Accounting Principles and Concepts

25 Essential Accounting Terms Everyone Should Know

Last updated Tuesday, September 12, 2023
25 Essential Accounting Terms Everyone Should Know

Accounting is the process of keeping track of and documenting financial transactions. It offers a way for people and businesses to measure their financial health and performance. Accounting terms can help you comprehend your numbers better and make better business decisions. Below are some fundamental accounting terms and concepts that can be beneficial for you.

1. Accounts payable

This is a term for all your unpaid bills and is often written as "AP." It should be written down and thought of as bills the business owes. This is quite a standard liability.

2. Accounts receivable

This is the opposite of owing money. Accounts receivable (AR) are the amounts of money owed to the business that still need to be paid. Consider this as an asset.

3. Allocation

On your balance sheet, this is spreading the cost of an expense over more than one accounting period. Depreciation is an excellent example of this. Let's say you buy equipment for your business. The equipment cost is typically distributed over several years.

4. Asset

An asset is anything the company owns that can have a price. This can include money, property, tools, and stock. Assets can have different levels of liquidity. This means that some assets, like cash, are straightforward to spend, while others, like property, are difficult to spend because they have to be sold first (or liquidated).

5. Balance sheet

This is the main record of how much money a business has. It lists the assets, liabilities, and equity and uses a set equation: Assets are equal to liabilities plus equity.

Read more about balance sheet

6. Capital

Capital refers to the money that your business can use to run and grow. Liabilities are subtracted from assets to get this number.

Capital = Assets - Liabilities

It can be the cash or other assets that can be sold or liquidated to pay for things. Capital doesn't indicate current expenditures; it shows the potential spending capacity.

7. Cash flow

It incorporates the total cash a company expects to receive over a certain period of time. Monthly cash flow represents the amount you expect to get in a given month.

8. CPA

The American Institute of Certified Public Accountants is the group that gives out the title "certified public accountant." CPAs pass a uniform exam and get a license in the state where they live. The title indicates that the holder has considerable accounting knowledge and is eligible to work in this sector.

9. Credit

Credit is an accounting entry that can make a company's liabilities or assets smaller. Whenever a credit is owed to the business, its assets increase A business's liability will go up if the business owes credit.

10. Debit

The opposite of credit is debit. When a business gets paid back, its assets go up. When a company pays a debit, its liabilities go down. With double-entry accounting, every debit and credit in the ledger are paired.

11. Depreciation

Depreciation is a way to determine how much an asset loses in value over time. A good example is a loss in the value of a company's car. The car's value depreciates every year.

12. Diversification

Diversification is the act of putting money into different kinds of assets. The goal is to minimize risk by diversifying the types of assets, thereby reducing the impact of any single adverse event.

13. Expenses

These expenses are what your business has to pay for it. Most of the time, we can divide them into four groups: fixed, variable, accrued, and operation.

  • Fixed expenses (FE) are payments that are the exact same every time, like rent or a mortgage.
  • Variable expenses (VE) are costs that change over time. Typical examples are labor or inventory stocking.
  • Accrued expenses (AE) are costs that still need to be paid.
  • Operation expenses (OE) are indirect costs, and these could include the likes of taxes or advertising.

14. Equity

On a balance sheet, equity is found by taking the difference between liabilities and assets. Owner's equity is a different term for how much of something a person or business actually owns. Property equity shows how much of a mortgage has been paid off, and stock equity shows how much of a company is owned through stock.

15. General ledger

This is a complete record of all the financial transactions performed by an enterprise.

16. Gross profit

This is the company's profit minus the costs of running the business. It is frequently used to figure out how much a company is worth. You will need to know this value to get a business loan or pitch to investors.

17. Insolvency

When an enterprise or person can't pay its debts, this is called insolvency. It is often predicted by making comparisons of all expenses to revenue. The business will go bankrupt if revenue isn't enough to cover costs.

18. Inventory

Inventory lists all the goods a company owns that can be sold. Usually, inventory is divided into finished goods, which are ready to sell; work-in-progress goods, which need to be put together; and raw materials.

You can use Wafeq as an all-in-one solution to run your inventory and track all the stock movements.

19. Liability

A business's debts are its liabilities. Accounts payable, taxes, and accrued expenses are all types of liabilities.

20. LLC

A limited liability company (LLC) is a type of business in which the owners are not personally responsible for the debts or liabilities of the company.

21. Net profit and loss

After deducting all costs from the revenue, the remaining amount is the net profit. If the profit is negative, this same calculation shows how much the company lost.

22. Overhead

This is the cost of running a business generally, but it does not incorporate the cost of goods sold. Some examples of overhead are the cost of utilities, printing, and property taxes.

23. ROI

Return on investment (ROI) is a way to determine how much money is made through an investment compared to how much it costs. This calculation is for more than just building up assets. For instance, money invested in advertising can be used to determine the return on investment.

24. Revenue

Revenue is how much money the business makes in total. It's used to figure out the gross profit and the net profit.