Basic Accounting Terms with Definitions & Explanations

Term Definition Explanation

Assets include cash, equipment, buildings, or anything valuable that the

Asset Resources owned by a business.
business owns and can use to generate income.

Debts or obligations owed by the These are amounts the business must pay to others, such as loans, accounts
Liability
business. payable, or taxes payable.

It represents the amount that belongs to the owner after liabilities are
Owner’s Equity The owner's claim on the business assets.
subtracted from assets. Also called "capital."

Revenue Income earned from business activities. Revenues come from sales of goods or services. It increases owner’s equity.

Expense Costs incurred to earn revenue. Expenses include salaries, rent, utilities, etc. They decrease owner’s equity.

Accounts Receivable Amounts customers owe to the business. It's an asset representing sales made on credit, to be collected in the future.

Accounts Payable Amounts the business owes to suppliers. A liability representing purchases made on credit.

Capital Money or assets invested by the owner. It increases the owner's equity in the business.

Money or goods withdrawn by the owner

Drawing It reduces the owner’s equity.
for personal use.

It's where all transactions are first recorded chronologically. Also called the
Journal The book of original entry.
General Journal.

Ledger A collection of accounts. Transactions from the journal are posted to individual accounts in the ledger.

Trial Balance A list of all account balances. It checks if total debits equal total credits after posting transactions.
Term Definition Explanation

Debit (Dr) The left side of an account. Debits increase assets and expenses, and decrease liabilities and revenues.

Credits increase liabilities, equity, and revenues; decrease assets and

Credit (Cr) The right side of an account.
expenses.

It summarizes revenues and expenses over a specific period to show net

Income Statement A financial report showing profit or loss.
income or net loss.

A financial report showing financial

Balance Sheet It shows assets, liabilities, and equity at a specific point in time.
position.

Cash Flow It summarizes how cash was earned and spent in operating, investing, and
Report of cash inflows and outflows.
Statement financing activities.

Entries made at the end of an accounting They update accounts for accurate financial reporting (e.g., accrued income,
Adjusting Entries
period. depreciation).

Recording revenues and expenses when It doesn't wait for cash to be received or paid. This gives a more accurate
Accrual Accounting
earned or incurred. financial picture.

Allocation of cost of a long-term asset It reflects the reduction in value of assets like equipment or buildings over
Depreciation
over its useful life. time.

An account that reduces the balance of a Example: Accumulated Depreciation (reduces asset value), Sales Returns
Contra Account
related account. (reduces revenue).

Double-Entry System where every transaction affects at One account is debited, and another is credited — keeping the accounting
Accounting least two accounts. equation balanced.
Term Definition Explanation

Transferring entries from the journal to This organizes data by account, allowing for the preparation of financial
Posting
the ledger. statements.

The recording of daily business It's the foundation of accounting but does not include interpretation or
Bookkeeping
transactions. analysis.

It can be the calendar year (Jan–Dec) or any 12-month period chosen by the
Fiscal Year A 12-month period for financial reporting.
business.

Inventory Goods available for sale. It’s considered an asset until sold, then recorded as Cost of Goods Sold (COGS).

Payment made in advance for a future

Prepaid Expense Example: paying 1 year of rent in advance; recorded as an asset until used.
expense.

Unearned Revenue Cash received before earning the income. A liability until the service or product is delivered (e.g., advance payments).

For example, salaries earned by employees but not yet paid at the end of
Accrued Expense Expense incurred but not yet paid.
the month. It must be recorded with an adjusting entry.

For instance, services already provided but the customer hasn’t paid yet.
Accrued Revenue Revenue earned but not yet received in cash.
Still, it’s recorded as revenue and an asset (Accounts Receivable).

Gradual reduction of intangible asset value Similar to depreciation, but used for intangible assets like patents,
Amortization
over time. trademarks, or goodwill.

These are customer debts that the business decides will never be paid and
Bad Debts Uncollectible accounts receivable.
must be written off as an expense.
 It’s calculated as Cost – Accumulated Depreciation. It shows the asset’s
Book Value The net value of an asset.
value in the books.

Cash Basis Recording income and expenses only when Easier method, often used by small businesses. Opposite of accrual basis
Accounting cash is exchanged. accounting.

A complete listing of all accounts used by a It helps organize financial information and is the foundation for the
Chart of Accounts
business. accounting system.

Journal entries made to close temporary Revenues and expenses are closed to the capital or income summary
Closing Entries
accounts. account at the end of the period.

Cost of Goods Sold Direct costs of producing or purchasing the Includes cost of raw materials, labor, and manufacturing costs. Subtracted
(COGS) goods sold. from sales to compute gross profit.

A document used to record a reduction in

Credit Memo Commonly issued for returns or customer overpayments.
revenue or accounts receivable.

Asset expected to be used or converted into

Current Asset Examples: cash, accounts receivable, inventory, prepaid expenses.
cash within one year.

Current Liability Debt or obligation due within one year. Examples: accounts payable, salaries payable, short-term loans.

Revenue or expense recorded later than

Deferral Examples include prepaid rent (expense deferred) or unearned revenue.
when cash is received or paid.

In corporations, profits may be returned to shareholders instead of being

Dividends Distribution of profits to shareholders.
retained in the business.

General Ledger A complete record of all financial transactions It’s where all posted journal entries are stored, allowing trial balance and
 for each account. financial statements to be created.

Also called Gross Margin. It shows how much profit remains after covering
Gross Profit Revenue minus the cost of goods sold.
the direct cost of production.

Examples include trademarks, copyrights, patents, and goodwill. These are

Intangible Asset A non-physical asset with value.
amortized, not depreciated.

A recorded transaction in the accounting It includes a date, description, debit, and credit accounts for every
Journal Entry
journal. transaction.

A business's ability to meet short-term High liquidity means the business has enough cash or assets easily
Liquidity
obligations. converted to cash.

Asset used in operations for more than one Examples: land, buildings, vehicles, machinery. These are depreciated over
Long-term Asset
year. time.

Long-term Liability Obligation not due within one year. Examples: bonds payable, mortgage payable, long-term loans.

An accounting principle that considers the

Materiality Information is material if its omission or error could influence decisions.
significance of financial information.

Notes Payable A formal written promise to pay a debt. It usually includes interest and due dates.

A written promise from a customer to pay a

Notes Receivable It’s an asset and includes interest, often resulting from a formal agreement.
specified amount.

Comparing two sets of records to ensure they Often used in bank reconciliation to match company records with the bank
Reconciliation
agree. statement.

Retained Earnings The accumulated net income not distributed Part of owner’s equity in corporations.
 as dividends.

An optional entry that cancels a previous

Reversing Entry Used at the beginning of a new period to simplify bookkeeping.
adjusting entry.

A detailed ledger for individual accounts

Subsidiary Ledger Example: the Accounts Receivable ledger shows each customer’s balance.
under a control account.

A simplified visual of an account shaped like Used for teaching or analysis — the left side is Debit, and the right side is
T-account
the letter T. Credit.

A list of all ledger accounts and their Used to check whether total debits equal total credits. Not a formal
Trial Balance
balances. statement.

Working Capital Current Assets – Current Liabilities. Indicates a company’s short-term financial health and liquidity.

Term Definition Explanation

Specific time period covered by financial It could be monthly, quarterly, or annually (e.g., January 1 to
Accounting Period
statements. December 31).

Allowance for Doubtful Estimated uncollectible amounts from It's a contra asset account used with Accounts Receivable to
Accounts customers. reflect bad debts.

The process of reviewing financial records for Auditors (internal or external) ensure compliance with standards
Auditing
accuracy. and fairness of reports.

Comparing financial data against industry

Benchmarking Used in performance analysis or strategic planning.
standards.
Term Definition Explanation

Sales exactly cover costs; no gain, no loss. Helpful in planning and

Break-even Point The level of sales where profit is zero.
decision-making.

Budgeting Planning future income and expenses. Budgets help control spending and guide business decisions.

Capital Expenditure Money spent to acquire or improve long-term Examples: purchasing new equipment or buildings. These are not
(CapEx) assets. expensed immediately.

Recording a cost as an asset instead of an It applies to expenditures that will benefit multiple accounting
Capitalization
expense. periods.

Carrying Amount Book value of an asset after depreciation. Also called Net Book Value.

A potential liability depending on a future Example: a pending lawsuit. Not always recorded but may be
Contingent Liability
event. disclosed in notes.

A bond that can be converted into company

Convertible Bond A hybrid of debt and equity.
shares.

Accounting focused on calculating production

Cost Accounting Often used in manufacturing to control and reduce costs.
costs.

A cost paid in advance and recorded as an

Deferred Expense Examples include prepaid insurance or rent. Expensed over time.
asset.

Deferred Revenue Money received before services are provided. A liability until the income is "earned" over time.

Dividends declared but not yet paid to

Dividends Payable A current liability until distributed.
shareholders.
Term Definition Explanation

A cost that does not change with the level of

Fixed Cost Example: monthly rent.
activity.

Freight In Cost of transporting goods purchased. Added to inventory cost in merchandising businesses.

The basic journal used to record all types of

General Journal Used when no specialized journal is available.
transactions.

A permanent reduction in the value of an Happens when the market value falls below the book value, and
Impairment
asset. recovery is not expected.

A cost not directly linked to a product or

Indirect Cost Examples: electricity, rent, administrative salaries.
service.

Loss of inventory due to theft, damage, or

Inventory Shrinkage The difference between recorded and actual inventory.
error.

Measures a company’s ability to pay short-

Liquidity Ratio Common ones are Current Ratio and Quick Ratio.
term debts.

Short-term investments easily converted to

Marketable Securities A type of current asset.
cash.

Ongoing business expenses not directly tied to

Overhead Examples: rent, utilities, insurance.
production.

The face value of a bond or stock as stated on

Par Value Usually a nominal amount for common stock.
its certificate.
Term Definition Explanation

Reconciliation Statement A document that explains discrepancies. Often used to match accounting records with bank statements.

Assigning costs to the department or manager

Responsibility Accounting Helps track performance and accountability.
responsible.

Using expected costs for budgeting and

Standard Costing Differences from actual costs are analyzed as variances.
performance analysis.

The difference between expected and actual

Variance Can be favorable or unfavorable.
figures.

Removing an uncollectible account or

Write-Off Often used for bad debts or obsolete inventory.
worthless asset.

Internal documents used in preparing financial Includes schedules, reconciliations, and analysis not shown to
Working Paper
statements. outsiders.