25 Accounting Terms You Need to Know

25 accounting terms you need to know

1. Accounts payable

Often abbreviated as AP, the term accounts payable describes all of your unpaid expenses. It should be recorded (and thought of) as bills that are due to the business. It is a common liability.

2. Accounts receivable

This is the inverse of accounts payable. Accounts receivable (AR) is money owed to the business that has not yet been paid. It can be considered an asset.

3. Amortization

Amortization is the practice of spreading the cost of an expense across multiple accounting periods on your balance sheet. A common example is depreciation. Suppose you purchase manufacturing equipment for your business. You can spread the cost of that equipment over several years.

4. Asset

Anything the company owns that has a determined monetary value is an asset. This can include cash, real estate, equipment and inventory. Assets can have varying degrees of liquidity, which is another way of saying some assets are easy to spend, like cash, while others are hard to spend, like property, which first has to be sold (or liquidated).

5. Balance sheet

A balance sheet is the master record of a business’s finances. It reports the assets, liabilities and equity, and it follows a set equation: Assets = Liabilities + Equity.

6. Capital

Capital is the money that your company can use for operations and investment. It is calculated by subtracting liabilities from assets. It can include cash as well as noncash assets that can be leveraged or liquidated for spending. Capital is not the measure of how much the company is spending but rather the amount the company could spend.

7. Cash flow

This is the amount of cash the company is expected to receive or lose over a select time period. Monthly cash flow is how much cash you anticipate receiving in a month.

8. CPA

Certified public accountant (CPA) is a designation conferred by The American Institute of Certified Public Accountants. CPAs pass a uniform certified accountant exam and are licensed in their home state (but can practice in other states). The designation denotes a certain level of mastery in accounting to verify that an individual is properly qualified to work in this field.

9. Credit

Credit is an accounting entry that can either increase a company’s liabilities or decrease its assets. A credit owed to the business decreases assets. A credit owed by the business increases liability.

10. Debit

A debit is the inverse of a credit. A debit paid to a business increases its assets. A debit paid by the business decreases its liabilities. The double-entry accounting method pairs every debit and credit in the ledger.

11. Depreciation

Depreciation measures how much value an asset loses over time. A classic example is the depreciation of a company vehicle. Each year, the vehicle decreases in value. The process of lowering an asset value is depreciation.

12. Diversification

Diversification is the process of spreading investments into varied assets. The goal is to minimize risk by reducing the percentage of assets that can lose value resulting from a single event or transaction.

13. Expenses

Business expenses are what your company pays. Generally, they are categorized as fixed, accrued, variable or operating expenses.

• Fixed expenses are payments that are the same each period, like rent or mortgage.
• Variable expenses change regularly. Labor and inventory replenishment are common examples.
• Accrued expenses are expenses that have yet to be paid.
• Operating expenses are indirect costs, such as advertising or taxes.

14. Equity

On a balance sheet, equity is determined by subtracting liabilities from assets. Owner’s equity is a different concept that describes how much of something is owned by a person or business. Property equity demonstrates how much of a mortgage is paid, while stock equity describes the percentage of a company that is owned via stock.

15. General ledger

This is the complete record of a company’s financial transactions.

16. Gross profit

This is the company’s profit excluding overhead expenses. It is often used as part of the calculation to evaluate a company’s value. Determining such value will be necessary to secure a business loan or pitch to investors.

17. Insolvency

Insolvency is what occurs when a company or individual cannot pay its debts. Insolvency is often projected by comparing all expenses to revenue. If revenue is insufficient to cover expenses, insolvency becomes inevitable.

18. Inventory

Inventory is the list of sellable goods owned by a company. Inventory is usually classified as finished goods (which are ready for sale), work-in-progress goods (which require assembly) and raw materials (which will become other goods in time).

19. Liability

A liability is money the business owes. Accounts payable, taxes and accrued expenses are different types of liability (but not a complete list of liabilities that exist).

20. LLC

A limited liability company (LLC) is a business structure in which the owners are not personally accountable for company debts or liabilities.

21. Net profit and loss

Net profit is how much money the business has made after subtracting every single expense. Net loss is how much money the company lost after this same calculation if profit is negative.

22. Overhead

This is the general cost of doing business, but it does not include the cost of goods that are sold. Utility payments, printing costs and property taxes are examples of overhead.

23. ROI

Return on investment (ROI) is a calculation that demonstrates how much money is made from an investment relative to its cost. This calculation is not limited to asset accumulation. An ROI can be calculated for money spent on advertising, for example.

24. Revenue

Revenue is the total amount of money earned by the business. It is used to calculate gross and net profit.

25. S Corp

A subchapter S corporation (S Corp) is a legal structure that passes income, losses and deductions on to the company’s shareholders.

The best accounting software for your business

For information on choosing the best accounting software for your business, check out our buyers guide on how to choose accounting software. To see our top picks and a comprehensive list of accounting software providers, check out our roundup of the best accounting software for small business.

By using business accounting software, you’ll gain experience with the accounting terms on this list. As you use this software, you’ll get accustomed to the accounting jargon and how your business should manage its finances. 

Additionally, accounting software will give you the tools you need to oversee your business’s finances. Invoicing, expense management, bill pay and tax filing are just some of the many financial needs that accounting software can easily cover.

We review accounting software every year and consistently find that these vendors rank among the best:

• Intuit QuickBooks: QuickBooks entirely deserves its reputation as the gold-standard accounting software. Its reporting features and extensive vendor and client network are highlights, as is its separate suite of self-employed accounting software. Learn more via our QuickBooks review.
• Xero: A standout accounting feature in Xero is the ability to make bulk payments to one or many vendors in just a few clicks. We also like that, unlike some other accounting software providers, Xero never limits your number of users. Our Xero review explains this powerful accounting platform in depth.

• Zoho Books: For businesses that earn under $50,000 per year in revenue, Zoho Books is entirely free. Its entry-level packages for other businesses are strikingly feature-rich as well. Read our Zoho Books review to see whether this accounting software might be right for you.
• Oracle NetSuite: This accounting software exists within an enterprise resource planning system, making this platform a great fit for growing businesses. NetSuite’s tools go far beyond accounting to help your small business grow. Our Oracle NetSuite review explains the most exciting features that come with this platform.
• FreshBooks: For service-based businesses that collect revenue via invoices, FreshBooks may be the best accounting software. Every year when we review FreshBooks, its invoicing features exceed those of QuickBooks, the gold-standard platform, in usability and feature depth. Check out our FreshBooks review to learn what makes this accounting software so powerful for invoicing.

Counting on your accounting 

Between mastering key accounting vocabulary and setting up robust accounting software, you’re putting your company in a powerful financial position. You’re preparing yourself to face challenging financial times and make the most of your highest-earning periods, and all it requires is some additional education and infrastructure.

Max Freedman contributed to this article.