Should Know Basic Accounting Terms for Every Business Owners

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Are you the one who hired a professional firm or an online accounting service to do your taxes? Are you also the one who always thought about dedicating a little time to understanding how your accountant is handling your business finances? Then you must have faced the problem of going through complicated terms while checking your tax return filed by your accountant and wondered what it is all about. But then again, to save time and avoid those research hassles, you left the same overlooked. After all, this is one of the main reasons you hire a professional to do it for you.

Or maybe some another scenario. Have you ever felt left out, when people around you start talking about how they do their taxes and how they save money and get refund benefits from the IRS? Most probably because you are on a payroll and you only know the total amount deducted from your salary in the name of taxes but not the science behind the terms mentioned with them. Well, not anymore!

We have compiled the 42 basic terms that every business owner should know for a smooth accounting process and financial consultation.

Also Read: What is the Role of Accounting Software for Companies

We are starting with the basic terms used while preparing or concerning a balance sheet;

1. Accounts Payable (AP)

Accounts Payable combines all of the expenses that a business has incurred but has not yet paid. This account is recorded as a liability on the Balance Sheet as it is a debt owed by the company.

2. Accounts Receivable (AR)

Accounts Receivable include all of the revenue (sales) that a company has provided but has not yet collected payment on. This account is on the Balance Sheet, recorded as an asset that will likely convert to cash in the short term.

3. Accrued Expense

An expense that has been incurred but hasn’t been paid is described by the term Accrued Expense.

4. Asset (A)

Anything the company owns that has monetary value. These are listed in order of liquidity, from cash (the most liquid) to land (the least liquid).

5. Balance Sheet (BS)

A financial statement that reports on all of a company’s assets, liabilities, and equity. As suggested by its name, a balance sheet abides by the equation.

6. Book Value (BV)

As an asset is depreciated, it loses value. The Book Value shows the original value of an asset, less any accumulated Depreciation.

7. Equity (E)

Equity denotes the value left over after liabilities have been removed. Recall the equation Assets = Liabilities + Equity. If you take your Assets and subtract your Liabilities, you are left with Equity, which is the portion of the company that is owned by the investors and owners.

8. Inventory

Inventory is the term used to classify the assets that a company has purchased to sell to its customers that remain unsold. As these items are sold to customers, the inventory account will be lower.

9. Liability (L)

All debts that a company has yet to pay are referred to as Liabilities. Common liabilities include Accounts Payable, Payroll, and Loans.

Income Statement Terms

The Income Statement or Profit and Loss Statement is one of the most common financial statements after a balance sheet. These are the most common basic accounting terms used in this reporting tool.

10. Cost of Goods Sold (COGS)

The cost of Goods Sold is the expenses that directly relate to the creation of a product or service. Not included in this category are those costs that are needed to run the business. An example of COGS would be the cost of Materials, or the Direct Labor to provide a service.

11. Depreciation (Dep)

Depreciation is the term that accounts for the loss of value in an asset over time. Generally, an asset has to have substantial value to warrant depreciating it. Common assets to be depreciated are automobiles and equipment. Depreciation appears on the Income Statement as an expense and is often categorized as a “Non-Cash Expense” since it doesn’t have a direct impact on a company’s cash position.

Also Read: Accounting Firms and CPAs Outsource Bookkeeping Services

12. Expense (Cost)

An Expense is any cost incurred by the business.

13. Gross Margin (GM)

Gross Margin is a percentage calculated by taking Gross Profit and dividing by Revenue for the same period. It represents the profitability of a company after deducting the Cost of Goods Sold.

14. Gross Profit (GP)

Gross Profit indicates the profitability of a company in dollars, without taking overhead expenses into account. It is calculated by subtracting the Cost of Goods Sold from Revenue for the same period.

15. Income Statement (Profit and Loss) (IS or P&L)

The Income Statement is the financial statement that shows the revenues, expenses, and profits over a given period. Revenue earned is shown at the top of the report and various costs (expenses) are subtracted from it until all costs are accounted for; the result being Net Income.

16. Net Income (NI)

Net Income is the dollar amount that is earned in profits. It is calculated by taking Revenue and subtracting all of the Expenses in a given period, including COGS, Overhead, Depreciation, and Taxes.

17. Net Margin

Net Margin is the percentage amount that illustrates the profit of a company concerning its Revenue. It is calculated by taking Net Income and dividing it by Revenue for a given period.

18. Revenue (Sales) (Rev)

Revenue is any money earned by the business.

General Terms

These are basic accounting terms that don’t pertain to a particular financial statement. That is why here's the category as 'General' because you know it's all GK.

19. Accounting Period

An Accounting Period is designated in all Financial Statements (Income Statement, Balance Sheet, and Statement of Cash Flows). The period communicates the time that is reported in the statements.

20. Allocation

The term Allocation describes the procedure of assigning funds to various accounts or periods.

21. Business (or Legal) Entity

This is the legal structure, or type, of a business. Common company formations include Sole Proprietor, Partnership, Limited Liability Corp (LLC), S-Corp and C-Corp. Each entity has a unique set of requirements, laws, and tax implications.

22. Cash Flow (CF)

Cash Flow is the term that describes the inflow and outflow of cash in a business. The Net Cash Flow for a period is found by taking the Beginning Cash Balance and subtracting the Ending Cash Balance. A positive number indicates that more cash flowed into the business than out, whereas a negative number indicates the opposite.

23. Certified Public Accountant (CPA)

CPA is a professional designation that an accountant can earn by passing the CPA exam and fulfilling the requirements for both education and work experience, which vary by state.

24. Credit

A credit is an increase in a liability or equity account or a decrease in an asset or expense account.

25. Debit

A debit is an increase in an asset or expense account or a decrease in a liability or equity account.

26. Diversification

Diversification is a method of reducing risk. The goal is to allocate capital across a multitude of assets so that the performance of any one asset doesn’t dictate the performance of the total.

27. Enrolled Agent (EA)

An Enrolled Agent is a professional accounting designation assigned to professionals who have successfully passed tests showcasing expertise in business and personal taxes. Enrolled Agents are generally sought out to complete business tax filings to ensure compliance with the IRS.

28. Fixed Cost (FC)

A Fixed Cost is something that does not change with the volume of sales. For example, rent and salaries won’t change if a company sells more. The opposite of a Fixed Cost is a Variable Cost.

29. General Ledger (GL)

A General Ledger is the complete record of a company’s financial transactions. The GL is used to prepare all of the Financial Statements.

30. Generally Accepted Accounting Principles (GAAP)

These are the rules that all accountants abide by when performing the act of accounting services. These general rules were established so that it is easier to compare ‘apples to apples when looking at a business’s financial reports.

31. Interest

Interest is the amount paid on a loan or line of credit that exceeds the repayment of the principal balance.

32. Journal Entry (JE)

Journal Entries are how updates and changes are made to a company’s books. Every Journal Entry must consist of a unique identifier (to record the entry), a date, a debit/credit, an amount, and an account code (that determines which account is altered).

33. Liquidity

A term referencing how quickly something can be converted into cash. For example, stocks are more liquid than a house since you can sell stocks (turning them into cash) more quickly than real estate.

34. Material

Material is the term that refers to whether information influences decisions. For example, if a company has revenue in the millions of dollars, an amount of $0.50 is hardly material. GAAP requires that all Material considerations must be disclosed.

35. On Credit/On Account

A purchase that happens On Credit or Account is a purchase that will be paid at a future time, but the buyer gets to enjoy the benefit of that purchase immediately. “Bartender put it on my tab…”

36. Overhead

Overhead are those Expenses that relate to running the business. They do not include Expenses that make the product or deliver the service. For example, Overhead often includes Rent and Executive Salaries.

37. Payroll

Payroll is the account that shows payments to employee salaries, wages, bonuses, and deductions. Often this will appear on the Balance Sheet as a Liability that the company owes if there is accrued vacation pay or any unpaid wages.

38. Present Value (PV)

Present Value is a term that refers to the value of an Asset today, as opposed to a different point in time. It is based on the theory that cash today is more valuable than cash tomorrow, due to the concept of inflation.

39. Receipts

A Receipt is a document that proves payment was made. A business produces receipts when it provides its product or service and it receives receipts when it pays for goods and services from other businesses. Received Receipts should be saved and cataloged so that a company can prove that its incurred expenses are accurate.

40. Return on Investment (ROI)

Originally, this term referred to the profit that a company was making (Return), divided by the Investment required. Today, the term is used more loosely to include returns on various projects and objectives. For example, if a company spent $1,000 on marketing, which produced $2,000 in profit, the company could state that its ROI on marketing spend is 50%.

41. Trial Balance (TB)

Trial Balance is a listing of all accounts in General Ledger with their balance amount (either debit or credit). The total debits must equal the total credits, hence the balance.

42. Variable Cost (VC)

These are costs that change with the volume of sales and are the opposite of Fixed Costs. Variable costs increase with more sales because they are an expense that is incurred to deliver the sale. For example, if a company produces a product and sells more of that product, it will require more raw materials to meet the increase in demand.

Also Read This:- Top 3 Golden Rules of Accounting

About Global FPO:

Global FPO( is an Outsourcing Accounting firm consistently recognized for its exceptional outcomes and strong work culture, with 500+ happy and satisfied clients across. They provide everything from straightforward tax return work, or basic bookkeeping, to advanced & complex Financial Statements to CPAs & Accounting Firms implementing best industry practices & values. Their Accounting solutions are comprehensive, customized to a unique business operating model, and use “best-of-breed” technology under a strong two-tier reviewing mechanism ensuring the minimum risk of error.

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