Basic Accounting Terms and Definitions

Above the Line Costs

Above the Line Costs refer to expenses directly tied to a company's core business operations.

Accounting Year

An accounting year is a 12-month period over which a company budgets and reports financial performance.

Accounts Payable

Accounts payable (AP) are amounts owed for goods or services received that have not yet been paid for.

Accounts Receivable Turnover

This ratio measures how often a business collects its average accounts receivable over a period.

Accounts Receivables

Accounts receivables represent funds owed to a company by customers for goods or services provided.

Accrual

Accruals in accounting are earned revenues and incurred expenses that have yet to be recorded.

Accrued Expense

Accrued expenses are recorded in accounting when incurred, often before they are paid for.

Accrued Revenue

Accrued revenue is income earned but not yet received, reflecting potential cash inflows.

Accumulated Depreciation

Accumulated depreciation accounts for the reduction in value of an asset over time.

Acid-Test Ratio

The Acid-Test Ratio measures a company's ability to pay short-term obligations without selling inventory.

Activity-Based Budgeting

Activity-based budgeting focuses on business activities costs, optimizing operational and financial planning.

Activity-Based Costing

Activity-based costing assigns production costs based on activities, for more precise cost management.

Amortization

Amortization involves gradually writing off the initial cost of an asset over its useful life.

Amortization Schedule

An amortization schedule details periodic payments on a loan, showing both principal and interest.

ARR (Annual Recurring Revenue)

ARR is the predictable revenue generated by a business from its customers annually.

Asset Turnover Ratio

This ratio measures a company's efficiency in using its assets to generate revenue.

Assets

Assets are resources owned by a company that have economic value and can provide future benefits.

Bad Debt

Bad debt is money owed to a company that is unlikely to be paid and is often written off as a loss.

Balance Sheet

A balance sheet is a financial statement showing a company's assets, liabilities, and equity.

Balance Sheet Forecasting

Balance sheet forecasting involves predicting future financial position based on current trends and assumptions.

Balance Sheet Reconciliation

Balance sheet reconciliation is the process of ensuring financial records are accurate and match account balances.

Bookkeeping

Bookkeeping involves recording and organizing all financial transactions in a company.

Break-Even Analysis

Break-even analysis determines when a business will be able to cover all its expenses and begin making a profit.

Break-even Point

The break-even point is the point at which total costs and total revenue are equal, meaning no net loss or gain.

Budget

A budget is a financial plan for a defined period, often one year, outlining projected revenue and expenditure.

Budget Forecast

Budget forecasting is estimating future income and expenditures to help guide business planning.

Budgeting Methods Explained

This guide explores various budgeting methods to optimize financial planning and control.

Burn Rate

Burn rate is the rate at which a company consumes its cash reserves before generating positive cash flow.

Capital

Capital refers to financial assets or the financial value of assets, such as funds held in deposit accounts.

Capital Expenditures

Capital expenditures refer to funds used by a company to acquire or upgrade physical assets.

Capital Gains

Capital gains are the profits from the sale of an asset and are subject to taxation depending on specific rules.

Cash Basis Accounting

Cash basis accounting records financial transactions when cash changes hands, either in or out.

Cash Budget

A cash budget details a company's cash inflows and outflows over a specific period, predicting future cash positions.

Cash Conversion Cycle Formula

This formula measures the time taken between the purchase of inventory and the receipt of cash from sales.

Cash Flow

Cash flow is the net amount of cash being transferred into and out of a business.

Cash Flow Forecast

Cash flow forecasting predicts a company's cash inflows and outflows over a future period.

Cash Flow Statement

A cash flow statement analyzes a company's inflows and outflows of cash and cash equivalents.

Cash Ratio

The cash ratio is a liquidity measure comparing a company's cash and cash equivalents to its current liabilities.

Certified Public Accountant (CPA)

A CPA is a licensed accounting professional who meets education and experience requirements and has passed an exam.

Chart of Accounts

A chart of accounts is a list of all financial accounts in the general ledger of a company, categorized systematically.

Company’s Profitability

Company's profitability is evaluated through metrics that assess the ability to generate income relative to revenue, assets, and equity.

Compound Interest

Compound interest is the addition of interest to the principal sum of a loan or deposit, considered "interest on interest."

Contingent Asset

A contingent asset is a potential asset that may arise due to a specific event or situation.

Contingent Liability

A contingent liability is a potential liability that may occur depending on the outcome of a future event.

Contribution Margin

Contribution margin is the revenue remaining after subtracting the variable costs that go into producing a product.

Corporate Tax

Corporate tax is a tax levied on the profits of a corporation.

Cost of Goods Sold (COGS)

COGS is the direct cost attributable to the production of goods sold by a company.

Cost-Benefit Analysis

Cost-benefit analysis involves comparing the benefits of an action to its costs to assess its overall value.

CPM (Cost Per Mille)

CPM, or cost per mille, refers to the cost of 1000 ad impressions on a webpage.

Credit

Credit refers to the trust which allows one party to provide resources to another where repayment is deferred.

Current Assets

Current assets are short-term resources expected to be converted into cash or used within a year.

Current Liabilities

Current liabilities are a company's short-term financial obligations that are due within one year or a business cycle.

Current Ratio

The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations.

Debit

Debit is an accounting entry that either increases an asset or expense account, or decreases equity, liability, or revenue.

Debt

Debt is an amount of money borrowed by one party from another, often for making large purchases.

Debt Financing (Loan)

Debt financing involves raising funds through borrowing, typically via a loan, bond issue, or other credit.

Debt Ratio

The debt ratio measures the extent of a company's leverage in terms of total debt to total assets.

Debt Service Coverage Ratio

This ratio assesses a company's ability to pay its debt obligations based on its net operating income.

Debt to Asset Ratio

The debt to asset ratio measures the proportion of a company's assets financed by debt.

Debt-to-Equity Ratio

The debt-to-equity ratio compares a company's total liabilities to its shareholder equity.

Deferred Expense

A deferred expense is an advance payment for goods or services to be received in future accounting periods.

Deferred Revenue

Deferred revenue refers to payments received in advance for services which have yet to be performed.

Deferred Tax

Deferred tax arises from the difference in timing between when tax is accrued and when tax is actually paid.

Depreciation

Depreciation is the systematic allocation of an asset's cost over its useful life.

Direct Cost

Direct costs are expenses directly tied to the production of goods or services, such as raw materials and labor.

Discounted Cash Flow

Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows.

Dividend

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.

Dividend Yield

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

Double-Entry Bookkeeping

Double-entry bookkeeping is an accounting system where every entry to an account requires a corresponding and opposite entry to a different account.

Earnings Before Interest and Taxes (EBIT)

EBIT refers to a company's earnings before the deduction of interest and tax expenses.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

EBITDA stands for earnings before interest, taxes, depreciation, and amortization and is an indicator of a company's financial performance.

Earnings Per Share (EPS)

EPS is a company's net profit divided by the number of its outstanding shares, indicating the profitability on a per-share basis.

Economic Order Quantity (EOQ)

EOQ is the ideal order quantity a company should purchase to minimize its inventory costs such as holding, shortage, and order costs.

Economic Value Added (EVA)

EVA is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit.

Efficiency Ratios

Efficiency ratios measure a company's ability to use its assets and manage liabilities effectively.

Enrolled Agent

An Enrolled Agent is a tax advisor who is a federally-authorized tax practitioner empowered by the U.S. Department of the Treasury.

Equity

Equity represents the value of ownership interest in a firm, calculated as total assets minus total liabilities.

Equity Financing

Equity financing involves raising capital through the sale of shares in a company.

Expected Value

Expected value is a calculated average of all possible values in a probability distribution, used in financial decision-making.

Expenses

Expenses are the costs of operations that a company incurs to generate revenue.

Fictitious Asset

Fictitious assets are not real assets but deferred expenses that are listed as assets in a company’s balance sheet.

Financial Analysis

Financial analysis involves evaluating businesses, projects, budgets, and other finance-related entities to determine their performance and suitability.

Financial Analytics

Financial analytics involves using financial data to assess a company's performance and make recommendations about how it can improve going forward.

Financial Automation

Financial automation involves using software to automate key financial operations like accounting, invoicing, and reporting.

Financial Forecasting

Financial forecasting is the process of estimating or predicting how a business will perform in the future.

Financial KPIs

Financial KPIs (Key Performance Indicators) are metrics used to evaluate a company's financial health and business strategy effectiveness.

Financial Modeling

Financial modeling is the process of creating a summary of a company's expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision.

Financial Ratios

Financial ratios are used to assess various aspects of a company's financial health, from profitability and liquidity to debt, efficiency, and market valuation.

Financial Reporting

Financial reporting involves the disclosure of financial information to management and the public (if the company is publicly traded) about how the company is performing over a specific period.

Financial Statement

A financial statement is a formal record of a company's financial activities, providing a view of its financial condition.

Fiscal Year

A fiscal year is a one-year period that companies and governments use for accounting and budget purposes.

Fixed Assets

Fixed assets are long-term tangible assets that a company owns and uses in its operations to generate income.

Fixed Costs

Fixed costs are business expenses that remain constant regardless of business activity level.

Flexible Budget

A flexible budget adjusts or flexes for changes in the volume of activity, providing a more useful tool for performance evaluation.

FP&A Analyst

An FP&A Analyst performs financial planning and analysis for an organization, a role crucial for guiding business decisions with financial insights.

Free Cash Flow (FCF)

Free cash flow (FCF) is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) are a collection of commonly-followed accounting rules and standards for financial reporting.

Gross Margin

Gross margin is a company's net sales revenue minus its cost of goods sold (COGS), representing the portion of each dollar of revenue that the company retains as gross profit.

Gross Profit

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products.

Gross Profit Margin

Gross profit margin is a profitability ratio that calculates the percentage of sales that exceed the cost of goods sold.

Gross Sales

Gross sales refer to the total sales amount before any deductions are made for returns, allowances, and discounts.

Horizontal Analysis

Horizontal analysis is a financial analysis technique that shows changes in the amounts of corresponding financial statement items over a period.

Imposed Budgeting

Imposed budgeting is a top-down approach where the budget is set by top management with little or no input from departmental managers.

Income Statement

An income statement is a financial statement that shows a company's revenues and expenses over a specific period.

Income Tax

Income tax is a tax levied by governments on the income generated by businesses and individuals.

Incremental Budgeting

Incremental budgeting is a budgeting process where the prior period's budget is used as a base with incremental changes.

Indirect Costs

Indirect costs are expenses not directly tied to the production of goods or services, such as overhead costs.

Interest Coverage Ratio

The interest coverage ratio measures a company's ability to handle its outstanding debt by comparing its earnings before interest and taxes (EBIT) to its interest expenses.

Interest Rate

An interest rate is the amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal.

Internal Rate of Return (IRR)

The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments.

Inventory

Inventory represents the goods available for sale and raw materials used to produce goods.

Inventory Turnover

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period.

Inventory Turnover Ratio

Inventory Turnover Ratio measures how often a company sells and replaces its stock of goods within a certain period.

Inventory Valuation

Inventory Valuation is the accounting practice of assigning a monetary value to a business's inventory for financial reporting.

Invoice

An Invoice is a document issued by a seller to a buyer that lists goods or services provided, prices, and payment terms.

Journal Entry

A Journal Entry is a record in accounting that logs a transaction and its impact on financial statements.

Leverage Ratio

The Leverage Ratio indicates the level of debt incurred by a business entity against its assets or equity.

Liabilities

Liabilities are obligations that a company owes to others, including loans, accounts payable, and mortgages.

Line of Credit

A line of credit is a flexible loan from a bank or financial institution, similar to a credit card.

Liquidation

Liquidation is the process of bringing a business to an end and distributing its assets to claimants.

Liquidity

Liquidity refers to how quickly and easily an asset can be converted into cash without significant loss in value.

Long Term Debt

Long term debt is any debt or borrowed funds that are repayable over a period longer than one year.

Long-Term Cash Flow Forecasting

Long-Term Cash Flow Forecasting involves predicting a company's financial liquidity over a longer period.

Margin Of Safety

Margin of Safety is the difference between actual or projected sales and the sales level at which break-even occurs.

Net Book Value (NBV)

Net Book Value (NBV) is the value of an asset after accounting for depreciation and amortization.

Net Income

Net income is a company's total earnings, reflecting revenues minus costs of doing business, taxes, and other expenses.

Net Present Value (NPV)

Net Present Value (NPV) is a method used in capital budgeting to evaluate the profitability of an investment or project.

Net Profit

Net profit is the amount of money left after all operating expenses, taxes, and costs are subtracted from total revenue.

Net Profit Margin

Net Profit Margin is a financial metric that shows the percentage of revenue that exceeds the costs of running a business.

Net Working Capital

Net Working Capital is the difference between a company's current assets and current liabilities.

Non-current Assets

Non-current Assets are long-term assets that are not expected to be converted into cash within a year, like buildings and equipment.

Non-current Liabilities

Non-current Liabilities are long-term financial obligations not due within the next year, such as bonds and long-term loans.

Non-Operating Expenses

Non-Operating Expenses are costs not related to the core business activities, like interest payments or losses from asset sales.

Operating Cash Flow

Operating Cash Flow is the cash generated from a company's normal business operations, reflecting its ability to generate cash.

Operating Expenses

Operating Expenses are costs associated with running a business's core operations, like rent, utilities, and payroll.

Operating Margin

Operating Margin is a profitability ratio showing what percentage of revenue remains after paying for variable costs of production.

Operating Profit

Operating Profit is the profit earned from a firm's core business operations, excluding deductions of interest and taxes.

Operating Profit Margin

Operating Profit Margin is a financial metric that shows the percentage of profit a company makes from its operations.

Operating Ratio

The Operating Ratio measures a company's operating efficiency by comparing operating expenses to net sales.

Other Comprehensive Income

Other Comprehensive Income includes revenues, expenses, gains, and losses that are not included in net income on the income statement.

P&L Budget

A P&L Budget is a financial plan outlining expected revenues and expenses, guiding business decisions and financial health.

Paid-In Capital

Paid-in capital is the amount of money raised by a company in exchange for shares of stock.

Partial Income Statement

A Partial Income Statement shows revenues and expenses for a part of the accounting period, focusing on specific operations.

Pay Stub

A Pay Stub is a document accompanying an employee's paycheck, detailing earnings, deductions, and net pay for a pay period.

Payable Period

The Payable Period is the average time it takes for a business to pay its invoices due, indicating liquidity and cash flow.

Payback Period

The Payback Period is the time it takes for an investment to generate enough cash flow to recover its initial cost.

Payroll

Payroll refers to the process of compensating employees, including salary calculations, deductions, and payment distribution.

Personnel Expenses

Personnel expenses are costs associated with employees, including wages, benefits, and taxes.

Prepaid Expenses

Prepaid Expenses are future expenses paid in advance, like insurance or rent, recorded as assets on the balance sheet.

Price-to-Earnings Ratio (P/E)

The P/E Ratio compares a company's share price to its earnings per share, indicating the market's valuation of its profitability.

Pro Forma Financial Statement

A Pro Forma Financial Statement is a report prepared based on assumptions and projections, used for planning and decision-making.

Profit & Loss Statement

A profit and loss statement summarizes revenues, costs, and expenses incurred during a specific period.

Profit Margin

Profit Margin measures the amount of profit a company makes for each dollar of sales, indicating efficiency and profitability.

Profitability

Profitability is the ability of a business to earn a profit, gauged by its revenue exceeding the costs and expenses of operation.

Profitability Analysis

Profitability Analysis involves assessing a company's income and expenses to evaluate its capacity to generate profits.

Profitability Ratios

Profitability Ratios are financial metrics used to assess a business's ability to generate earnings compared to its expenses.

Quick Ratio

The Quick Ratio measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory.

Revenue

Revenue is the total income generated by the sale of goods or services related to the company's primary operations.

Sales Tax

Sales tax is a tax paid to a governing body for the sales of certain goods and services.

Short-Term Debt

Short-term debt includes any debt obligations with a maturity of less than a year.

Subscription

Subscriptions are a business model where customers pay a recurring price at regular intervals for access to a product.

Variable Costs

Variable costs are expenses that change in proportion to the activity of a business.

Working Capital

Working capital is the difference between a company's current assets and current liabilities.