Common Accounting Terms
Basic Accounting & Bookkeeping Terminology
Understanding accounting and bookkeeping starts with understanding basic accounting & bookkeeping terms. Confused about something or just looking to brush up on your accounting vocabulary? Read on for some of the basics
General Bookkeeping Terminology
Accrual Accounting – an accounting method whereby economic events are recorded at the time a transaction occurs rather than when money actually exchanges hands. Accrual accounting is used by most large businesses; however many small businesses utilize cash accounting. (Take a look at our blog post providing more detail on the difference between cash accounting and accrual accounting here.)
Accounts Payable – an accounting entry / category that represents a company’s obligation to pay off a near-term debt to its creditors or suppliers. It appears on the balance under the current liabilities category. Another common usage refers to a business department that is responsible for handling payments owed by the company to its various creditors. Want to learn even more about AP? Click here.
Accounts Receivable – an accounting entry that represents the money that a company is owed from its clients. (The opposite of accounts payable.) In most cases it refers to services that have already been rendered, but this does not always have to be the case.
Account Reconciliation – the reconciliation of an account is a process whereby the accuracy of the account balance is checked for correctness.
Cash Accounting – an accounting method whereby economic events are recorded when money exchanges hands, rather then when two parties agree to an exchange. Cash accounting is used by many small businesses, while accrual accounting is used by most large businesses. (In case you missed it, you can find a blog post explaining the difference between cash accounting and accrual accounting here.)
Depreciation – an accounting procedure whereby the cost of an asset is accounted for over the course of its useful life rather than all at once. This allows a company to write-off the value of an asset over time and smooth their net income.
Double Entry Accounting – an accounting system whereby every transaction is recorded in (at least) two accounts. The two entries will have equal and offsetting sides – the debit and the credit. This process ensures that the fundamental accounting equation, i.e. Assets = Liabilities + Equity, is satisfied.
Financial Statements – records of the financial activities and standing of an entity that are included in the 10Ks of public companies. They provide wide ranging insights as to the health, profitability, and financial inner-workings of a company. The three parts of financial statements are the income statement (also know as the statement of profit and loss), balance sheet, and statement of cash flows. (Click here to learn more about the income statement. Click here to learn more about the balance sheet.)
Fundamental Accounting Equation – the foundation of modern double entry accounting which represents the relationship between a business’s assets, liabilities, and shareholder’s equity. Also known as the balance sheet equation, it is represented as: Assets = Liabilities + Equity. The basic intuition is that all assets are financed by either borrowings (liabilities) or shareholder contributions (equity). If this equation does not hold than something is wrong!
General Ledger – a document which provides a complete history of all of a company’s transactions.
Balance Sheet Terminology
Assets – articles of value that are owned by a company and are recorded on the balance sheet. Typical examples include cash, accounts receivable, land, buildings, equipment, and inventory.
Contra Accounts – special balance sheet accounts used to offset the value of a ‘normal’ account by accumulating the opposite balance. (The two are combined to tabulate a net amount. Take a look at this blog post for more on this topic.)
Equity – the ownership interest in a business which can be calculated as assets – liabilities. (See fundamental accounting equation.) In the case of an individual asset, equity refers to the portion of the asset which is owned, for example the amount of a house’s mortgage which has been paid off is the level of equity.
Liabilities – obligations and debts that are incurred in the process of doing business. Examples include accounts payable, long term debts, and accrued expenses.
Want to learn more about balance sheets? Check out our blog post all about balance sheets here.
Income Statement Terminology
Cost of Goods Sold (COGS) – costs directly attributable to the production of a certain type of goods. Can include the cost of physical inputs used in making a final product and the cost of the services required to bring the final product to bear. Click here to learn even more about COGS.
Expenses – money spent and costs associated with efforts to generate revenues that are not included in cost of goods sold. Examples may include rent, utility costs, and insurance costs.
Gross Profit – profits made after deducting the costs directly associated with the production of a product for sale, i.e. cost of goods sold. Gross profit = revenues – cost of goods sold.
Net Profit – profits made after accounting for all expenses that a business occurs. This is the ‘bottom line’ of the income statement, and is transferred to retained earnings on the balance sheet at the end of an annual accounting cycle. (Note that profit and cash flows aren’t the same thing. Check out this post if you want to better understand the difference between cash flows and profits.)
Revenue – the money that a company takes in during a given period of time. This is the top line of the income statement.
Want to learn more about income statements? We’ve got you covered. You can read a great blog post on income statements here. Want to learn more about bookkeeping, accounting, and finance in general? Here are some great places to start: Investopedia, Accounting Coach, and the Quickbooks Support Center. Have questions about other accounting & bookkeeping terms or any other questions about accounting, bookkeeping, or taxes? Reach out to us today!