COMPREHENSIVE TERMS USED IN FINANCIAL MANAGEMENT.

Financial Management Terminology

Financial management has its own language and you need to understand what the
terms mean in plain English before you can get down to business.
Some common terms include:
Account
An account is a record in an accounting system that tracks the financial activities
of a specific asset, liability, equity, revenue, or expense. ... Each individual account is
stored in the general ledger and used to prepare the financial statements at the end of
an accounting period.
An Account is a financial statement that shows the state of finances as at a particular
time.

Profit and loss (P&L) statement: This is a report of your income and expenditure
for a specific period of time, e.g., a month, a quarter, a year.
Balance sheet: The balance sheet is the total picture of a company’s worth at a
given point in time, e.g., 30 June. It lists the value of all assets and liabilities.
Cash flow projection: This is a forecast of when a company expects to receive
funds or cash and when payments need to be made. Projections are done for a
period of time, generally a month. The aim of doing a cash flow projection is to
make sure you have enough money to pay all expenses when they fall due.
Budget: A budget is a financial planning tool. It is a list of anticipated income and
expenditure over a period of time, usually a year. Budgets may predict a surplus
(income exceeds expenditure) or a deficit (expenditure exceeds income).
A cash budget tracks when income and expenditure can be expected during the
period covered by the operating budget. It amounts to a series of monthly cash
flow projections.

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What Is a Budget?
A budget is a way to balance income, expenses and financial goals for a
specific length of time.
A budget is a spending plan based on income and expenses. In other words,
it’s an estimate of how much money you’ll make and spend over a certain
period of time, such as a month or year. (Or, if you're accounting for the
incoming and outgoing money of everyone in your household, that's a family
budget.)
Budgeting can involve making a comprehensive list of expenditures or
focusing on a few categories. Some people prefer to write their budget out by
hand, while others use a spreadsheet or budgeting app. There’s no correct way
to budget — what works for one person might not work for another.
That said, the 50/30/20 budget is one of our favorites. This method suggests you
spend about 50% of your monthly after-tax income on necessities, 30% on
wants and 20% on savings and paying off debt.
What’s the purpose of a budget?
Budgeting isn’t about depriving yourself; it’s about taking control of your
money. Making a budget shouldn’t feel like a punishment. Remember, it’s a plan
for all of your money — that includes money for fun stuff, too.
A budget doesn’t have to be rigid. In fact, it should change as your
circumstances change — when you get a raise, for example, or become a
homeowner. The idea is to make your budget as personalized as possible,
leaving room to adapt. Surprises (and mistakes) will happen.
Why is budgeting important?
Budgeting benefits everyone, not just those who struggle financially.
It encourages you to live within your means and put your money to work in
the best way possible. Think of a budget as a steppingstone to your financial
goals. It can help you:
 Understand your relationship with money. Tracking your income and
expenses paints a clear picture of how much you have to save or
spend. Once you spot patterns, you can identify where to make
adjustments. Maybe you spend less than you earn (way to go!) but
you’re paying for that subscription beauty box that you no longer need.

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  Save enough for the future. A good budget coaxes you to earmark
money for an emergency fund and savings goals like a vacation or
retirement. Here's how to work out how much you should save each month.
 Get — or stay — out of debt. Mapping out expenses in advance
reduces the risk of overspending and can help you pay off debt you
already have.
 Relieve stress. Budgeting isn’t a cure-all, but it can help you manage
financial decisions and prepare for challenges.
How do you start a budget?
Ready to give budgeting a whirl? Start with the basics. That includes outlining
your income, account balances and debts, and tracking expenses. Then,
identify your priorities and find the right budget system for your needs. If you get
stuck, try these budgeting tips.
Before you build a budget
Track all your spending at a glance to understand your trends and spot
opportunities to save money.

Income: Monies received or expected to be received (i.e., invoiced).

Expenditure: Monies spent or bills received.
Assets: A physical asset is anything that a person or business owns, e.g., car,
furniture, building, equipment.
Current assets (or Liquid Assets) are those that a business could expect to realize in
cash, sell or consume during the current year, e.g., cash, short-term investments.
Noncurrent assets (Non-Liquid Assets) are ‘long-term’ assets such as property and
equipment.
Intangible assets are not physical in nature, e.g., copyright, intellectual property.
Owners’ Equity: The net worth of the business. All Assets less all Liabilities
equals net worth.
Liabilities: Loans or expenses that a person or company has committed to and
must pay for.
Capital: Money and property that a person or company uses to transact business.
Reserves: Funds that have been set aside for special purposes or to cover
contingencies.
Debtors: People who owe you money.
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Creditors: People you owe money to.
Depreciation: An amount which represents a decrease in the value of an item over
time due to wear and tear - usually expressed as a percentage amount each year.
Cash accounting: With cash accounting, you record entries according to the date
you paid someone or someone paid you. So, if you invoice someone, you record
the date you receive the money, rather than the date you sent the invoice. At its
simplest, cash accounting uses the receipt book and bank deposit details to track
income and the chequebook to track expenditure.
Cash accounting is the simplest form of book-keeping and very small stations may
find it adequate. If your station operates largely on short-term transactions and you
don’t have long-term debts or commitments, cash accounting will work as long as
the station stays small. If you start growing, you will need to switch to accrual
accounting.
Accrual accounting: In accrual accounting, revenue is recognized when it is
earned rather than when it is received, and expenses are recognized when they are
incurred, rather than when they are paid. So, if you buy an item using your credit
card, record the date you bought the item, rather than the date you paid your credit
card bill. Similarly, your income is recorded when an invoice is raised by your
station, not when it is paid. Accrual accounting is generally preferable because it
gives a better idea of your station’s overall medium-term financial status.
Account ageing: Refers to tracking payments due to you, or payments that you
need to make. The days are tracked from the date you sent out an invoice, or the
date you received an invoice.

Financial Management Terminology

 Profit and loss (P&L) statement: This is a report of your income and
expenditure for a specific period of time, e.g., a month, a quarter, a year.
 Balance sheet: The balance sheet is the total picture of a company's worth at
a given point in time

 Accounts payable – a record of all unpaid short-term (less than 12 months)

invoices, bills and other liabilities. Examples of accounts payable include
invoices for goods or services, bills for utilities and tax payments due.

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  Accounts receivable – a record of all short-term accounts (less than 12
months) from customers you sell to but are yet to pay. These customers are
called debtors and are generally invoiced by a business.
 Accounts receivable finance – see Factoring .
 Accrual accounting – an accounting system that records transactions at the
time they occur, whether the payment occurs now or in the future.
 Amortization – the process of offsetting assets such as goodwill and
intellectual property over a period of time. See also Depreciation .
 Assets – things you as an individual or business owns. These can be cash or
something you can convert into cash such as property, vehicles, equipment
and inventory.
 Audit – a check by an auditor or tax official on your financial records to
check that you account for everything correctly.

 Bad debts – money that is unlikely to be paid in the near future.

 Balance sheet – a snapshot of a business on a particular date. It lists all of
your assets and liabilities and works out the net assets.
 Balloon payment – a final lump sum payment due on a loan agreement.
Loans with a larger final 'balloon payment' have lower regular repayments
over the term of the loan.
 Bank reconciliation – a cross-check that ensures the amounts in your
cashbook match the relevant bank statements.
 Bankrupt – an individual or business is bankrupt when they cannot pay
their debts and aren't able to reach an agreement with their creditors.
 Bankruptcy – a process where an individual is legally bankrupt and an
appointed trustee manages their assets and financial affairs.
 Benchmark – a set of conditions against which you can measure a product
or business.
 Benchmarking – the process of comparing your business to similar
businesses in your industry.
 Bill of sale/ Cash sale receipt – a legal document for the purchase of
property or other assets that details the purchase, where it took place, the
date and for how much.
 Bookkeeping – the process of recording the financial transactions of a
business.

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  Bootstrapping – where a business funds its growth purely through personal
finances and revenue from the business.
 Bottom line – see Net profit .
 Break-even point – the exact point when a business's income equals its
expenses.
 Budget – a listing of planned revenue and expenditure for a given period.

 Capital – wealth in the form of money or property owned by a business.

 Capital cost – a one-off substantial purchase of physical items such as plant,
equipment, building or land.
 Capital gain – the amount gained when an asset sells above its original
purchase price.
 Capital growth – an increase in the value of an asset.
 Cash – includes all money available on demand, including bank notes and
coins, petty cash, certain cheques, and money in savings or debit accounts.
 Cash accounting – an accounting system that records transactions at the
time you actually receive money payment.

Cash book – a daily record of all cash, credit or cheque transactions received or
paid out by a business. A cash book is a financial journal that contains all cash
receipts and disbursements, including bank deposits and withdrawals. Entries in
Cash Book is the one in
the cash book are then posted into the general ledger.
which all the cash receipts and cash payments including the funds that
are deposited in the bank and funds which are withdrawn from the bank
are recorded according to the date of the transaction. All the transaction
which is recorded in the cash book has the two sides i.e., debit and
credit.
The difference between the sum of balances of the debit side and
credit side shows the balance of the cash on hand or bank account.
Cashbook plays a dual role as it is the book of the original entry of the
company as well as book the final entry

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 Types of Cash Book Formats
 There are three types of cash book formats which are the
following:

Single Column (One Column)

 Single column cash-book contains only the cash transactions
done by the business. Single column cash-book has only a single
money column on debit and credits both sides. It does not
record the transaction-related, which involves banks or
discounts. The transactions which are done on credit are not
recorded while preparing the single column cash –book.

Double Column (Two Column)

 Double column cash-book contains two money column both on
the debit side as well as the credit side. One column is for the
transactions related to the cash, and the other column is for the
transactions related to the bank account of the business. So,
under double-column cash-book, not only cash transactions but
transaction through the bank is done by the business is also
recorded. The transactions which are done on credit are not
recorded while preparing the double column cash –book.

Triple Column(Three Column)

 It is also referred to as a three-column cash book format, and it is
a most exhaustive form which has three columns of money on
both receipt and payment sides and record transactions about
the cash, bank, and discounts. This book is generally maintained
by the large firms that do transactions in cash mode as well as

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 through the bank and frequently allows and receives cash
discounts.

Two Colmn Cash Book Format

 Mr. X started the business in the month of June-2019. He
invested the capital of $200,000, in which the cash contribution is
$100,000, and the rest $100,000 he deposited in the business
bank account a business. During June 19, the following
transactions took place in the business. Prepare the necessary
double-column Cashbook using the data as given below:

Date Transactions

1-Jun
Initial capital contribution. Cash : $100,000 an Bank $100,000

2-Jun Paid for Advertisement $ 500 from check

4-Jun Raw material purchased from Mr. A of $ 10,000 by paying cash

4-Jun Purchased stationery for cash worth $ 550

7-Jun Raw material purchased from Mr. B of $ 20,000 on credit

9-Jun Goods sold to the customer for $15,000 by cash

10-Jun Paid $ 200 for the office expenses in cash

13-Jun Goods sold on credit worth $ 11,000 to Mr. C

15-Jun Received a check worth $ 11,000 for the goods sold on credit on 13-July-2019 to Mr. C;

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Date Transactions

18-Jul Raw material purchased $ 10,000 by paying through check

21-Jun Withdrew from bank $ 15,000 for business

25-Jun Goods sold on credit worth $ 5,000

30-Jun Paid rent by check of $ 7,500

30-Jun Paid the salaries to staff of $ 17,000 in cash

 Solution:


 Advantages
 It helps in saving time and labor as in case of recording cash
transactions in the journal, tremendous time and labor are
required, whereas, in the case of cashbook, cash transactions are
recorded straight away that is in the form of the ledger.

 Management can know the balances of cash and bank at any

time. It helps in effective cash management.
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  Cashbook is balanced regularly, which helps in avoiding fraud.
Also, discrepancies, if any, arises can be found and rectified.

Limitations

1. It may take a lot of time to start and maintain this book.

2. In the case of a large organization, maintaining it involves high
costs.

 Cash flow – the measure of actual cash flowing in and out of a business.
 Cash incoming (DR) – money that is flowing into the business.
 Cash outgoing (CR) – money that is flowing out of the business.
 Chart of accounts – an index of the accounts a business will use to classify
transactions. Each account represents a type of transaction such as asset,
liability, owner's equity, income, and expense.
 Chattel mortgage – similar to a hire-purchase agreement although the
business owns the asset from the start. Chattel mortgages require regular
ongoing payments and typically provide the option of reducing the payments
through the use of a final 'balloon' payment.
 Collateral – see Security .
 Commercial bill (also known as a bill of exchange) – a form of commercial
loan on an interest only basis, or interest reducing basis. Commercial bills
typically require some sort of security and suit short-term funding needs
such as inventory.
 Contingent liability – a liability where payment is made only if a particular
event or circumstance occurs.
 Cost of goods sold – the total direct costs of producing a good or delivering
a service.
 Credit – a lending term for when a customer purchases a good or service
with an agreement to pay at a later date. This could be an account with a
supplier, a store credit card or a bank credit card.
 Creditor – a person or business that allows you to purchase a good or
service with an agreement to pay at a later date. A creditor is also anyone
who you owe money to, such as a lender or supplier.
 Credit limit – a dollar amount that you cannot exceed on a credit card or the
maximum lending amount offered for a loan.

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  Credit rating – a ranking applied to a person or business based on their
credit history that represents their ability to repay a debt. Visit ASIC’s
Money Smart website to learn more about credit ratings - external site.
 Credit history – a report detailing an individual's or business's past credit
arrangements. A lender may seek a credit history when assessing a loan
application. Visit ASIC’s Money Smart website to read more about credit
reports - external site.
 Crowdfunding – is a way of financing your business idea through
donations of money from the public. This usually occurs online, through a
crowdfunding website.
 Current asset – an asset in cash or something you can convert into cash
within 12 months.
 Current liability – a liability that is due for payment within 12 months.

 Debit – in double-entry bookkeeping, a debit is an entry made on the left-

hand side of a journal or ledger representing an asset or expense.
 Debt – any amount that you owe including bills, loan repayments and
income tax.
 Debt consolidation – the process of combining several loans or other debts
into one for the purposes of obtaining a lower interest rate or reducing fees.
 Debt finance – money provided by an external lender, such as a bank or
building society.
 Debtor – a person or business that owes you money.
 Debtor’s finance – See Factoring .
 Default – a failure to pay a loan or other debt obligation.
 Depreciation – the process of offsetting an asset over a period of time. You
can depreciate an asset to spread the cost of the asset over its useful life.
 Disbursements – money that a business spends.
 Discount – a reduction applied to a full priced good or service. See
also Mark down .
 Double-entry bookkeeping – is a bookkeeping method that records each
transaction in 2 accounts, both as a debit and a credit.
 Drawings – personal expenses paid for from a business account.
 Drip pricing - external site – is when one price is presented at the
beginning of an online shopping experience. Gradually, incremental fees and
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 charges are added (or 'dripped') as you progress, for example, when buying a
plane ticket. Drip pricing can result in the customer paying a higher price for
a service or product than they first thought. However, you are required to
show fees and charges at the beginning of an online shopping process and
not gradually add them in.

 Employee share schemes - external site – where you give your employees
the opportunity to buy shares in your company. Other terms include an
'employee share purchase plan' or an 'employee equity scheme'.
 Encumbered – an encumbered asset is one that is currently put forward as
security or collateral for a loan.
 Equity – the value of ownership interest in the business, calculated by
deducting liabilities from assets. See also Owner's equity .
 Equity finance – money provided to a business in exchange for part
ownership of the business. This can be money invested by the business
owners, friends, family, or investors like business angels and venture
capitalists.
 Excise duty – an indirect tax levied on certain types of goods produced or
manufactured in Australia including petrol, alcohol, tobacco and coal.

 Facility – an arrangement such as an account offered by a financial

institution to a business (such as a bank account, a short-term loan or
overdraft).
 Factoring (also known as debtor’s finance and accounts receivable finance)
– when a factor company buys a business's outstanding invoices at a
discount. The factor company then chases up the debtors. Factoring is a way
to get quick access to cash, but can be quite expensive compared to
traditional financing options.
 Finance – money used to fund a business or high value purchase.
 Financial year – a 12-month period typically from 1 July to 30 June.
 Financial statement – a summary of a business's financial position for a
given period. Financial statements can include a profit and loss, balance
sheet and cash flow statement.
 Fixed asset – a physical asset used in the running of a business.

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  Fixed cost – a cost that is not part of producing a good or service.
 Fixed interest rate – when the interest rate of a loan remains the same for
the term of the loan or an agreed timeframe.
 Float – when a private company offers shares in the company to the public
for the first time. See Initial public offering .
 Forecast – a list of future financial transactions. Forecasts help to plan a
more accurate budget.
 Fringe benefits – non-monetary benefits, such as company cars and mobile
phones, included as part of a salary package.
 Fully drawn advance – is a long-term loan with the option to fix the
interest rate for a period. These loans are usually secured and can help fund a
new business or equipment.

 Goodwill – an intangible asset that represents the value of a business's

reputation.
 Gross income – the total money earned by a business before you deduct
expenses.
 Gross profit (also known as net sales) – the difference between sales and
the direct cost of making the sales.
 Guarantor – a person who promises to pay a loan in the event the borrower
cannot meet the repayments. The guarantor is legally responsible for the
debt.

 Hire-purchase – a type of contract where you purchase a good through an

initial deposit. You then rent it and pay the balance off in instalments plus
interest charges. When you make the final payment, ownership of the good
transfers to the purchaser. See also Rent to buy .

 Initial public offering (IPO) – when a company first offers shares on the
stock market to sell them to the general public. Also known as floating on

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 the stock market. Visit ASIC’s Money Smart website for more information
about IPOs - external site.
 Insolvent – a business or company is insolvent when they cannot pay their
debts as and when they are due.
 Intangible assets – non-physical assets with no fixed value, such as
goodwill and intellectual property rights.
 Interest – the cost of borrowing money on a loan or earned on an interest-
bearing account.
 Interest rate – a percentage used to calculate the cost of borrowing money
or the amount you will earn. Rates vary from product to product and
generally the higher the risk of the loan, the higher the interest rate. Rates
may be fixed or variable.
 Inventory – a list of goods or materials a business is holding for sale.
 Investment – the purchase of an asset for the purpose of earning money
such as shares or property. Visit ASIC’s Money Smart website for more
about personal investing - external site.
 Invoice – a document to a customer to request payment for a good or service
received.
 Invoice finance – finance based on the strength of a business's accounts
receivable. This form of financing is similar to factoring, except that the
invoices or accounts receivable remain with the business. See
also Factoring .

 Liability – any financial expense or amount owed.

 Line of credit – an agreement allowing a borrower to withdraw money from
an account up to an approved limit.
 Liquidate – to quickly sell all the assets of a company and convert them into
cash.
 Liquidation – the process of winding up an insolvent company. An
appointed administrator will do this by ceasing business operations, selling
assets, and paying creditors and shareholders.
 Liquidity – how quickly you can convert assets into cash.
 Loan – a finance agreement where a business borrows money and pays it
back in instalments (plus interest) within a specified period of time.
 Loan to value ratio (LVR) – your loan amount shown as a percentage of
the market value of the property or asset that you purchase. The ratio helps a

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 lender work out if they can recover the loan amount if the loan goes into
default.

 Margin – the difference between the selling price of a good or service and
the profit. Margin is generally shown as a gross margin percentage which
shows the proportion of profit for each sales dollar.
 Margin call – when the value of a property or asset falls below a certain
loan to value ratio (LVR). For higher risk loans such as margin loans, the
lender will request further payment to bring the LVR back to the agreed
percentage. See also Loan to value ratio (LVR).
 Mark down – a discount applied to a product during a promotion or sale for
the purposes of attracting sales or for shifting surplus or discontinued
products. See also Discount .
 Mark up – the amount added to the cost price of goods, to help determine a
selling price. Essentially it is the difference between the cost of the
good/service and the selling price. It does not take into account what
proportion of the amount is profit.
 Maturity date – when a loan's term ends and all outstanding principal and
interest payments are due.

 Net assets (also known as net worth, owner's equity or shareholder's equity)
– the total assets minus total liabilities.
 Net income – the total money earned by a business after tax and other
deductions.
 Net profit (also known as your bottom line) – the total gross profit minus all
business expenses.
 Net worth – see Net assets.

 Overdraft facility – a finance arrangement where a lender allows a business

to withdraw more than the balance of an account.

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  Overdrawn account – a credit account that has exceeded its credit limit or a
bank account that has had more than the remaining balance withdrawn.
 Overheads – the fixed costs associated with operating a business such as
rent, marketing, utilities and administrative costs. See also Fixed costs .
 Owner's equity – see Net assets .

 Personal property – covers any property someone can own, except for land,
buildings and fixtures. Examples include goods, plant and equipment, cars,
boats, planes, livestock and more.
 Personal Property Security Register (PPSR) – the PPSR - external
site replaces a number of registers of security interests. It provides a single
national noticeboard of security interests in personal property.
 Petty cash – cash for small miscellaneous purchases such as postage.
 Plant and equipment – a group of fixed assets used in the operation of a
business such as furniture, machinery, fit-out, vehicles, computers and tools.
 Principal – the original loan amount borrowed or the remainder of the
original borrowed amount that is still owing (excluding the interest portion).
 Profit – the total revenue a business earns minus the total expenses. See
also Revenue .
 Profit and loss statement (also known as an income statement) – a
financial statement listing sales and expenses. Use it to work out the gross
and net profit of a business.
 Profit margin – see Margin .
 Projection – see Forecast .

 R&D – stands for 'research and development'. Businesses conduct research

and development to innovate, create new products and find better ways of
doing things.
 Receipts – a document given to a customer to confirm payment and to
confirm the sale of a good or service.

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  Record keeping – the process of keeping or recording information that
explains certain business transactions. Record keeping is a requirement
under tax law.
 Refinance – when a new loan helps to pay off an existing one. Reasons to
refinance include: extending the original loan over a longer period of time,
reduce fees or interest rates, switch banks, or move from a fixed to variable
loan.
 Rent to buy – a finance arrangement where you purchase something
through an initial deposit and then 'lease' it while pay it off. After the final
payment, the purchaser has the option (but no obligation) to buy the good or
continue leasing. See also Hire-purchase .
 Repossess – the process of a bank or other lender taking ownership of
property/assets for the purpose of paying off a loan in default.
 Retention of title – a clause in contracts where a buyer may receive
property, but doesn’t take legal ownership until the full price is paid.
 Return on investment (ROI) – a calculation that works out how efficient a
business is at generating profit from the original equity from the
owners/shareholders. It's a way of thinking about the benefit (return) of the
money you invest into the business. To calculate ROI, divide the gain (net
profit) of the investment by the cost of the investment. The ROI then
becomes a percentage or a ratio.
 Return on investment (ROI) formula example – Annie buys $1000 worth
of stocks and sells the stocks a year later for $1500. The net profit is $500.
ROI = (500/1000) = 0.5 x 100 = 50%. Annie's ROI on the stocks is 50%.
 Revenue (also known as turnover) – the amount earned before expenses, tax
and other deductions.

 Single-entry bookkeeping – a bookkeeping method within a cash

accounting system that records one side of each transaction.
 Scam – a deliberate and targeted deception to obtain money or information
unlawfully.
 Security (also known as collateral) – property or assets that a lender can
take ownership of when repayment of a loan does not occur.
 Shareholder's equity – see Net assets .
 SMSF – stands for self-managed superannuation fund - external site. An
SMSF is a way of saving for your retirement. Unlike other super funds, an
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 SMSF is self-managed, which means you're responsible for making sure the
super fund complies with super and tax laws. ASIC's Money Smart also has
useful information on SMSFs - external site.
 Stock – the actual goods or materials a business currently has on hand.
 Stocktaking – a regular process involving a physical count of merchandise
and supplies actually held by a business, to verify stock records and
accounts.
 Superannuation – money set aside for retirement that must go into a
complying superannuation fund. There is useful information on ASIC's
Money Smart website about businesses paying their employees super -
external site.

 Tax invoice – an invoice required for the supply of goods or services over a
certain price. You need a valid tax invoice when claiming GST credits. See
also Invoice .
 Turnover – See Revenue .

 Variable interest rate – when the interest rate of a loan changes with
market conditions for the duration of the loan.
 Variable cost – a cost that changes depending on the number of goods
produced or the demand for the products or service.
 Venture capital – an investment in a start-up business that has excellent
growth prospects. However, it does not have access to capital markets
because it is a private company.

 Working capital – the cash available to a business for day-to-day expenses.

Basic accounting terms, acronyms, abbreviations and concepts to remember

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It seems every industry has its own secret language. And knowing the lingo is an
entry-point into the inner circle—an indicator that you truly belong. So if you’re
starting to think about pursuing a career in accounting, your first step is to
familiarize yourself with some of the basic accounting terms, acronyms and
abbreviations in the field.

Because of the confusing credentials, different accounting myths and these

industry terms, it’s not uncommon for people to think working in accounting is
inaccessible when really it just has its own unique language. Knowing how to “talk
the talk” will allow you to focus less on accounting definitions and more on
the important training you’ll need to launch a successful accounting career.

It's time to roll up those sleeves and start building your accounting vocabulary. To
help you get started, we compiled an assortment of basic financial terms and
acronyms and created this simple accounting glossary for beginners.

Check out these basic accounting definitions and start to commit them to memory.
That way, when you start your accounting education journey, you’ll already feel
like you’re a step ahead and speaking the language.

1. Accounts receivable (AR)

Accounts receivable (AR) definition: The amount of money owed by customers

or clients to a business after goods or services have been delivered and/or used.

2. Accounting (ACCG)

Accounting (ACCG) definition: A systematic way of recording and reporting

financial transactions for a business or organization.

3. Accounts payable (AP)

Accounts payable (AP) definition: The amount of money a company owes

creditors (suppliers, etc.) in return for goods and/or services they have delivered.

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4. Assets (fixed and current) (FA, CA)

Assets (fixed and current) definition: Current assets (CA) are those that will be
converted to cash within one year. Typically, this could be cash, inventory or
accounts receivable. Fixed assets (FA) are long-term and will likely provide
benefits to a company for more than one year, such as a real estate, land or major
machinery.

5. Asset classes

Asset class definition: An asset class is a group of securities that behaves similarly
in the marketplace. The three main asset classes are equities or stocks, fixed
income or bonds, and cash equivalents or money market instruments.

6. Balance sheet (BS)

Balance sheet (BS) definition: A financial report that summarizes a company's

assets (what it owns), liabilities (what it owes) and owner or shareholder equity, at
a given time.

7. Capital (CAP)

Capital (CAP) definition: A financial asset or the value of a financial asset, such
as cash or goods. Working capital is calculated by taking your current assets
subtracted from current liabilities—basically the money or assets an organization
can put to work.

8. Cash flow (CF)

Cash flow (CF) definition: The revenue or expense expected to be generated

through business activities (sales, manufacturing, etc.) over a period of time.

9. Certified public accountant (CPA)

Certified public accountant (CPA) definition: A designation given to an

accountant who has passed a standardized CPA exam and met government-
mandated work experience and educational requirements to become a CPA.

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10. Cost of goods sold (COGS)

Cost of goods sold (COGS) definition: The direct expenses related to producing
the goods sold by a business. The formula for calculating this will depend on what
is being produced, but as an example this may include the cost of the raw materials
(parts) and the amount of employee labor used in production.

11. Credit (CR)

Credit (CR) definition: An accounting entry that may either decrease assets
or increase liabilities and equity on the company's balance sheet, depending on the
transaction. When using the double-entry accounting method there will be two
recorded entries for every transaction: A credit and a debit.

12. Debit (DR)

Debit (DR) definition: An accounting entry where there is either an increase in

assets or a decrease in liabilities on a company's balance sheet.

13. Diversification

Diversification definition: The process of allocating or spreading capital

investments into varied assets to avoid over-exposure to risk.

14. Enrolled agent (EA)

Enrolled agent (EA) definition: A tax professional who represents taxpayers in

matters where they are dealing with the Internal Revenue Service (IRS).

15. Expenses (fixed, variable, accrued, operation)

Expenses (FE, VE, AE, OE) definition: The fixed, variable, accrued or day-to-
day costs that a business may incur through its operations.

 Fixed expenses (FE): payments like rent that will happen in a regularly
scheduled cadence.
 Variable expenses (VE): expenses, like labor costs, that may change in a
given time period.
 Accrued expense (AE):an incurred expense that hasn’t been paid yet.

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  Operation expenses (OE): business expenditures not directly associated
with the production of goods or services—for example, advertising costs,
property taxes or insurance expenditures.
16. Equity and owner's equity (OE)

Equity and owner's equity (OE) definition: In the most general sense, equity is
assets minus liabilities. An owner’s equity is typically explained in terms of the
percentage of stock a person has ownership interest in the company. The owners of
the stock are known as shareholders.

17. Insolvency

Insolvency definition: A state where an individual or organization can no longer

meet financial obligations with lender(s) when their debts come due.

18. Generally accepted accounting principles (GAAP)

Generally accepted accounting principles (GAAP) definition: A set of rules

and guidelines developed by the accounting industry for companies to follow
when reporting financial data. Following these rules is especially critical for all
publicly traded companies.

19. General ledger (GL)

General ledger (GL) definition: A complete record of the financial transactions

over the life of a company.

20. Trial balance

Trial balance definition: A business document in which all ledgers are compiled
into debit and credit columns in order to ensure a company’s bookkeeping system
is mathematically correct.

21. Liabilities (current and long-term)

Liabilities (current and long-term) definition: A company's debts or financial

obligations incurred during business operations. Current liabilities (CL) are those
debts that are payable within a year, such as a debt to suppliers. Long-term
liabilities (LTL) are typically payable over a period of time greater than one year.
An example of a long-term liability would be a multi-year mortgage for office
space.
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22. Limited liability company (LLC)

Limited liability company (LLC) definition: An LLC is a corporate structure

where members cannot be held accountable for the company’s debts or liabilities.
This can shield business owners from losing their entire life savings if, for
example, someone was to sue the company.

23. Net income (NI)

Net income (NI) definition: A company's total earnings, also called net profit. Net
income is calculated by subtracting total expenses from total revenues.

24. Present value (PV)

Present value (PV) definition: The current value of a future sum of money based
on a specific rate of return. Present value helps us understand how receiving $100
now is worth more than receiving $100 a year from now, as money in hand now
has the ability to be invested at a higher rate of return. See an example of the time
value of money here.

25. Profit and loss statement (P&L)

Profit and loss statement (P&L) definition: A financial statement that is used to
summarize a company’s performance and financial position by reviewing
revenues, costs and expenses during a specific period of time, such as quarterly or
annually.

26. Return on investment (ROI)

Return on investment (ROI) definition: A measure used to evaluate the financial

performance relative to the amount of money that was invested. The ROI is
calculated by dividing the net profit by the cost of the investment. The result is
often expressed as a percentage. See an example here.

27. Individual retirement account (IRA, Roth IRA)

Individual retirement account (IRA) definition: IRAs are savings vehicles for
retirement. A traditional IRA allows individuals to direct pre-tax dollars toward
investments that can grow tax-deferred, meaning no capital gains or dividend
income is taxed until it is withdrawn, and, in most cases, it’s tax deductible. Roth

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IRAs are not tax-deductible; however, eligible distributions are tax-free, so as the
money grows, it is not subject to taxes upon withdrawals.

28. 401K & Roth 401K

401k & Roth 401k definition: A 401K is a savings vehicle that allows an
employee to defer some of their compensation into an investment-based retirement
account. The deferred money is usually not subject to tax until it is withdrawn;
however, an employee with a Roth 401K can make contributions after taxes.
Additionally, some employers choose to match the contributions made by their
employees up to a certain percentage.

29. Subchapter S corporation (S-CORP)

Subchapter S corporation (S-CORP) definition: A form of corporation (that

meets specific IRS requirements) and has the benefit of being taxed as a
partnership versus being subject to the “double taxation” of dividends with public
companies.

30. Bonds and coupons (B&C)

Bonds and coupons (B&C) definition: A bond is a form of debt investment and
is considered a fixed income security. An investor, whether an individual,
company, municipality or government, loans money to an entity with the promise
of receiving their money back plus interest. The “coupon” is the annual interest
rate paid on a bond.

Start defining your accounting career

Now that you have a solid foundation of basic accounting terms, you’re ready to
start on your path to entering the field. Learn more about the road ahead in our
article, “Your Step-by-Step Guide on How to Become an Accountant

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