Basic Accounting Terminologies and their Definitions
Here is a list of some of the basic accounting terminologies alongwith their definitions that you will find useful.
Account
A record where transactions involving individual assets, liabilities, stockholders’ equity, revenues, and expenses are kept.
Accounting Equation
Assets = Liabilities + Stockholders’ Equity (A = L + SE). This is the core relationship shown in the balance sheet and serves as the foundation for bookkeeping.
Accounts Payable
A liability that reflects the amount owed to another entity, usually for purchasing merchandise or services on credit.
Accounts Receivable
An asset that represents a claim against another entity, typically from selling goods or services on credit.
Accrual Accounting
This method recognizes revenues and expenses as they happen, even if the related cash is received or paid at a different time.
Accrued Liabilities
Amounts owed by a company as of the balance sheet date.
Accumulated Depreciation
The total depreciation expense recognized over time. It’s a contra asset, meaning it’s subtracted from the cost of the related asset on the balance sheet.
Additional Paid-in Capital
The amount received from selling stock above its par value.
Assets
Resources with probable future economic benefits controlled by an entity due to past transactions or events.
Balance Sheet
A financial statement listing an entity’s assets, liabilities, and stockholders’ equity at a specific point in time. Also known as the statement of financial position.
Balance Sheet Equation
Another term for the accounting equation.
Cash
An asset representing the money on hand and balances in bank accounts.
Common Stock
A class of stock that signifies residual ownership in a corporation.
Corporation
A business structure where ownership is represented by shares of stock. Features like limited liability make it a popular choice for many businesses.
Cost of Goods Sold
The cost of merchandise sold during a specific period. It’s an expense deducted from net sales to determine gross profit. Other terms include cost of sales and cost of products sold.
Current Assets
Cash and other assets likely to be converted to cash or used within one year of the balance sheet date.
Current Liabilities
Liabilities that are due to be paid within one year of the balance sheet date.
Depreciation
The process of allocating the cost of an asset over its useful life.
Depreciation Expense
The amount of depreciation recognized during a specific fiscal period.
Dividend
A distribution of a corporation’s earnings to its stockholders.
Earnings Per Share (EPS)
Net income available to common stockholders divided by the average number of outstanding shares during the period.
Equity
The ownership claim on an asset. Also known as stockholders’ equity.
Expenses
Outflows or the use of assets or liabilities incurred during a period from delivering goods, providing services, or conducting major operations.
Fiscal Year
The annual period used for financial reporting.
Gains
Increases in net assets from transactions that aren’t revenues or investments by owners.
Going Concern Concept
The assumption that a business will continue to operate indefinitely.
Gross Profit
Net sales minus the cost of goods sold, also called gross margin.
Income from Operations
The difference between gross profit and operating expenses, also known as operating income.
Income Statement
A financial statement summarizing revenues, expenses, gains, and losses for a specific period, showing the results of operations.
Liabilities
Future obligations to transfer assets or provide services due to past transactions or events.
Losses
Decreases in net assets from incidental transactions that aren’t expenses or distributions to owners.
Matching Concept
The principle that expenses should be matched with the revenues they help generate during the same reporting period.
Merchandise Inventory
Items held for sale to customers as part of regular business operations.
Net Assets
The difference between assets and liabilities. Also referred to as stockholders’ equity or owners’ equity.
Net Income
The excess of revenues and gains over expenses and losses for a given fiscal period.
Net Sales
Gross sales minus sales discounts and returns.
Net Worth
Another term for net assets or stockholders’ equity, although “worth” may sometimes be misleading.
Opportunity Cost
The income forgone because a different opportunity wasn’t pursued.
Owners’ Equity
Another term for stockholders’ equity, representing the owners’ claim on the entity’s assets.
Paid-in Capital
The amount stockholders invest in a company.
Par Value
An assigned value for a share of stock when a corporation is formed. It may also refer to the stated or face value of a security.
Partnership
A business structure owned by two or more individuals or corporations, without the limited liability features of a corporation.
Profit
Another term for net income, representing the excess of revenues and gains over expenses and losses.
Profit and Loss Statement
Another term for income statement.
Proprietorship
A business owned by one individual, without the limited liability features of a corporation.
Retained Earnings
Cumulative net income not distributed to stockholders as dividends.
Revenues
Increases in assets or settlements of liabilities from delivering goods, providing services, or other major operations.
Statement of Cash Flows
A financial statement showing changes in cash from operating, investing, and financing activities during a fiscal period.
Statement of Changes in Capital Stock
A summary of changes in capital stock and additional paid-in capital during a fiscal period. This may be part of the statement of changes in stockholders’ equity.
Statement of Changes in Retained Earnings
A summary of changes in retained earnings during a fiscal period, sometimes included in the statement of changes in stockholders’ equity.
Statement of Changes in Stockholders’ Equity
A summary of changes in capital stock, additional paid-in capital, retained earnings, and other stockholders’ equity elements during a fiscal period.
Statement of Earnings
Another term for the income statement, showing revenues, expenses, gains, and losses for a specific period.
Statement of Financial Position
Another term for the balance sheet, listing assets, liabilities, and stockholders’ equity at a point in time.
Statement of Operations
Another term for the income statement.
Stock
Proof of ownership in a corporation.
Stockholders
Owners of a corporation’s stock, also called shareholders.
Stockholders’ Equity
The stockholders’ claim on a company’s assets, often referred to as owners’ equity or net assets.
Subsidiary
A corporation with more than 50% of its stock owned by another corporation.
Transactions
Economic exchanges between entities that are recorded and reflected in financial statements.