Basic Accounting Terms and Definitions
A comprehensive directory of basic accounting terms, abbreviations, acronyms, and concepts every entrepreneur should know. Gain an understanding of accounting concepts and expand vocabulary.
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 Planning
Financial planning involves creating a comprehensive plan for managing financial affairs to meet life goals and ensuring long-term financial security.
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.
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