Accounting terminology can be daunting and confusing, but this accounting glossary provides an easy-to-follow reference to key accounting terms.
Accounting Cycle: The sequence of steps that need to be taken in order to properly record the financial transactions of a business or individual. These steps include collecting accounting data, preparing documents for recording entries, making journal entries for each transaction, posting information from journals to ledgers, and generating reports such as financial statements.
Accounts Payable: Accounts payable is the money a business or organization owes to suppliers, vendors, or other creditors. It is tracked as a liability on the balance sheet and can include regular payments such as rent and utilities, as well as any goods purchased that have yet to be paid for.
Accrual Basis Accounting: Accrual accounting is an accounting method of recognizing events that occur in different accounting periods by recording transactions when they are incurred rather than when payment is made. This method allows businesses to track income and expenses on a more accurate timeline.
Assets: Assets are resources owned by an individual or entity that hold value, such as cash, real estate, inventory, investments, accounts receivable, and equipment.
Bookkeeping: The process of recording accounting transactions using accounting software or paper ledger books. This process includes entering transactions into accounting records, maintaining those records and ensuring accuracy of information within them.
Balance Sheet: A balance sheet is a financial statement that measures the performance of a business or organization at any given point in time by listing all the assets, liabilities, and equity. All accounting entries must be recorded on this statement in order to accurately measure a company’s financial position.
Chart of Accounts: The chart of accounts is an accounting tool used to map out different types of business transactions and their associated accounts. This allows businesses to organize information in a consistent manner for accounting purposes.
Credit: An accounting entry that increases the value of a liability or equity account, or decreases an asset or expense account. Credits are paired with debits when recording accounting entries in double-entry bookkeeping systems.
Debit: An accounting entry that increases the value of an asset or expense account, or decreases a liability or equity account. Debits are paired with credits when recording accounting entries in double-entry bookkeeping systems.
Depreciation: Depreciation is an accounting method used to spread the cost of an asset over its useful life. It enables companies to recognize the impact of asset obsolescence over time rather than taking an immediate hit to their income statement.
Income Statement: An accounting report that summarizes a business or individual’s revenues, expenses, gains and losses over a specific accounting period. It is also known as the “profit and loss statement” or “statement of operations.”
Journal Entry: A record of accounting transactions made in an accounting system that documents the date, amount, source, and purpose of each transaction. Journal entries are used to track financial information such as income, expenses, assets, liabilities and equity.
Liabilities: Liabilities are debts or obligations that an individual or entity owes to other parties such as banks, vendors, customers, and governments. Common liabilities include accounts payable, payroll taxes, loans, and credit card debt.
Revenue: Revenue is the money earned from selling goods or services and is tracked on the income statement. It can be either recognized when payment is made (cash basis accounting) or when work has been completed (accrual accounting).
Unearned Revenue: Unearned revenue is money received upfront for goods or services that have not yet been provided. It is reported as a liability until the service has been rendered and appears as revenue on the income statement once the service has been completed.
Vendor: A vendor is any individual or business that sells goods and services to another entity. Vendors are typically paid on a regular basis for providing these goods or services.
These accounting terms provide the foundation of accounting principles and practices, which are essential knowledge for individuals and businesses alike. By understanding these accounting terms, you can make better financial decisions and gain insight into your organization’s performance. We hope this accounting glossary has been helpful!