountant’s issued report when their professional opinion believes the presented information isn’t sound, as opposed to an Unqualified Opinion

Quality of Earnings – earnings connected to higher sales or lower costs instead of accounting anomalies

 

Raw Materials – purchased materials for processing into Finished Goods

Refinancing Agreement – company’s arrangement to avoid defaulting by replacing existing financing with other funding

Realization Principle – GAAP principle where revenue is only recognized when those goods or services deliver or fulfill

Rebate – partial refund for overpaying or canceling services before they finished

Receipt – a record of payment, usually written or printed

Replacement Cost – the cost of replacing an asset or liability

Reserve Account – account set up to retain earnings, usually to clarify balance sheets or reserve money against future purchases or liabilities

Retained Earnings – net income a company keeps instead of distributing as Dividends to Shareholders

Return on Investment (ROI) – A very popular profitability ratio most frequently calculated by dividing investment Profit its Cost

Revenue – money a business receives for its commercial activities

Risk – the possibility of loss in investment calculated to determine the most profitable market return

 

Sales – total income from selling goods or services

Secured Loan – loan where the borrower pledges an asset that the lender then uses as collateral

Segment Reporting – business divisions separated for individual reporting

Shareholder – owner of shares in a company, also known as Stockholders

Share – an evenly divided portion of a company, also known as Stock

Simple Interest – Interest only applied to a loan’s original Principal

Sinking Fund – money set aside over time to repay a debt or replace a wasting asset

Statement of Cash Flows – a financial statement that shows how changes in the Balance Sheet affects the movement of cash in Operating, Investing, and Financing Activities

Stock Exchange – an organization that sets legal standards for buying and selling publicly traded Shares, also known as the Stock Market

Subordinated Debt – a company’s owed Unsecured Debt if it’s Liquidated

Subsidiary Company – company owned by a Parent Company

Subtotal – smaller items grouped to create a Total

Sunk Costs – money a business can’t recover

Suspense Account – account to hold funds temporarily

 

Tangible Assets – physical Assets like buildings, vehicles, and machinery

Tax – mandatory financial contribution to a government

Total – the final “bottom line” of a financial statement, usually represented by a line above and two lines below

Total Cost of Ownership (TCO) – full cost of an asset including renewal fees and other mandatory expenses

 

Undeposited Funds Account – an account which shows money a company has received but not banked or spent, also called a Cash-in-Hand Account

Unlisted Company – Limited Liability Company unlisted on a Stock Exchange

Unqualified Opinion – an accountant’s issued report when their professional opinion believes the presented information isn’t sound, as opposed to a Qualified Opinion

Unsecured Creditor – creditor without a claim against an Asset and will potentially incur Bad Debt if a company Liquidates

Unsecured Loan – debt without any collateral attached to it

 

Valuation – a process that determines the value of a company’s assets

Variance – the difference between the estimated and actual cost

 

Wages – expense paid to employees for their services

Withholding – money withheld from salaries by an employer for payment to governments and pre-tax organizations

Working Capital – an excess of Current Assets minus Current Liabilities

Work-in-progress (WIP) – partially completed goods or services recorded as an asset when completed

Write-down – non-cash partial-value expensed reduction of an asset

Write-off – non-cash total-value expensed reduction of an asset

 

Zero Based Account (ZBA) – bank account always kept as close to zero as possible

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