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 |
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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