According to Merriam-Webster.com, Accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results. People and businesses use accounting to assess their financial health and stability.
By knowing the most common industry terms, it can provide a better understanding of the accounting concepts, the accountant’s role, and develop a strategic way to achieve financial goals. In this blog, we will share the most common accounting terms, used in the industry. From this glossary, you can start building your own accounting vocabulary.
Accountant
A professional who performs accounting functions such as account analysis, auditing, or financial statement analysis. Accountants work with accounting firms or internal account departments with large companies. They may also set up their own, individual practices.
Accounting Cycle
A collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its inclusion in the financial statements.
Accounts Payable
Accounts payable is basically the list of all unpaid business expenses. It tracks money owed to creditors, such as bank loans, unpaid bills and invoices, debts to suppliers or vendors, and credit card or line of credit debts. It is the debt the company owes and is recorded under liability on its balance sheet.
Accounting Period
The span of time reported in a financial statement. Examples of commonly used accounting periods include fiscal years, calendar years, and three-month calendar quarters. Each accounting period covers one complete accounting cycle.
Accounts Receivable
Recorded under assets on the firm’s balance sheet and a source of short-term cash, accounts receivable tracks the money owed to a person or business by its debtors, coming from products or services provided on credit or without an upfront payment.
Asset
An asset is any company possession with monetary value. Assets can reduce expenses, generate cash flow or improve sales. Asset types include fixed, current, liquid and prepaid expenses. Liquid means how quickly a business can convert the asset into spendable revenue without losing value.
Balance Sheet
A balance sheet, a.k.a. statement of financial position, is a standard financial statement. It specifies the business’ current state regarding its assets, liabilities, and owner’s equity. It follows the equation: asset + liabilities + equity. It is one of the two most common financial statements prepared by accountants.
Book Value
The book value shows the original value of an asset minus its accumulated depreciation or liability. Book value is equal to the cost of carrying an asset on a company’s balance sheet, and firms calculate it by netting the asset against its accumulated depreciation. As a result, book value can also be thought of as the net asset value (NAV) of a company, calculated as its total assets minus intangible assets (patents, goodwill) and liabilities.
Bookkeeping
Bookkeeping involves the regular recording, of a company’s financial transactions to track all information on its books to make key operating, investing, and financing decisions.
Capital
Capital is a financial asset or its value, including goods or cash. In common usage, capital (abbreviated “CAP.”) refers to any asset or resource a business can use to generate revenue.
Capita can also refer to the level of owner investment in the business, which then used to adjust these investments for any gains or losses the owner/s have already realized. Accountants recognize various subcategories of capital such as Working, Equity, and Debt capital.
Closing the books
The phrase “Closing the books” describes the process by an accountant to close, or zero out, a business’s revenue, expense, and income summary reports. It occurs at a specific period as mandated by the company.
Cost of Goods Sold
The direct costs of producing the goods sold by a company.
Credit
Records all of the money flowing out of an account.
Debit
Records all of the money flowing into an account.
Depreciation
Depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. It represents how much of an asset’s value has been used and allows companies to earn revenue from the assets they own by paying for them over a certain period of time.
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