25 Basic Accounting Terms All Business Owners Should Know

Accounting plays a vital role in running a particular business. It helps one in tracking the expenditure and income. It offers statutory compliance and provides the investors with quantitative financial information that can help in business decision-making.

Keeping the financial records clean is crucial during the tax season. That is the reason why you should know some of the basic accounting terms. This article covers it all.

What are Accounting Terms?

Accounting is a type of documentation that is related to monetary transactions. It includes all types of financial and non-financial communications for both small and large companies. It has various categories such as tax auditing, financial and management accounting, external auditing, etc. Whether you have a small or large business, your enterprise must have an independent accounts department for witnessing hindrance-free business operations. Small business owners often prefer hiring a bookkeeper to look after the accounting requirements.

What is Accounting Terminology?

Accounting terminology refers to the complete description of every accounting-related term. You will be able to understand what is going on in your company's accounting department only when you are well-versed with the accounting terminologies.

If you often end up being perplexed after having a conversation with your accountant, then it is high time that you make yourself familiar with accounting jargon. Learning these basic business accounting terms can go a long way in strengthening your knowledge of accounting. If you are wondering where to learn about different accounting terms, then let us help you. We have compiled a list of the top 25 accounting terms and their definitions, which you must know to run a successful business or company. Have a look:

1. AR or Accounts Receivable: It includes all the revenues which your company has not yet collected. You will find this account on the Balance Sheet as an asset. It will most probably be converted into cash soon.

2. CF or Cash Flow: This terminology describes the outflow and inflow of cash in your company. You will get the Net Cash Flow for a specific period by subtracting total cash outflows from total cash inflows. If the result is positive, it hints that more cash has flowed into the business. If the result is negative, it means that your business cannot cover all the expenses from sales. You will need extra funding from investments to cover up the gap between the two.

3. AP or Accounts Payable: This includes all expenses your business has already incurred, but payment has not been made yet. You will find this account as a liability on the Balance Sheet. It is a debt owed by your company.

4. Accrued Expense: Accrued Expenses are those expenses that your business has incurred in one accounting period. But it will not be paid until the next accounting period.

5. BS or Balance Sheet: This is the financial statement that reports the company's assets, equity, and liabilities at a particular period giving out the detail of expenditure and income over the preceding period.

6. A or Asset: Assets is referred to anything which your company owns and has a monetary value. Assets are enlisted in order of most liquid to least liquid.

7. E or Equity: Equity refers to the left-over value once you remove the liabilities. When you take your assets and subtract Liabilities from them, you will get the Liability. The equity is that portion of your company that comes under the owners and investors.

8. BV or Book Value: When an asset depreciates, it tends to lose its value. You get the original value of an asset from the Book Value, minus Accumulated Depreciation.

9. L or Liability: All the debts of a company come under Liability. The common liabilities include Payroll, Accounts Payable, and Loans.

10. Inventory: This term classifies the assets your company has purchased to sell to the customers that remain unsold. When these items are sold to your customers, your inventory account will get reduced gradually.

11. Dep or Depreciation: It is the loss of value in an asset over a specific period. Mostly an asset requires a substantial value for warranting depreciation. Equipment and automobiles are common assets that get depreciated. It appears on the Income Statement in the form of Non-Cash Expense.

12. Cost or Expense: This is the expenditure which your company has incurred.

13. COGS or Cost of Goods Sold: This term refers to the expenditures directly connected with the creation of a service or product. Those expenses which you require to run your business are not mentioned in COGS. Direct labour, cost of materials, etc., come under COGS.

14. GP or Gross Profit: This term indicates the profitability of a company. It does not consider overhead expenses, though. Gross Profit can be calculated by subtracting COGS from Revenue.

15. Net Margin: It is the percentage amount that reflects your company's Profit in relation to the Revenue. Net Margin can be calculated by dividing Net Income by Revenue for a given period.

16. NI or Net Income: This is the profits which can be calculated by subtracting all the expenses like overhead expenses, depreciation, taxes, etc., from Revenue.

17. Legal or Business Entity: This term refers to the type of legal structure of your business. Some of the most typical company formations are a partnership, sole proprietorship, limited liability corp (LLC), C-corp, and S-corp.

18. CPA or Certified Public Accountant: This is a professional designation which an accountant can acquire. For this, he has to pass the CPA examination and must possess the required educational qualifications and have enough work experience.

19. EA or Enrolled Agent: This is another professional accounting designation assigned to all the professionals who have successfully passed different tests, thereby displaying his expertise in personal and business taxes. EAs help their clients in filing business taxes in compliance with IRS.

20. Diversification: This method is used to reduce the chances of risk. The aim is to allocate the capital to different assets, not to dominate the others.

21. GAAP or Generally Accepted Accounting Principles: Every professional accountant needs to abide by this set of rules. These rules make it easy to go through the financial reports of different businesses and make a valid and effective comparison.

22. Payroll: This account is meant to reflect employee salaries, bonuses, deductions, and wages. It appears on the balance sheet in the form of a liability that your company owes if there are some unpaid wages or accrued vacation pay.

23. Overhead: These expenses are incurred for running your business, such as executive salaries, rent, etc.

24. PV or Present Value: This term refers to the value of an asset today. The term relies on the theory that cash today has a greater value than the cash you will get tomorrow because of inflation.

25. VC or Variable Cost: Variable Costs constantly change with the volume of your sales. The higher your sales, the higher will be the variable cost. For instance, if your company is producing and selling more products, you will need more raw materials to meet the increased demand.

Conclusion

These are some of the basic accounting terminologies that you should know to have a clear and meaningful conversation with your accountant. If you have any more doubt, you can go through the FAQ section as well, where we have tried to cater to some of the common questions that people often ask.

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FAQs

Q. What are the basic accounting terms, and why do we need to know about them?

Ans. There are specific terminologies in Accounts that you need to know if you wish to run your business or company smoothly. These terms are known as basic accounting terms. Make yourself aware of these terminologies, and you will be able to communicate better with your accountant and understand accounting solutions easily.

Q. What are some of the common accounting terms for expenses?

Ans. Some of the common accounting terminologies for expenses are overhead expenses, cost of goods sold, accrued expense, etc.

Q. What is the meaning of allocation in Accounting?

Ans. It means assigning funds to different periods or accounts. For instance, one can allocate a cost over several months. It is also possible to allocate the cost over different departments.