Dictionary of General Accounting Terms
Helping you understand the jargon
An Accounting Period is designated in all Financial Statements (Income Statement, Balance Sheet, and Statement of Cash Flows). The period communicates the span of time that is reported in the statements.
Accounts Payable (AP)
Accounts Payable include all of the expenses that a business has incurred but has not yet paid. This account is recorded as a liability on the Balance Sheet as it is a debt owed by the company.
Accounts Receivable (AR)
Accounts Receivable include all of the revenue (sales) that a company has provided but has not yet collected payment on. This account is on the Balance Sheet, recorded as an asset that will likely convert to cash in the short-term.
Accrual basis of accounting
The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service).
Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in Cash (if the expense was paid at the time the expense was incurred), an increase in Accounts Payable (if the expense will be paid in the future), or a decrease in Prepaid Expenses (if the expense was paid in advance)
Accrued: is a term used to describe the ability of something to accumulate over time i.e. entitlement that has been earned that has not been paid out yet.
An expense that been incurred but hasn’t been paid is described by the term Accrued Expense.
The term Allocation describes the procedure of assigning funds to various accounts or periods. For example, a cost can be Allocated over multiple months (like in the case of insurance) or Allocated over multiple departments (as is often done with administrative costs for companies with multiple divisions).
Anything the company owns that has monetary value. These are listed in order of liquidity, from cash (the most liquid) to land (least liquid).
To reduce the force, affect or value of, or physically reduce the thickness or capacity of
To assign something to another thing. One is attributed to the other because it is assumed that it as the cause or origin of that thing
Balance Sheet (BS)
A financial statement that reports on all of a company’s assets, liabilities, and equity. As suggested by its name, a balance sheet abides by the equation < Assets =Liabilities + Equity >.
Book Value (BV)
As an asset is depreciated, it loses value. The Book Value shows the original value of an Asset, less any accumulated Depreciation.
Business (or Legal) Entity
This is the legal structure, or type, of a business. Common company formations include Sole Proprietor, Partnership, Limited Liability Corp (LLC), S-Corp and C-Corp. Each entity has a unique set of requirements, laws, and tax implications.
Cash Flow (CF)
Cash Flow is the term that describes the inflow and outflow of cash in a business. The Net Cash Flow for a period of time is found by taking the Beginning Cash Balance and subtracting the Ending Cash Balance. A positive number indicates that more cash flowed into the business than out, where a negative number indicates the opposite.
C – Labour Rate (CF)
Contracted Labour Rate. i.e. employed for $25 per hour (new definition created by Labour8)
CE – Labour Rate. (CF)
Contracted + Entitlements Labour Rate – contracted hourly rate plus the costs of holiday entitlements as an average per hour rate for actual hours worked within a year (new definition created by Labour8)
CEO – Labour Rate (CF)
Contracted + Entitlements + Overhead Staff (admin staff) Labour Rate – contracted hourly rate plus the costs of holiday entitlements plus the attributed costs of Overhead Staff as an average per hour rate for actual hours worked within a year apportioned to each productive staff members hourly rate (new definition created by Labour8)
CEOC – Labour Rate (CF)
Contracted + Entitlements + Overhead Staff (admin staff) + Company Overheads Labour Rate – contracted hourly rate plus the costs of holiday entitlements plus the attributed costs of Overhead Staff plus Company Overheads (not staff related) as an average per hour rate for actual hours worked within a year apportioned to each productive staff members hourly rate (new definition created by Labour8)
Chartered Accountant (NZ) or Certified Public Accountant (AUS)
CPA is a professional designation that an accountant can earn by passing the CPA exam and fulfilling the requirements for both education and work experience, which may vary by state.
Assets that are pledged by a borrower and forfeited if the terms of lending are not followed.
An agreement between parties, where each party has obligations. In order to be valid, a contract must have three basic elements; an offer, an acceptance of that offer and consideration.
Cost of Goods Sold (COGS)
Cost of Goods Sold are the expenses that directly relate to the creation of a product or service. Not included in this category are those costs that are needed to run the business. An example of COGS would be the cost of Materials, or the Direct Labour to provide a service.
A credit is an increase in a liability or equity account, or a decrease in an asset or expense account.
A debit is an increase in an asset or expense account, or a decrease in a liability or equity account.
Deferral accounting (also see accrual accounting)
In accounting this means to defer or to delay recognizing certain revenues or expenses on the income statement until a later, more appropriate time. Revenues are deferred to a balance sheet liability account until they are earned in a later period. When the revenues are earned, they will be moved from the balance sheet account to revenues on the income statement. Expenses are deferred to a balance sheet asset account until the expenses are used up, expired, or matched with revenues. At that time they will be moved to an expense on the income statement.
Depreciation is the term that accounts for the loss of value in an asset over time. Generally, an asset has to have substantial value in order to warrant depreciating it. Common assets to be depreciated are automobiles and equipment. Depreciation appears on the Income Statement as an expense and is often categorized as a “Non-Cash Expense” since it doesn’t have a direct impact on a company’s cash position.
Diversification is a method of reducing risk. The goal is to allocate capital across a multitude of assets so that the performance of any one asset doesn’t dictate the performance of the total.
Enrolled Agent (EA)(AUS)
An Enrolled Agent is a professional accounting designation assigned to professionals who have successfully passed tests showcasing expertise in business and personal taxes. Enrolled Agents are generally sought out to complete business tax filings to ensure compliance with the IRD/IRS.
Holiday and leave entitlements made available to the employee by agreement or by law.
Equity denotes the value left over after liabilities have been removed. Recall the equation Assets = Liabilities + Equity. If you take your Assets and subtract your Liabilities, you are left with Equity, which is the portion of the company that is owned by the investors and owners.
An Expense is any cost incurred by the business.
Fixed Cost (FC)
A Fixed Cost is one that does not change with the volume of sales. For example, rent and salaries won’t change if a company sells more. The opposite of a Fixed Cost is a Variable Cost.
General Ledger (GL)
A General Ledger is the complete record of a company’s financial transactions. The GL is used in order to prepare all of the Financial Statements.
Generally Accepted Accounting Principles (GAAP)
These are the rules that all accountants abide by when performing the act of accounting. These general rules were established so that it is easier to compare ‘apples to apples’ when looking at a business’s financial reports.
Gross Margin (GM)
Gross Margin is a percentage calculated by taking Gross Profit and dividing by Revenue for the same period. It represents the profitability of a company after deducting the Cost of Goods Sold.
Gross Profit (GP)
Gross Profit indicates the profitability of a company in dollars, without taking overhead expenses into account. It is calculated by subtracting the Cost of Goods Sold from Revenue for the same period.
Income Statement (Profit and Loss) (IS or P&L)
AKA Profit and Loss Statement is the second of the two common financial statements.
The Income Statement (often referred to as a Profit and Loss) is the financial statement that shows the revenues, expenses, and profits over a given time period. Revenue earned is shown at the top of the report and various costs (expenses) are subtracted from it until all costs are accounted for; the result being Net Income.
The act of one party protecting or guaranteeing protection, or freedom from liability, of a third party for actions of that party.
A person or entity that is not able to pay debts generally as they become due.
Interest is the amount paid on a loan or line of credit that exceeds the repayment of the principal balance.
Inventory is the term used to classify the assets that a company has purchased to sell to its customers that remain unsold. As these items are sold to customers, the inventory account will lower.
Journal Entry (JE)
Journal Entries are how updates and changes are made to a company’s books. Every Journal Entry must consist of a unique identifier (to record the entry), a date, a debit/credit, an amount, and an account code (that determines which account is altered).
All debts that a company has yet to pay are referred to as Liabilities. Common liabilities include Accounts Payable, Payroll, and Loans. Any financial or legal obligation for which a person is responsible. In accounting terms, liabilities are monies still owed.
A lien is a right of possession over goods or property belonging to another, with a right to retain possession until debts due to the possessor are paid. It may be in the form of an equitable charge in favour of a creditor who may sell the property this charged. A lien over documents is restricted as against a Liquidator although in certain cases $500 may rank as a preferential creditor.
Liquidation commences on the appointment of a Liquidator and is the process whereby a company has its assets realised by a Liquidator to satisfy its liabilities and to repay its shareholders. The term “winding up” was previously used. For more details refer to the Insolvency Definitions part of this website.
A term referencing how quickly something can be converted into cash. For example, stocks are more liquid than a house since you can sell stocks (turning it into cash) more quickly than real estate.
A Liquidator is the person (or persons) responsible for dealing with the liquidation of a company. The Liquidator is appointed by the shareholders, the directors if the constitution permits, or the Court. A Liquidator must be an actual person and cannot be a company or some other body corporate. The Companies Act 1993 lists qualifications which restricts certain persons from acting (see Section 280).
Material are items purchased to be assembled for resale, or for production purposes.
To make less severe, serious or painful. To lessen the gravity of
Net Income (NI)
Net Income is the dollar amount that is earned in profits. It is calculated by taking Revenue and subtracting all of the Expenses in a given period, including COGS, Overhead, Depreciation, and Taxes.
Net Margin is the percent amount that illustrates the profit of a company in relation to its Revenue. It is calculated by taking Net Income and dividing it by Revenue for a given period.
On Credit/On Account
A purchase that happens On Credit or On Account is a purchase that will be paid at a future time, but the buyer gets to enjoy the benefit of that purchase immediately. "Bartender, put it on my tab…"
Overhead are those Expenses that relate to running the business. They do not include Expenses that make the product or deliver the service. For example, Overhead often includes Rent, and Executive Salaries.
Payroll is the account that shows payments to employee salaries, wages, bonuses, and deductions. Often this will appear on the Balance Sheet as a Liability that the company owes if there is accrued vacation pay or any unpaid wages.
PPSA - Personal Property Security Act
A Government register that will allow a creditor to register any interest that he has in the property of another before the security is valid. The Registry can therefore be used if an institution is considering taking security on various assets.
Present Value (PV)
Present Value is a term that refers to the value of an Asset today, as opposed to a different point in time. It is based on the theory that cash today is more valuable than cash tomorrow, due to the concept of inflation.
A Receipt is a document that proves payment was made. A business produces receipts when it provides its product or service and it receives receipts when it pays for goods and services from other businesses. Received Receipts should be saved and catalogued so that a company can prove that its incurred expenses are accurate.
"Receiver" is the general term applied to a person appointed either by a secured creditor, debenture holder or the Court to take control of an/or realise assets. A receiver and manager can carry on the company’s business and sell the business and other assets secured by the charge (refer to the Insolvency Definitions part of this website for more information).
"Receivership" is the general term applied when a person is appointed as a Receiver. All receiverships are governed by laws.
Return on Investment (ROI)
Originally, this term referred to the profit that a company was making (Return), divided by the Investment required. Today, the term is used more loosely to include returns on various projects and objectives. For example, if a company spent $1,000 on marketing, which produced $2,000 in profit, the company could state that it’s ROI on marketing spend is 50%.
Revenue (Sales) (Rev)
Revenue is any money earned by the business.
Of course, there are those accounting terms that don’t pertain to a particular financial statement. For those, we’ve reserved the "general" category.
Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in fixed intervals, for example, monthly payments of one-twelfth of the annual salary.
Trial Balance (TB)
Trial Balance is a listing of all accounts in the General Ledger with their balance amount (either debit or credit). The total debits must equal the total credits, hence the balance.
Variable Cost (VC)
These are costs that change with the volume of sales and are the opposite of Fixed Costs. Variable costs increase with more sales because they are an expense that is incurred in order to deliver the sale. For example, if a company produces a product and sells more of that product, they will require more raw materials in order to meet the increase in demand.
An Order by the Court that gives to a person, possession, control or title of property.
An act done by a person in order to annoy, embarrass or otherwise aggravate that person.
Views of Creditors
Liquidators must have regard to the views of creditors set out in a resolution or by the liquidation committee.
A voidable charge is one within a specified period prior to a liquidation and where no new valuable consideration has been given. This may be voidable against a Liquidator (see Preference).
A voidable transaction is made when a company is unable to pay its debts within a specified period prior to the liquidation and has a preferential effect. These may in certain cases be voidable against a liquidator.
A wage is monetary compensation (or remuneration, personnel expenses, labour) paid by an employer to an employee in exchange for work done, usually on an hourly contract rate.