24 Common Accounting Terms Explained

Regardless of your industry, you can benefit from knowing basic accounting terms. A majority of business owners need to have a working knowledge of accounting phrases, especially if you are in charge of your company’s books.

It is a common fallacy that you should not try to understand your accountant because the field has its unique language. You will be in a better position if you take a little time to become familiar with the accounting vocabulary.

Here are two-dozen terms and abbreviations that accountants and bookkeepers frequently use.

1. Accounts Receivable (AR) – The amount of money clients owe to a business after goods or services have been used.
2. Accounts Payable (AP) – The amount of money a business owes to its suppliers or creditors in exchange for goods or services delivered to the company.
3. Accrual Accounting – Is a type of accounting typically used by businesses. This type of accounting is set apart from other kinds because you will record your proceeds and expenditures when they are earned. Companies gain a more precise look at their income and expenses by addressing these immediately and not when they are received or paid.
4. Asset Classes – An asset class is a collection of various securities that exhibit similar traits as well as comparable responses to market fluctuations. They are unique in their capacities and serve different purposes. Each asset class is irreplaceable, and none are a perfect substitute for another. a group of securities that behaves similarly in the marketplace. The three main asset classes are:
   · Equities or stocks (to learn more about stocks, visit The Market Bull)
   · Fixed income or bonds
   · Cash equivalents or money market instruments.
5. Bank Reconciliation – A monthly process used to find and record any changes that are not a part of your general ledger. Ideally, a bank reconciliation will find any bank charges you are unaware of, as well as any posting errors.
6. Capital (CAP) – Capital is the value of a financial asset such as cash or goods.
7. Cash Flow (CF) – The amount of expenses or revenue that will be generated through activities like manufacturing or sales over some time.
8. Certified Public Accountant (CPA) – An accountant who has passed an exam for CPA accreditation and accumulated the right amount of government-mandated work experience and educational requirements to become a CPA.
9. Cost of Goods Sold (COGS) – The amount of expense tied up in creating the product a business sells. How this is calculated depends on what is being manufactured. Typically, the cost of goods sold is the cost of raw materials and labour to produce the goods.
10. Credit (CR) – If an accountant uses a double-entry bookkeeping system, they record numbers for each business transaction in two accounts: credit and debit. Credits are entries that either increase an equity or liability account or decrease an expense or asset account.
11. Debit (DR) – For accountants working with a double-entry bookkeeping system, debits either increase expense or asset accounts or decrease equity or liability accounts.
12. Enrolled Agent (EA) – A tax professional whose job is to represent taxpayers
13. Equity – Equity is calculated by subtracting liabilities from assets Equity= Assets-Liabilities
14. General Ledger (GL)– A company’s total record of the financial transactions over the life of the business
15. Generally Accepted Accounting Principles (GAAP) – A set of guidelines established by the accounting industry that governs the reporting of financial data. Accuracy in reporting is critical for all publicly traded companies.
16. Insolvency – The state where a business or individual is not able to meet its financial obligations with lenders.
17. Inventory – Your inventory is a tally of the goods your business owns. There are three stages of inventory.
    • Finished products that are ready to sell
    • Products that are a work in progress
    • The raw materials that create ready-to-sell products
18. Limited Liability Company (LLC) – An LLC is a structure for corporations where members cannot be held accountable for the business’s debts or liabilities.
19. Owner’s Equity (OE) – Owner’s equity is the percentage of stock a shareholder has in a company. It represents the percentage of the company a shareholder owns.
20. Present Value (PV) – The current value of a future sum of money based on a specific rate of return is its present value.
21. Profit and Loss Statement (P&L) – A profit and loss statement is a financial document that summarises a company’s financial position by looking at costs, revenues, and expenses during a set amount of time.
22. Return on Investment (ROI) – A way to evaluate financial performance as it relates to the amount of money invested. Net profit is divided by investment cost
23. Trial Balance – A ledger where all of a company’s debits and credits are compiled to ensure the mathematical accuracy of the accounting
24. Working Capital – The amount of money you have after subtracting your assets from your liabilities is your working capital. Essentially, working capital is the amount of money available for your company to use

If you would like to find out more about our boutique accounting practice or schedule a meeting with one of our experts, please get in touch with M2 Corporate. We cover most business and personal finance areas, emphasising accounting, taxation, and business advisory.

Our team has decades of experience in the accounting industry and are eager to partner with you to help your business reach its full potential. We are reliable and professional. M2 Corporate offers our services in business packages for our customers’ convenience.