40 Basic Accounting Terms For Small Business

Here are 40 basic accounting terms to warm you up in managing the accounting department of your small business.

1. Accounting Period – An accounting period is the span of time covered by a set of financial statements. This period defines the time range over which business transactions are accumulated into financial statements. For internal financial reporting, an accounting period is generally considered to be one month. A few firms compile financial information in four-week increments so that they have 13 accounting periods per year. Whatever the accounting period is used should be applied consistently over time.
2. Accounts Payable Voucher – a document used by a company\’s accounts payable department to document an invoice received from the supplier and set up the accounts payable.
3. Accounts Payables (A/P) – the amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered. Trade payables or A/P Trade constitute the money a company owes its vendors for inventory-related goods, such as business supplies or materials that are part of the inventory. While A/P Non-Trade constitute the money a company owes for non-inventory-related goods such as payroll, reimbursements, etc.
4. Accounts Receivables – The amount of money owed by customers or clients to business after goods or services have been delivered and/or used.
5. Accrual – The recognition of an expense or revenue that has occurred but has not yet been recorded.
6. Administrative Expense – Administrative expenses are expenses an organization incurs that are not directly tied to a specific function such as manufacturing, production or sales.
7. Asset – An economic resource that is expected to be of benefit in the future. Probable future economic benefits obtained as a result of past transactions or events.  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 real estate, land, or major machinery.
8. Audit -A professional examination of a company’s financial statement by a professional accountant or group to determine that the statement has been presented fairly and prepared using Generally Accepted Accounting Principles (GAAP). An internal audit is the evaluation of a company\’s internal controls, including its corporate governance and accounting processes. These audits ensure compliance with laws and regulations and help to maintain accurate and timely financial reporting and data collection
9. Balance Sheet – A financial report that summarizes a company\’s financial position, assets (what it owns), liabilities (what it owes) and the owner or shareholder equity, at a given time.  
10. Bank Reconciliation – A process by which an accountant determines whether and why there is a difference between the balance shown on the bank statement and the balance of the cash account in the firm’s book balance or record.
11. Bookkeeping – The process of recording financial transactions and keeping financial records.
12. Cash Flow – Net of cash receipts and cash disbursements relating to a particular activity during a specified accounting period.
13. Chart of Accounts -A chart of accounts (COA) is an index of all the financial accounts in the general ledger of a company. In short, it is an organizational tool that provides a digestible breakdown of all the financial transactions that a company conducted during a specific accounting period, broken down into subcategories.
14. Check Voucher – A voucher check is a combination of a check and a voucher, also known as a \”remittance advice\”, which includes pertinent information about the parties to the transaction and thus creates an auditable paper trail about that check\’s payment.
15. Cost Accounting -Procedures used for rationally classifying, recording, and allocating current or predicted costs that relate to a certain product or production process.
16. Cost of Goods Sold – Figure representing the cost of buying raw materials and producing finished goods.
17. Credit (CR) – 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.
18. Debit (DR) – An accounting entry where there is either an increase in assets or a decrease in liabilities on a company\’s balance sheet.
19. Depreciation – Expense allowance made for wear and tear on an asset over its estimated useful life.
20. Disbursement – Payment by cash or check.

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1. EBITDA – Earnings before interest, taxes, depreciation, and amortization, is a measure of a company\’s overall financial performance.
2. Equity – Residual Interest in the Assets of an entity that remains after deducting its liabilities. Also, the amount of a business\’ total assets less total liabilities. Also, the third section of a Balance Sheet, the other two being assets and liabilities.  
3. GAAP or Generally accepted accounting principles – refers to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB).
4. General Ledger – Collection of all asset, liability, owners\’ equity, revenue, and expense accounts. A subsidiary ledger is a record or breakdown of the details to support a general ledger account.
5. Gross Profit – Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company\’s income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales). These figures can be found on a company\’s income statement.
6. Income Statement – Summary of the effect of Revenues and expenses over a period of time.
7. Income Tax – is a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligation.
8. Inventory – Inventory is the term for the goods available for sale and raw materials used to produce goods available for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company\’s shareholders. Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software. The periodic inventory system is a method of inventory valuation for financial reporting purposes in which a physical count of the inventory is performed at specific intervals. This accounting method takes inventory at the beginning of a period, adds new inventory purchases during the period, and deducts ending inventory to derive the cost of goods sold (COGS).
9. Journal Entry / Accounting Entry – A notation in General Ledger to update balances. It records a single transaction.
10. Labor Cost – the sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer. The cost of labor is broken into direct and indirect (overhead) costs. Direct costs include wages for the employees that produce a product, including workers on an assembly line, while indirect costs are associated with support labor, such as employees who maintain factory equipment. 
11. Liability – Debts or Obligations owed by one entity (Debtor) to another entity (Creditor) payable in money, goods, or services.
12. Net Income – also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization. This number appears on a company\’s income statement and is also an indicator of a company\’s profitability.
13. Operating Expenses – An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development. One of the typical responsibilities that management must contend with is determining how to reduce operating expenses without significantly affecting a firm\’s ability to compete with its competitors.
14. Revenue – is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.  
15. Sales Invoice – An invoice is a time-stamped commercial document that itemizes and records a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal and provides information on the available methods of payment. Types of invoices may include a paper receipt, a bill of sale, debit note, sales invoice, or online electronic record.
16. Source Document – an original record that contains the detail that supports or substantiates a transaction that will be (or has been) entered into an accounting system. In the past, source documents were printed on paper. Today, the source documents may be an electronic record.
17. Unearned Revenue – s money received by an individual or company for a service or product that has yet to be provided or delivered. It can be thought of as a \”prepayment\” for goods or services that a person or company is expected to supply to the purchaser at a later date. As a result of this prepayment, the seller has a liability equal to the revenue earned until the good or service is delivered.
18. Value-Added Tax (VAT) – Consumption Tax levied on the value added to a product at each stage of its manufacturing cycle as well as at the time of purchase by the ultimate consumer.
19. Withholding Tax Compensation – the amount of an employee\’s pay withheld by the employer and sent directly to the government as partial payment of income tax.
20. Withholding Tax Expanded – the amount due to supplier withheld by the buyer and sent directly to the government as partial payment of income tax.

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