Essential Accounting Terms and Definitions
Accounting
The recording, measurement, and interpretation of financial information.
Accounting Cycle
The four-step procedure of an accounting system:
- Examining source documents
- Recording transactions in an accounting journal
- Posting recorded transactions
- Preparing financial statements
Accounting Equation
Assets equal liabilities plus owners’ equity.
Accounts Payable
The amount a company owes to suppliers for goods and services purchased with credit.
Accounts Receivable
Money owed a company by its clients or customers who have promised to pay for the products at a later date.
Accrued Expenses
All unpaid financial obligations incurred by an organization.
Annual Report
Summary of a firm’s financial information, products, and growth plans for owners and potential investors.
Assets
A firm’s economic resources or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things.
Balance Sheet
A “snapshot” of an organization’s financial position at a given moment.
Budget
An internal financial plan that forecasts expenses and income over a set period of time.
Cash Flow
The movement of money through an organization over a daily, weekly, monthly, or yearly basis.
Certified Management Accountants (CMA)
Private accountants who, after rigorous examination, are certified by the Institute of Management Accountants and who have some managerial responsibility.
Certified Public Accountant (CPA)
An individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to the complex audits of corporate financial records.
Cost of Goods Sold
The amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies.
Current Assets
Assets that are used or converted into cash within the course of a calendar year; also called short-term assets.
Current Liabilities
A firm’s financial obligations to short-term creditors, which must be repaid within 1 year.
Current Ratio
Current assets divided by current liabilities.
Depreciation
The process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used.
Double-Entry Bookkeeping
A system of recording and classifying business transactions that maintains the balance of the accounting equation.
Earnings per Share
Net income or profit divided by the number of stock shares outstanding.
Expenses
The costs incurred in the day-to-day operations of an organization.
Gross Income
Revenues minus the cost of goods sold required to generate the revenues.
Income Statement
A financial report that shows an organization’s profitability over a period of time—month, quarter, or year.
Journal
A time-ordered list of account transactions.
Ledger
A book or computer file with separate sections for each account.
Liabilities
Debts that a firm owes to others.
Managerial Accounting
The internal use of accounting statements by managers in planning and directing the organization’s activities.
Net Income
The total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings.
Owners’ Equity
Equals assets minus liabilities and reflects historical value.
Private Accountants
Accountants employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements.
Profit
The difference between what it costs to make and sell a product and what a customer pays for it.
Profit Margin
Net income divided by sales.
Profitability Ratios
Ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners’ equity, and sales.
Quick Ratio (Acid Test)
A stringent measure of liquidity that eliminates inventory.
Ratio Analysis
Calculations that measure an organization’s financial health.
Receivables Turnover
Sales divided by accounts receivable.
Return on Assets
Net income divided by assets.
Return on Equity
Net income divided by owners’ equity; also called return on investment (ROI).
Revenue
The total amount of money received from the sale of goods or services, as well as from related business activities.
Statement of Cash Flows
Explains how the company’s cash changed from the beginning of the accounting period to the end.
Times Interest Earned Ratio
Operating income divided by interest expense.
Total Asset Turnover
Sales divided by total assets.