Accounting is confusing for business owners who didn’t major in the subject. This glossary of terms will help out with some key accounting terminology. This list will evolve over time, so feel free to ask questions below that we can respond to! Also, check out our separate Bookkeeping, QuickBooks, & Tax definition of terms article.
Accounting: Analyzing, verifying, and reporting the results into a record that summarizes the financial transactions of a business. A key function of any business that helps manage a business. Basic accounting can be done by a bookkeeper, whereas advanced accounting transactions should be performed by an accountant.
Accountant: A professional who performs accounting functions typically more advanced functions. Have a higher level of understanding than a bookkeeper and must make sure books abide by the ethical standards and guiding principles of the IFRS.
Certified Public Accountant (CPA): An accountant who has been certified in this practice by the American Institute of Certified Public Accountants. To become a CPA one must pass a test and meet work experience requirements or education.
Balance Sheet: A financial statement that displays a company at a specific point in time. It includes a company’s assets, liabilities, and Owner’s Equity. The basic equation of this financial statement is Assets – Liabilities = Owner’s Equity which is where ALOE comes from.
Assets: A resource that an individual or company owns that provides economic value. These can be tangible or intangible and are typically separated into current assets and noncurrent assets.
Current Assets: An asset that can be “used” within the next year of doing business.
Accounts Receivable: The money a company is owed by its clients. Can usually be calculated by the number of outstanding invoices a company has sent. This grows when goods are sold or services are provided and no payment is collected.
Inventory: The number of goods a company has in stock that they can sell for profit. This includes items throughout a product pipeline including raw materials, work in process, and finished goods.
Noncurrent Assets: Company long-term investments where the full value will not be “used” within the accounting year. Includes a lot of intangible assets.
Equipment: Machines and tools that a company uses to produce its products or provide its services. Should be written down over time with depreciation expense.
Goodwill: An intangible asset that arises when one company purchases another for a premium price. A company might pay more than the purchased companies value to obtain elements like: a brand name, customer base, patents, and logo. Goodwill gives these off-balance sheet items a monetary value.
Liabilities: A company’s debt or financial obligation to pay off. Liabilities are what a company owes in the future and can be reduced through the exchange of money, goods, or services. It’s like if you borrowed money from a friend you eventually have to pay them back.
Accounts Payable (AP): A companies obligation to pay short-term debt. These short-term debts are usually owed to creditors or suppliers and should be paid off within one year of recording.
Long-Term Notes Payable: Similar to AP but these debts are owed outside of the current year. These debts tend to be larger sums and are paid with incurred interest.
Unearned Service Revenue: Occurs when a business is paid for their services or product before they are delivered. If someone prepays for a service or pays upfront for a product the money received goes into this account. When the service/product obligation is fulfilled, the amount is moved from this account into revenue.
Owner’s Equity: Represents the net value of a company or the financial health of a company. If a company were to be liquidated, it’s the amount that would be left for the owner of the company to take.
Common Stock: An equity that represents ownership of a company. Stockholders elect a board of directors who exercise voting power in the company. A way to finance a business without having to take out a loan and pay interest.
Additional Paid-In Capital: The excess paid by an investor in a company’s stock. The excess is calculated taking the sale price and subtracting the par value of the stock. This is an accumulated account and decreased with distributions in excess of earnings and profits.
Net Income: The amount of profit/ loss that a company acquires during 1 year of business. This account resets every year with revenue increasing it and expenses decreasing it.
Revenue: Money brought into the business through sales.
Expenses: Money spent by a company during the year to operate the business.
Depreciation Expense: Write-downs of noncurrent assets as they become older and less efficient. Can be calculated using several methods.
Bad Debt Expense: Write down account for accounts receivable when money owed won’t be collected.
Cost of Goods Sold: When products are sold or services performed, an account to write-down the inventory used in that product or service.