20 Common Accounting Terms You Have to Know
Accounting is a field that you need to know if you are doing accounting for your business. It can be difficult to understand accounting terms, which leads many people to avoid accounting altogether. This post will go over 20 accounting terms and what they mean so that you don’t have to fear to account any longer.
Here’s a list of 20 Common Accounting Terms Explained:
- Profit – refers to earning money for one’s efforts or investments; what remains after subtracting costs from revenue.
- Revenue – measures the amount of income generated by a company during an operating period.
- Expenses – include both recurring expenses as well as capital expenditures that are not part of day-to-day operations such as buildings and equipment depreciation, office supplies, etc.).
- Losses vs Gains – again occurs when revenue exceeds expenses, a loss occurs when the reverse is true.
- Accrual accounting – a method of accounting for transactions and events in which revenues are matched with related costs or expenses even if payment has not yet been received. This technique recognizes income as soon as it is earned rather than on receipt of cash, and records expenditures at the time they were incurred (e.g., repairs) instead of when bills are paid.
- Cash accounting – most often used by small businesses where all transactions involve only cash; this form records sales/income/revenues “when money changes hands” from customer to business owner and spending “when money changes hands” from business owners to vendors, etc.)
- Depreciation – refers to two different accounting methods used to allocate the cost of fixed assets, such as vehicles and equipment. There are two approaches for accounting depreciation: straight-line accounting or accelerated accounting. Under the straight-line method, equal amounts of expense are recognized each year over an asset’s lifetime. With this type of accounting, a vehicle might have a five-year life span so expenses would be evenly split among those years – 20% in Year One, 40% in Year Two, etc.). Accelerated depreciation methods recover more costs earlier than under straight-line accounting which results in lower profit figures on tax returns but greater deductions when taxes are paid).
- Assets – anything that has value to its owner; also called property—anything owned by someone else is referred to as “theirs”).
- Liabilities – describes a company’s financial obligations as well as the money that is owed to creditors.
- Equity – accounting term used to describe an investor’s interest in the net assets of a business; it is also referred to as owner’s capital or stockholders’ equity and represents total assets less total liabilities). A business could be either solvent (it has enough cash on hand and accounts receivables from sales of products/services, etc. so its liabilities do not exceed its assets) or insolvent (liabilities exceed available funds)).
- Accounting period – time interval for which accounting records are kept such as by month, quarter, year-to-date, fiscal year),
- Accounting cycle – accounting period + accounting method; e.g., annual accounting (12 months); quarterly accounting (four periods per year); semi-annual accounting (six periods per year).
- Cash discount – a deduction given to customers for paying their bills early, usually expressed as a percentage of the total amount due).
- Accounting software – computer programs that are used to prepare financial records and reports such as balance sheets, income statements, etc.). Most companies use off-the-shelf software or hire accountants/bookkeepers who will custom build them based on company needs). Great care should be taken in selecting an appropriate package that meets the business’s specific requirements.
- Balance sheet – includes assets, liabilities, and equity ) along with their corresponding values at a specific point in time.
- Fixed assets – refers to long-term tangible assets that are not bought and sold in the normal course of business such as real estate, buildings, equipment/machinery, etc.).
- Preferred stock – stock with certain preferences over common stock (such as higher dividends or more votes). Preferred shares may be preferred because they have fewer voting rights than all other classes of stocks),. They also could become “senior” to common shares if there is no money left after paying creditors), e.g., bankruptcy).
- Common stock – represents an ownership interest in a company; it has general voting rights but cannot vote on anything affecting the company unless specifically stated otherwise); it also has the right to receive dividends.
- Accounts receivable – Money owed by customers for products/services sold on credit).
- Fiduciary accounting – refers to one of three accounting methods used in businesses that are owned or managed by another entity such as a corporation, partnership, etc.). It counts assets and liabilities at book value rather than market), e.g., historical cost), because it is easier to keep track of them this way; this method should only be used when the business owner acts as an agent (e.g., a trustee who manages property for someone else’s benefit)) not like a principal (i.e., owner)). For example, if you own your home but act as its fiduciary, accounting exists to keep track of the property’s value and not its purchase price.