Basic Accounting Terms & Concepts

Accounting Cycle or Period

Defines the length of time covered by a financial statement or operation. Examples of commonly used accounting periods include fiscal years, calendar years, and three-month calendar quarters.

Accounts payable (AP) 

Tracks money owed to creditors. Examples include bank loans, unpaid bills and invoices, debts to suppliers or vendors, and credit card or line of credit debts.

Accounts receivable (AR)

Tracks the money owed to a person or business by its debtors. It is the functional opposite of accounts payable

Accrual accounting

Records revenue and expense related items when they first occur. For example, a customer purchases a $1,000 product on credit. Accrual accounting recognizes that $2,000 in revenue on the date of the purchase. The method contrasts with cash basis accounting, which would record the $1,000 in revenue only after the money is actually received. 

Accruals

Revenues and expenses recognized by a company but not yet recorded in their accounts. By definition, accruals occur before an exchange of money resolves the transaction.

Assets

Items of value, or resources that a business owns or controls. 

Balance sheet

Standard financial statement. It specifies the business' current state regarding its assets, liabilities, and owners' equity. 

Capital

Any asset or resource a business can use to generate revenue. A second definition considers capital the level of owner investment in the business.

Cash Basis Accounting

Records revenues and expenses when the money involved in each transaction officially changes hands.

Cash Flow

The balance of cash that moves into and out of a company during a specified accounting period. Accountants track this on the cash flow statement.

Chart of accounts

List of all accounts in an organization's general ledger. 

Five main types of accounts appear: assets, equity, expenses, liabilities, and revenues.

Cost of Goods Sold (COGS)

The total costs a company incurred in creating a product or providing a service. 

Credits

Accounting entries that increase liabilities or decrease assets.

Debits

Accounting entries that function to increase assets or decrease liabilities.

Depreciation

When fixed assets can decline in value (real estate, equipment, and machinery).

Dividends

Portions of the company's profits voluntarily paid out to investors

Equity

The amount of money that would remain if a business/person sold all its assets and paid off all its debts.

Fixed cost

Cost that stays the same regardless of increases or decreases in a company's output or revenues

Income statement

Specifies the total revenues earned by the company in a given accounting period, minus all expenses incurred during the same period. 

Liability

When an individual or business owes money to another person or organization.

Liquidity

the ease with which an asset can be sold for cash. Assets that can easily be converted into cash are known as liquid assets. 

Net Profit/Income

The amount of money left over after subtracting the cost of taxes and goods sold from the total value of all products or services sold during a given accounting period.

Retained Earnings

The profits that remain after the business has paid all costs in a given accounting period.

Return on investment (ROI)

Describes the level of profit or loss generated by an investment

Revenue

The income a business earns by selling products and/or services associated with its main operations.

T-account

A set of financial records that uses double-entry bookkeeping.

Variable costs

Expenses that can change depending on the volume of goods produced or sold by a company.