Every industry has its own language, and accounting is no exception. On the contrary, accounting terms are particularly complex and it is impossible for someone who has not studied this area to know and understand them all.
Even if your accountant takes care of the majority of the accounting processes for your business, it is important to become familiar with the language that relates to it in order to help you gain a better overview of your company, interesting insights into your business, and better day-to-day and long-term decisions.
Here are the top 30 accounting terms (and their definition) that will be very useful to you in your business journey!
Top 30 basic accounting terms and concepts
1. 401K & Roth 401K
401 (k) plans are like employee savings plans. They are offered by the employer and are mainly funded by the employee's contribution via payroll deduction. Besides 401 (k) for private companies, other similar plans exist for other entities (schools and public institutions in particular: 403 (b), 457, and Thrift Savings Plans (TSP)).
An asset is an identifiable element of the assets of the entity having a positive economic value for the latter, that is to say, an element generating a resource that the entity controls due to past events and from which it expects benefits future economic. These are all items that match what the business owns (its revenue). The assets are made up of two headings: Fixed assets and current assets.
3. Account receivable
A business with many customers needs to identify its receivables. The account receivable includes the sum of outstanding invoiced, but not yet paid, following delivery of goods (or products) or services by a company, to its customers.
4. Accounting Period
The accounting period defines a period of time during which all the economic facts of a company are recorded to prepare its accounts. As a general rule, the duration of an accounting period is twelve months. Most often, this period is a calendar year (although this is not always the case). The mission of the accounting year is to harmonize the representations of the value of organizations, as well as that of their performance.
5. Balance sheet
The balance sheet is a financial statement that describes the financial health of the company, at a given time, in general, the closing of the annual accounts. It identifies what the company owns (assets) and what it owes (liabilities), in other words, the resources committed to financing its assets (share capital, loans, etc.).
6. Book value
Book value is a term that generally relates in accounting to a business. The book value of a business is equal to its equity, which is the sum of the value of all the assets of the business minus its liabilities. It allows potential investors to know what a company's value is once its assets have been sold and all of its debts have been paid.
Book value = Total assets - total liabilities
7. Cash flow
Cash flow refers to the inflow or outflow of cash that a business experiences during a specific time period. A cash flow, therefore, relates to the flow of funds in liquids generated during the financial year and generated by the ordinary activities of the company.
8. Certified public accountant (CPA)
The certified public accountant is the license necessary for the exercise of the profession of chartered accountant, which distinguishes licensed accounting experts committed to protecting the public interest.
To have the CPA license, an accountant must take at least 150 hours of extensive accounting class and a four-part exam.
9. Cost of goods sold (COGS)
The cost of goods sold is the total cost paid by a business to its suppliers when selling goods. Generally, the notion of “cost of purchases of goods sold” can be formulated by a simple question: How much did the goods sold to a customer cost? You can refer to a company's income statement to determine this purchase cost by focusing on goods purchased and changes in inventory.
Cost of goods sold (COGS) = Purchase of goods + change in inventory (initial stock - final stock). The final stock is estimated after inventory.
Credit in accounting indicates that a transaction has taken place and caused a liability or a profit. Thus, a credit transaction can be used to reduce a debit balance or increase a credit balance.
11. Current assets
Current assets are made up of items that are not intended to remain on the balance sheet for a long time and that enter into the determination of accounting income. It contains inventories, trade receivables, and prepaid expenses.
An accounting debit represents all transactions owed by third parties to the company. For example, a customer who bought a good or service from the company but who has not yet paid, then this transaction is classified in the debit column.
Recorded at the end of a company's financial year, depreciation (formerly called "provisions for depreciation") corresponds to the loss or decrease in value of an asset. Unilaterally, depreciation is the accounting recognition of impoverishment of a company or/and of a depreciation of the assets of the company.
A business can finance its operations using debt, equity, or both. Equity is money invested in the company by the shareholder or by investors.
Variable expenses, also called operating expenses or activity expenses, are linked to the operation of the company and depend on the volume of tasks of the business.
Fixed charges, also called structural charges, are, conversely, independent of the level of activity of the business. They represent a cost for the business even if the latter does not generate any turnover.
These expenses exist for the three types contained in the income statement: operating, financial and exceptional expenses.
16. Fixed assets
In accounting, the term "fixed asset" refers to assets intended to serve the job of a company in a sustainable manner. There are three categories of fixed assets: Financial fixed assets, tangible fixed assets, and intangible fixed assets.
17. Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) are a set of rules, standards, and principles that Canadian public companies must follow in preparing their financial statements. GAAP establishes a standardized accounting system, which provides clarity and makes it easy to compare companies with each other, even companies from different fields of industries.
18. Gross margin (GM)
The gross margin represents the tax-free difference between the selling price and the total cost of goods and services sold. It, therefore, makes it possible to know whether a particular activity is likely to generate a profit or not. When setting up a pricing policy, for example, setting a gross margin per product will be useful and will allow purchasing costs to be negotiated with suppliers.
19. Gross profit (GP)
Gross profit is the amount of money a business has left after subtracting all the direct costs of producing or purchasing the products or services it sells. The higher the gross profit, the more the business can contribute to its indirect costs and other expenses such as interest.
20. Income statement (profit and loss statement)
The income statement is an annual accounting statement presenting all the income and expenses of a business for a given period. It provides the bottom line of this business. No compensation can be made between expense and income items. The difference between expenses and income (balance) constitutes the profit or loss for the accounting year. It makes it possible to observe the surplus or insufficiency of resources.
For companies, an inventory designates the action that allows the census of all the elements that a business owns on a specific date. The inventory is often carried out just before the end of an accounting period, but it is not an obligation. This is indeed the practical moment that allows a better correlation of the stock with the accounting documents.
Liabilities correspond to items that are part of the company's assets and that have a negative value for the entity. It includes all the debts of the business to a third party which allows it to finance the assets and which will cause an outflow of resources. Symmetric on the asset side, together they form the company's balance sheet.
23. Net income
Net income is the amount of book profit that a business has left after paying all of its expenses. Net income is obtained by taking income from sales.
24. Net margin
The net margin corresponds to the ratio between the net profit of a business during an accounting year and its turnover during the same period. This indicator makes it possible to assess the net result achieved by a business each time it sells a product or a service.
The gross margin corresponds to the first level of profit, which is obtained as follows:
Turnover - charges = net margin.
Payroll is the term that corresponds to the amount of money paid to a natural person in exchange for work performed. The pay is calculated on a payslip with security. The payroll calculation uses a lot of parameters that correspond to salary and employer charges.
26. Present Value (PV)
Present value (PV) represents the higher market value and use-value, which represents the value of the future economic benefits expected from the use of the asset and its sale.
For example, if an asset has a market value greater than its value in use, and the market value is less than the net book value of that asset. Then it is necessary to record depreciation for the difference between these two values so that the good is valued in the balance sheet at its market value.
A payment receipt, or more simply "receipt", refers to a document serving as an acknowledgment of payment for a product or service. It is issued by the lender (seller), who will generate an invoice, and intended for the lessee (buyer) who receives the good or service.
28. Return on Investment (ROI)
Return on investment or ROI is a financial indicator that measures and compares the return on investment. In general, the return on investment is based on the following calculation: the ratio of the benefits of the investment / the cost of the investment.
In other words, the return on investment is an essential indicator to compare different investments made. It measures the return on investment when you take into account the amounts invested and the money that has been won or lost.
29. Trial Balance (TB)
The trial balance is an accounting statement used in a double-entry accounting system. The report totals all debits and credits and is used to identify recording errors. It is often prepared at the end of the accounting period after several records have been entered. The creation, updating, and reporting of the trial balance is a common and automated function of modern accounting software.
30. Variable Cost (VC)
Variable costs are costs that vary depending on the volume of tasks of the business. This term is used in cost accounting or management accounting. It refers to the set of dues that vary according to the level of the task of the company.
Variable costs are opposed to fixed costs, which remain stable over a given period, regardless of the volume of tasks of the company over that period. A variable cost varies more or less in proportion to the quantity produced. This cost is made up of operating expenses, i.e. related to production, so it is also more or less proportional to the turnover achieved.
How business owners and students can use accounting terms guide
For business owners, they can find this accounting term guide useful by mastering all the accounting principle concepts. You probably have a lot of questions about finance and accounting, unless you run an accounting firm. With so many financial terms, calculations, and accounting strategies, it can be hard not to feel overwhelmed. It is important to have a good knowledge of finance and accounting, whether you hire someone to handle your finances or not. This experience will allow you to have more constructive discussions with your financial professionals and to make smarter and more profitable business decisions.
Furthermore, they can identify easily which accounting method and financial records for their company. Especially, business owners will understand the importance to have an accountant expert in their company.
Students who study accounting can consult this dictionary to better understand and master basic accounting concepts for their majors. These basic terms can be a base for their future studies and researches.
Tips to remember and master accounting concepts
"Memorizing a lesson is not enough." This is the basic principle advocated by Hélène Weber, a psycho-sociologist. Here are some tips to help you master accounting terms!
- To understand well: To remember well, you first need to understand what you are learning. But you also need to know what your business goals are. In other words, the terms need to be meaningful to you and your business. After that, you will be able to grasp "tips" to memorize better, and faster.
- To practice in your real context: Nothing can help you remember better than using these terms in your real financial statement. It is important to put accounting terms in context. Indeed, learning a single word will be difficult to remember.
- To call on the accountant expert when it needs: Using a chartered accountant is not an obligation for companies. Indeed, it is possible to take charge of the management of the accounting and all administrative, fiscal and legislative aspects internally. But without the support of an accountant, it's not just about depriving yourself of someone's help to manage the accounts. In reality, the area of intervention of an accounting firm is much larger.