Accounting Glossary

Accounting Glossary

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Welcome to our comprehensive accounting glossary!

Whether you’re a seasoned accountant, a business owner, or simply interested in understanding financial terms, this accounting glossary is your go-to resource for demystifying the complex world of accounting.

Accounting is the language of business, and having a solid grasp of its terminology with an accounting glossary is crucial for effective financial management.

Our accounting glossary provides clear definitions and explanations of key terms, from basic concepts like assets, liabilities, and income to more advanced topics such as accrual accounting, depreciation, and financial ratios.

Whether you’re looking to brush up on your accounting knowledge or seeking to enhance your financial literacy, our accounting glossary is designed to make complex accounting jargon accessible and easy to understand.

Explore our accounting glossary and empower yourself with the knowledge you need to navigate financial statements, understand accounting principles, and make informed decisions.

With our user-friendly explanations and comprehensive coverage of definitions in our accounting glossary, you’ll gain the confidence to discuss financial matters and improve your financial acumen with our accounting glossary.

Let’s dive in and unlock the language of accounting together with our accounting glossary!

A

Account: A record of financial transactions for a specific item, such as cash or inventory.

Accounts payable: The amount a company owes to its suppliers for goods or services that have been received but not yet paid for.

Accounts receivable aging: A report that shows how long a company’s customers have owed it money and how much is owed in each category (e.g. current, 30 days past due, 60 days past due).

Accounts Receivable Turnover Ratio: This ratio shows how quickly a company collects payment from its customers. It’s calculated by dividing revenue by accounts receivable.

Accounts receivable: The amount a customer owes a company for goods or services that have been sold but not yet paid for.

Accrual accounting: An accounting method that records financial transactions when they are incurred, rather than when cash is received or paid.

Accrual: A recognition of revenue or expenses before the cash is received or paid.

Accrued interest: Interest that has been earned but has not yet been paid or received.

Adjusting entries: Changes made to a company’s financial records at the end of an accounting period to ensure they are accurate and up-to-date.

Allowance for bad debts: An estimate of the amount of a company’s accounts receivable that it expects will not be collected.

Amortization (Asset): A method of allocating the cost of an intangible asset, such as a patent, over its useful life.

Amortization (Debt): The gradual reduction of debt over time through regular payments of interest and principal.

Asset Turnover Ratio: This ratio shows how efficiently a company is using its assets to generate revenue. It’s calculated by dividing revenue by total assets.

Assets: Things a company owns that have value, such as money, buildings, and equipment.

Audit: An independent examination of a company’s financial records and practices by an auditor to ensure they are accurate and in compliance with accounting standards.

B

Balance sheet: A financial statement that reports a company’s assets, liabilities, and equity at a specific point in time.

Bank reconciliation: The process of comparing a company’s records of its cash transactions with its bank statements to ensure they match and to identify any errors or discrepancies.

Bill of lading: A document that acknowledges receipt of goods being shipped and acts as a contract of carriage between the shipper and the carrier.

Bookkeeping: The process of recording a company’s financial transactions in its accounting records.

Budget: A financial plan that outlines a company’s expected revenue, expenses, and cash flow for a future period.

C

Capital expenditures: Money a company spends to acquire or improve long-term assets, such as buildings or equipment.

Capital: Money a company has invested in its business to purchase assets, fund operations, or grow the business.

Capitalization Ratio: This ratio shows how much of a company’s financing comes from debt compared to equity. It’s calculated by dividing total debt by total debt plus equity.

Cash Conversion Cycle (CCC): This ratio shows how long it takes for a company to convert its resources into cash. It’s calculated by adding days sales outstanding, days inventory outstanding, and days payable outstanding and subtracting days payable discount received.

Cash flow statement: A financial statement that reports the inflows and outflows of a company’s cash during a specific period.

Cash flow: The amount of cash coming in and going out of a company over a period of time.

Certificate of deposit (CD): A low-risk investment in which a person deposits money with a bank for a fixed term and receives a guaranteed interest rate.

Chart of accounts: A list of all the accounts in a company’s accounting system, including accounts for assets, liabilities, equity, revenue, and expenses.

Collection period: The average number of days it takes a company to collect its accounts receivable from its customers.

Commission: A fee paid to a salesperson for selling a product or service.

Consignment: An arrangement in which a company allows another company to sell its goods, but retains ownership until the goods are sold.

Cost of goods sold: The cost a company incurs to produce and sell its products, including direct costs such as raw materials and labor, and indirect costs such as overhead.

Credit note: A document issued by a company to its customer to adjust a previous sale, such as when a customer returns goods or requests a price adjustment.

Credit: An agreement in which a company allows a customer to purchase goods or services now and pay for them later.

Current Ratio: This ratio measures a company’s ability to pay its short-term obligations with its current assets. It’s calculated by dividing current assets by current liabilities.

D

Days Sales in Inventory (DSI): This ratio shows how many days on average it takes for a company to sell its inventory. It’s calculated by dividing 365 days by inventory turnover.

Days Sales Outstanding (DSO): This ratio shows how long it takes for a company to collect payment from its customers. It’s calculated by dividing accounts receivable by average daily sales.

Debits and credits: The two sides of a financial transaction, with debits representing an increase in assets or a decrease in liabilities and equity, and credits representing a decrease in assets or an increase in liabilities and equity.

Debt Service Coverage Ratio (DSCR): This ratio shows a company’s ability to pay off its debt obligations. It’s calculated by dividing net operating income by total debt service.

Debt to Asset Ratio: This ratio shows how much of a company’s assets are financed through debt. It’s calculated by dividing total debt by total assets.

Debt to Capital Ratio: This ratio shows the proportion of a company’s financing that comes from debt. It’s calculated by dividing total debt by total debt plus equity.

Debt to Equity Ratio: This ratio shows how much of a company’s financing comes from debt compared to equity. It’s calculated by dividing total liabilities by shareholder’s equity.

Debt to Income Ratio: This ratio shows how much of a person’s or a company’s income is being used to pay off debt. It’s calculated by dividing total debt by total income.

Deferral: Postponing the recognition of an expense or revenue until a future period.

Deferred revenue: Revenue a company has received but has not yet earned, such as advance payment for a product or service that has not yet been delivered.

Depreciation: A method of allocating the cost of a long-term asset over its useful life to reflect the asset’s wear and tear.

Discount: A reduction in the price of a product or service, such as a cash discount or a volume discount.

Dividend Payout Ratio: This ratio shows what percentage of a company’s earnings is being paid out as dividends to shareholders. It’s calculated by dividing dividends by earnings.

Dividend Yield: This ratio shows what percentage of a company’s stock price is being paid out as dividends to shareholders. It’s calculated by dividing annual dividends per share by stock price per share.

Dividend: A portion of a company’s profit paid to its shareholders.

Double-entry accounting: An accounting method that requires each financial transaction to be recorded in two or more accounts, such as a debit to one account and a credit to another.

E

Earnings Before Interest and Taxes (EBIT): This ratio shows a company’s profit before paying interest on loans and taxes. It’s calculated by subtracting operating expenses from total revenue.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): This ratio shows a company’s profit before paying interest, taxes, depreciation, and amortization. It’s calculated by subtracting all expenses from total revenue.

Earnings per Share (EPS): This ratio shows a company’s profit per share of stock. It’s calculated by dividing net income by the number of outstanding shares.

Endorsement: The signature of a person, such as a bank customer or a check endorser, authorizing the transfer or negotiation of a financial instrument, such as a check or a note.

Equity: The difference between a company’s assets and liabilities, representing the owners’ interest in the business.

Expense: Money a company spends to run its business, such as salaries, rent, and utilities.

F

Factoring: The sale of a company’s accounts receivable to a financial institution in exchange for immediate cash, with the financial institution assuming the risk of non-payment by the customers.

Financial statement: A document that reports a company’s financial performance, such as its income statement, balance sheet, and cash flow statement.

Fixed Asset Turnover Ratio: This ratio shows how efficiently a company is using its fixed assets (property, plant, and equipment) to generate revenue. It’s calculated by dividing revenue by total fixed assets.

Fixed asset: A long-term asset, such as property, plant, and equipment, that a company uses in its business and expects to keep for more than one year.

Franchise: An agreement in which a company allows another company to use its brand name and business model in exchange for a fee or a percentage of sales.

G

GAAP (Generally Accepted Accounting Principles): The set of guidelines and rules that companies follow when preparing their financial statements.

General ledger: A record of a company’s financial transactions, with separate accounts for each type of asset, liability, equity, revenue, and expense.

General ledger: A record of all a company’s financial transactions, including assets, liabilities, equity, revenues, and expenses.

Gross Debt Service Ratio (GDSR): This ratio shows how much of a person’s or a company’s income is being used to pay off debt related to housing. It’s calculated by dividing total housing expenses by total income.

Gross Margin Return on Investment (GMROI): This ratio shows a company’s profit margins on its investments in inventory. It’s calculated by dividing gross profit by average inventory investment.

Gross margin: The amount of money a company earns after subtracting the cost of goods sold from its revenue.

Gross Profit Margin: This ratio shows how much of a company’s sales are left after paying for the cost of goods sold. It’s calculated by dividing gross profit by total revenue.

I

Income statement: A financial statement that reports a company’s revenue, expenses, and profit for a specific period.

Indirect cost: A cost that is not directly associated with a specific product or service, such as general and administrative expenses.

Insurance: A contract in which an insurance company agrees to provide financial protection against loss or damage in exchange for a premium.

Interest Coverage Ratio: This ratio shows how easily a company can pay off its interest expenses on loans. It’s calculated by dividing earnings before interest and taxes by total interest expenses.

Interest expense: The cost a company incurs for borrowing money, such as from a bank or bondholders.

Internal control: Procedures and processes a company has in place to ensure the accuracy and reliability of its financial information and to prevent fraud and error.

Inventory Turnover Ratio: This ratio shows how many times a company sells and replaces its inventory in a given period. It’s calculated by dividing cost of goods sold by average inventory.

Inventory: The raw materials, work-in-progress, and finished goods a company has on hand for sale.

Invoice: A document sent to a customer that outlines the goods or services the customer has purchased and the amount the customer owes.

J

Journal entry: A record of a financial transaction in a company’s journal, which will later be transferred to the general ledger.

Journal: A book used to record financial transactions as they occur, which will later be transferred to the general ledger.

L

Lease: An agreement between a company and a lessor for the use of an asset, such as real estate or equipment.

Ledger account: A record of all transactions for a specific item, such as cash or accounts payable, in a company’s ledger.

Ledger: A record of a company’s financial transactions, organized by account.

Liabilities: Debts or obligations a company owes to others, such as loans, accounts payable, or taxes.

Long-term debt: A debt a company expects to repay over a period of more than one year, such as a bond or a loan.

Loss: When expenses are greater than revenue, resulting in negative profit.

M

Margin: The difference between a company’s revenue and its cost of goods sold, representing its profit on each unit of goods sold.

N

Net income: The amount of money a company earns after subtracting all its expenses from its revenue.

Net Profit Margin: This ratio shows how much of every dollar in revenue a company actually keeps as profit after accounting for all expenses. It’s calculated by dividing net profit by revenue.

O

Operating Profit Margin: This ratio shows the amount of profit a company generates from its operations after deducting operating expenses. It’s calculated by dividing operating profit by revenue.

Overhead: The indirect costs of a company, such as rent, utilities, and insurance, that are not directly associated with its products or services.

Owner’s equity: The portion of a company’s assets that is owned by its shareholders, representing the residual value of the company after deducting its liabilities.

P

Payables: Money a company owes to others, such as suppliers for goods or services it has purchased on credit.

Payout Ratio: This ratio shows what percentage of a company’s earnings is being paid out as dividends to shareholders. It’s calculated by dividing dividends by earnings.

Payroll: The process of paying a company’s employees for their work, including calculating and paying their salaries, wages, and benefits.

Petty cash: A small amount of cash a company keeps on hand for small expenditures, such as office supplies or taxi fares.

Price to Book Ratio (P/B Ratio): This ratio compares a company’s stock price to its book value. It’s calculated by dividing the stock price by book value per share.

Price to Earnings Growth (PEG) Ratio: This ratio compares a company’s stock price to its earnings growth. It’s calculated by dividing the price to earnings ratio by the company’s earnings growth rate.

Price to Earnings Ratio (P/E Ratio): This ratio compares a company’s stock price to its earnings per share. It’s calculated by dividing the stock price by earnings per share.

Price to Sales Ratio (P/S Ratio): This ratio compares a company’s stock price to its sales per share. It’s calculated by dividing the stock price by sales per share.

Profit and loss statement: A financial statement that shows a company’s revenues, expenses, and net income or loss over a period of time.

Profit: The amount of money a company earns after subtracting all expenses from revenue.

Purchasing: The process of acquiring goods or services a company needs to operate its business.

Q

Quick Ratio: This ratio is similar to the current ratio but excludes inventory from current assets. It’s calculated by dividing (current assets – inventory) by current liabilities.

R

Receipts: Records of money received by a company, either in cash or by check.

Receivables: Money a company is owed by its customers for goods or services it has sold on credit.

Return on Assets (ROA): This ratio shows how much profit a company is generating for each dollar invested in its assets. It’s calculated by dividing net income by total assets.

Return on Equity (ROE): This ratio shows how efficiently a company is using its shareholder’s equity to generate profit. It’s calculated by dividing net profit by shareholder’s equity.

Return on Invested Capital (ROIC): This ratio shows how much profit a company is generating for every dollar invested in its business. It’s calculated by dividing net operating profit after taxes by invested capital.

Revenue: The money a company earns from selling its goods or services.

S

Sales tax: A tax a company must collect and remit to the government on behalf of its customers when it sells taxable goods or services.

Sales: The process of selling a company’s products or services to customers.

Statement of cash flows: A financial statement that shows the flow of cash into and out of a company over a period of time.

Stock or Share: A unit of ownership in a corporation, representing a claim on its assets and earnings.

Subsidiary ledger: A record of detailed information for a specific type of account, such as accounts receivable or accounts payable, that is part of a company’s general ledger.

T

T-account: A visual representation of a ledger account, showing debits on the left and credits on the right.

Tax: Money a company or individual must pay to the government to support public services and programs.

Transfer pricing: The process of determining the prices that a company charges its various units or divisions for goods, services, or intellectual property they provide to each other.

Trial balance: A report that shows the balance in each of a company’s accounts to verify that its books are in balance and its financial transactions have been recorded accurately.

U

Unearned revenue: Money a company has received in advance for goods or services it has not yet provided.

V

Variance analysis: The process of comparing actual results to budgeted or expected results to identify any differences and understand the reasons for them.

Virtual CFO: A Chief Financial Officer (CFO) oversees and manages an organisation’s or business’s finances, including budgeting, forecasting, reporting, and compliance. Their expertise lies in understanding financial concepts and trends to help businesses grow, reduce costs, and increase profits. A virtual CFO has the same qualifications as an in-house CFO. The difference is that they work remotely and provide their services virtually on an as-needed basis. Virtual CFOs are generally more cost-effective than in-house CFOs. You do not have to pay for additional overhead costs such as office space and benefits. They also offer flexible payment arrangements and can be hired on a project-by-project basis.

W

Working capital: The difference between a company’s current assets and its current liabilities, representing its ability to pay its short-term obligations.

Write-off: The process of removing an uncollectible account receivable from a company’s books, recognizing that it is unlikely to ever be collected.

Simplify business with our Accounting glossary

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