Useful Accounting Terms

Our clients often ask about various accounting terms to better understand financial concepts and communicate effectively with our accountants, bookkeepers, and business advisors. These terms cover a broad range of accounting concepts and practices that clients often seek to understand better in their financial endeavors:

 

No.

 

Term

 

Description

1

Accounting Equation

The fundamental equation in accounting representing the relationship between assets, liabilities, and equity: (Assets - Liabilities = Equity)

2

Accounts Payable

The money a company owes its suppliers or vendors

3

Accounts Receivable

The money owed to a company by its customers

4

Accrual Basis Accounting

A method of accounting where revenues and expenses are recorded when earned or incurred, regardless of when the cash is received or paid

5

Accruals

Recognition of revenue or expenses before the cash is received or paid

6

Acid-Test Ratio (Quick Ratio)

A measure of a company's ability to cover its short-term liabilities with its most liquid assets

7

Amortization

The gradual reduction of an asset's value over time

8

Assets

any resource owned or controlled by a business or an economic entity, and may included tangible and intangible assets

9

Audit Committee

A committee of independent directors responsible for overseeing the company's financial reporting and internal control processes

10

Audit Trail

A chronological record that tracks the sequence of activities surrounding an accounting transaction (reconstructs and verifies accounting transactions)

11

Balance Sheet

A financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time

12

Bookkeeping

The process of recording financial transactions and maintaining financial records

13

Break-even Point

The level of sales at which a company covers all its costs and neither makes a profit nor incurs a loss

14

Budget

A financial plan that outlines expected revenues and expenses over a specific period

15

Callable Bond

A bond that the issuer has the right to redeem before its maturity date

16

Callable Preferred Stock

A type of preferred stock that can be redeemed by the issuing company after a specified date

17

Capital Expenditure (CapEx)

Spending on assets that have a long-term benefit, such as property, plant, and equipment

18

Cash Basis Accounting

A method of accounting where transactions are recorded when cash is exchanged

19

Cash Conversion Cycle

The time it takes for a company to convert its investments in inventory and other resources into cash

20

Cash Discount

A reduction in the amount payable by a customer if payment is made within a specified period

21

Cash Discount

A reduction in the amount payable by a customer if payment is made within a specified period

22

Cash Flow Statement

A financial statement that summarizes how changes in balance sheet accounts affect cash and cash equivalents

23

Convertible Debt

Debt that can be converted into equity shares at a predetermined conversion rate

24

Cost Accounting

A branch of accounting that focuses on capturing costs associated with production

25

Cost Allocation

The process of assigning indirect costs to products, services, or departments

26

Cost of Capital

The weighted average cost of a company's debt and equity used to finance its operations and projects

27

Cost of Equity

The return required by equity investors for their investment in a company

28

Cost of Goods Sold (COGS)

The direct costs of producing goods or services

29

Cost-Volume-Profit (CVP) Analysis

A method used to study the relationship between costs, volume, and profits

30

Credit

An entry that increases a liability or equity account or decreases an asset or expense account

31

Debit

An entry that increases an asset or expense account or decreases a liability or equity account.

32

Debt-to-Equity Ratio

A financial ratio indicating the proportion of equity and debt used to finance a company's assets

33

Deferred Tax Asset

A future tax benefit that arises due to temporary differences between accounting and tax rules

34

Deficit

The negative balance in a company's retained earnings, indicating cumulative losses

35

Depreciation

The allocation of the cost of an asset over its useful life

36

Derivative

A financial instrument whose value is derived from the value of an underlying asset, index, or rate

37

Dividend

A distribution of a portion of a company's earnings to its shareholders

38

Dividend Yield

A financial ratio that shows the annual dividend income as a percentage of the investment's market price

39

Double Entry Accounting

A system where each transaction has equal and opposite effects on two or more accounts (at least two different accounts)

40

Earnings Before Interest and Taxes (EBIT)

A measure of a company's profitability before deducting interest and income taxes

41

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

A measure of a company's operating performance

42

Earnings Before Tax (EBT)

A measure of a company's profitability before deducting income taxes

43

EBIT Margin

The ratio of operating earnings over operating sales. The percentage of revenue that represents EBIT.

44

Enterprise Resource Planning (ERP)

Integrated software systems used for managing and coordinating all the resources, information, and functions of a business

45

Enterprise Value

The total value of a company's equity and debt

46

Equity

The residual interest in the assets of an entity after deducting liabilities

47

Equity Method

An accounting method used to account for investments in other companies where significant influence is exerted but not control

48

Equity Ratio

The proportion of a company's total assets financed by shareholders' equity. It shows how effectively a company funds asset requirements without using debt.

49

External Audit

An independent examination of financial information by an external auditor

50

Fair Value

The estimated market value of an asset or liability

51

FIFO (First In, First Out)

An inventory valuation method where the first items added to inventory are assumed to be the first ones sold. See LIFO.

52

Financial Leverage

The use of debt to increase the return on equity

53

Financial Ratio

A comparison of two financial figures to assess a company's performance

54

Financial Statement Analysis

The process of reviewing and analyzing a company's financial statements for decision-making

55

Financial Statements

The reports that summarize the financial transactions and position of a business

56

Fiscal Year

A 12-month period used for financial reporting and tax purposes. A fiscal year is also known as a financial year and can be different than a calendar year. For companies that operate on a seasonal basis, using a fiscal year may be beneficial.

57

Fixed Assets

Tangible assets with a long-term useful life, such as buildings and equipment

58

GAAP (Generally Accepted Accounting Principles)

The set of accounting standards, principles, and procedures issued and frequently revised by the Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow GAAP when their accountants compile their financial statements.

59

General Ledger

The primary accounting record that summarizes all financial transactions of a business. Within a general ledger, transactional data is organized into assets, liabilities, revenues, expenses, and owner's equity. After each sub-ledger has been closed out, the accountant prepares the trial balance.

60

Going Concern

The assumption that a business will continue to operate indefinitely (assuming that a company has the resources to continue making enough money to stay afloat for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period)

61

Goodwill

The intangible asset that represents the excess of the purchase price over the fair value of identifiable assets acquired in a business combination

62

Hedging

Using financial instruments to offset the risk of adverse price movements in an asset or liability

63

IFRS (International Financial Reporting Standards)

Global accounting standards developed by the International Accounting Standards Board (IASB). They are a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world.

64

Impairment

A reduction in the estimated or nominal value of an asset due to a decrease in its recoverable amount

65

Income Statement

Also known as a profit and loss statement, it shows a company's revenues, expenses, and profits over a specific period

66

Installment Sale

A method of selling goods or property where the buyer makes payments over time

67

Intangible Assets

Assets without physical substance, such as patents, trademarks, and goodwill

68

Interest Expense

The cost of borrowing money

69

Internal Audit

An independent examination of financial information within an organization

70

Journal Entry

The recording of financial transactions in a journal

71

Journals

The book or computer file where initial accounting transactions are recorded

72

Leasehold Improvements

Alterations made to rental premises in order to customize it for specific business needs.

73

Leverage

The use of various financial instruments or borrowed capital to increase the potential return of an investment

74

Liabilities

Debts or obligations owed by a company such as loans, accounts payable, and accrued expenses. See Assets

75

LIFO (Last In, First Out)

An inventory valuation method where the last items added to inventory are assumed to be the first ones sold. See FIFO

76

Liquidity Ratio

A measure of a company's ability to meet its short-term obligations with its most liquid assets

77

Markup

The amount added to the cost price of goods or services to cover overhead and profit

78

Matching Principle

The accounting principle that requires expenses to be recorded in the same period as the related revenue and is associated with accrual accounting. See Revenue Recognition

79

Materiality

The concept that certain information is important enough to influence the decisions of financial statement users

80

Mutual Fund

An investment vehicle that pools money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities

81

Net Income

The total profit after deducting all expenses from revenue

82

Net Present Value (NPV)

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

83

Operating Cash Flow

The cash generated by a company's normal business operations

84

Operating Income

A measure of a company's profitability from its core operations

85

Operating Lease

A lease that does not transfer ownership of the leased asset to the lessee

86

Overhead

Indirect costs that cannot be directly traced to a specific product or service

87

P/E Ratio (Price-to-Earnings Ratio)

A valuation ratio calculated by dividing the market price per share by earnings per share

88

Private Equity

Investments made in private companies or assets not traded on a public exchange

89

Purchase Order

A commercial document issued by a buyer to a seller, indicating the type, quantity, and agreed-upon price of products or services

90

Reconciliation

The process of ensuring that two sets of records (eg, bank statements and accounting records) are in agreement

91

Retained Earnings

The cumulative net income retained by a company after distributing dividends to shareholders

92

Return on Investment (ROI)

A measure of the profitability of an investment. The ROI formula is: (profit minus cost) / cost.

93

Revenue Recognition

The accounting principle that governs when and how revenue is recognized in financial statements. Per GAAP, revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs.

94

Segment Reporting

The disclosure of financial information about a company's operating segments

95

Share Buyback

The repurchase of a company's own shares, often as a strategy to return value to shareholders

96

Statement of Cash Flows

A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents

97

Tangible Assets

Asset with physical substance, such as buildings, machinery, and inventory. See Intangible Assets

98

Tax Credit

An amount that can be subtracted directly from the taxes owed

99

Tax Deduction

An expense that can be deducted from taxable income to reduce the amount of income subject to taxation

100

Tax Loss Carryforward

A tax strategy allowing a business to use a net operating loss to offset future profits

101

Tax Shelter

A legal method used to reduce taxable income

102

Taxable Income

The amount of income used to calculate an individual or company's income tax liability

103

Trial Balance

A list of all the accounts in a general ledger and their balances at a certain point in time

104

Variable Costs

Costs that vary with the level of production or sales

105

Variance Analysis

The process of comparing actual financial results to budgeted or expected results

106

VAT (Value Added Tax)

A consumption tax added to a product's sale price repeatedly at every point of sale at which value has been added

107

Weighted Average Cost of Capital (WACC)

A calculation representing the average rate of return a company is expected to pay to its investors

108

Working Capital

The difference between a company's current assets and current liabilities

109

Working Capital Ratio

The ratio of current assets to current liabilities, indicating a company's short-term liquidity

110

Write-Off

The process of reducing the value of an asset on the balance sheet to reflect its current market value

111

Z-Score

A numerical measurement that predicts the likelihood of bankruptcy for a company

 

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These terms provide insight into various financial and business concepts that clients may find useful in their interactions with accounting professionals. If you have any questions or need further clarification, feel free to ask us here!

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