Accounting Terms & Meanings
A
Money a business owes to suppliers for goods or services received on credit.
Example: A company orders office furniture worth $5,000 on credit and must pay the supplier in 30 days.
Money owed to a business by customers for goods or services sold on credit.
Example: A consulting firm provides services worth $10,000 and invoices the client, expecting payment in 15 days.
A method where income and expenses are recorded when they are earned or incurred, not when cash is received or paid.
Example: A law firm bills a client in December but receives payment in January. Under accrual accounting, the revenue is recorded in December.
The gradual repayment of a loan or the spreading of an intangible asset’s cost over time.
Example: A business purchases a patent for $50,000 and records an expense of $5,000 per year over ten years.
Everything a business owns that has value, such as cash, inventory, and equipment.
Example: A bakery owns a delivery van, which is considered an asset.
B
A financial statement that shows a company’s assets, liabilities, and equity at a specific point in time.
Example: A company’s balance sheet on December 31 shows $200,000 in assets, $120,000 in liabilities, and $80,000 in equity.
The level of sales at which total revenue equals total costs, resulting in no profit or loss.
Example: A coffee shop needs to sell 500 cups per month to cover rent, salaries, and supply costs.
The process of creating a plan to manage income and expenses.
Example: A startup sets a $10,000 monthly budget to control costs and allocate resources efficiently.
C
Money spent on acquiring or upgrading physical assets like equipment, buildings, or vehicles.
Example: A manufacturing company buys a new machine for $100,000 to increase production.
The movement of money in and out of a business.
Example: A business receives $15,000 from sales but spends $8,000 on rent and salaries, resulting in a positive cash flow of $7,000.
The process of creating a plan to manage income and expenses.
Example: A startup sets a $10,000 monthly budget to control costs and allocate resources efficiently.
D
The gradual reduction in the value of a tangible asset over time.
Example: A company purchases a truck for $50,000, and its value decreases by $5,000 per year.
Payments made by a corporation to its shareholders from its profits.
Example: A profitable company pays $2 per share as dividends to its investors.
E
The owner’s claim on company assets after liabilities are deducted.
Example: If a business has $500,000 in assets and $300,000 in liabilities, the owner’s equity is $200,000.
Costs incurred in running a business, such as rent, salaries, and utilities.
Example: A software company pays $5,000 in monthly rent for its office.
F
Expenses that do not change regardless of production or sales levels.
Example: A company pays $3,000 in rent every month, whether it sells 10 or 1,000 products.
The process of predicting future financial performance based on historical data and trends.
Example: A retail store forecasts a 10% increase in sales during the holiday season.
G
Revenue minus the cost of goods sold (COGS).
Example: A clothing store sells a jacket for $100, which costs $40 to make. The gross profit is $60.
The percentage of revenue remaining after subtracting COGS.
Example: A company with $500,000 in revenue and $200,000 in COGS has a gross profit margin of 60%.
I
A financial statement showing revenue, expenses, and profit over a period.
Example: A company’s income statement for the year shows revenue of $1 million and expenses of $700,000, leading to a profit of $300,000.
Raw materials, work-in-progress, and finished goods a company holds for sale.
Example: A bookstore has 5,000 books in stock, which are considered inventory.
A document sent to customers requesting payment for goods or services provided.
Example: A marketing agency sends a $2,000 invoice to a client for services rendered.
L
What a business owes to others, including loans, accounts payable, and wages payable.
Example: A business has a $50,000 bank loan that must be repaid over five years.
How easily an asset can be converted into cash without losing value.
Example: Cash is the most liquid asset, while real estate takes longer to sell.
N
The amount left after subtracting all expenses from revenue.
Example: A company earns $200,000 in revenue and spends $150,000 on expenses, leaving a net income of $50,000.
The total assets of a business minus its liabilities.
Example: If a company has $1 million in assets and $600,000 in liabilities, its net worth is $400,000.
O
The costs required to keep a business running, excluding COGS.
Example: Office rent, salaries, and marketing costs are operating expenses.
Indirect business costs such as rent, utilities, and insurance.
Example: A coffee shop’s rent and electricity bills are overhead costs.
R
Profits that a business keeps rather than distributing to owners or shareholders.
Example: A company makes $100,000 in profit and reinvests $60,000 into expansion, keeping it as retained earnings.
A measure of the profitability of an investment.
ROI=(Net ProfitCost of Investment)×100ROI = \left( \frac{\text{Net Profit}}{\text{Cost of Investment}} \right) \times 100ROI=(Cost of InvestmentNet Profit)×100
T
Expenses that reduce taxable income.
Example: A freelancer deducts a $1,500 laptop purchase as a business expense.
A summary of all company accounts to ensure debits and credits match.
Example: An accountant checks the trial balance to confirm the accuracy of financial records.
