Accounting Glossary

Variable costs are expenses that change in proportion to the activity of a business. They are typically linked to the production level, such as raw materials and labor costs.

ROI measures the gain or loss generated on an investment relative to the amount of money invested. It is a key metric for evaluating the efficiency of an investment.

Retained earnings refer to the portion of net income that is retained by the company rather than distributed to its shareholders as dividends. It’s an important source of capital for growth.

Present value is the current value of a future sum of money or stream of cash flows, given a specified rate of return. This concept is used in finance to compare the value of money now with the value of money in the future.

Overhead refers to ongoing business expenses not directly attributed to creating a product or service but necessary for the business’s operation, like utilities, marketing, and administrative expenses.

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. It’s calculated as sales revenue minus the cost of goods sold (COGS).

Fixed costs are business expenses that remain constant regardless of the level of production or sales. They include expenses like rent, salaries, and insurance.

An asset is anything of value or a resource of value that can be converted into cash. Assets are owned by a company and can be classified as either current (short-term) or non-current (long-term).

Profit margin is a financial metric used to assess a company’s financial health by revealing the percentage of revenue that exceeds the costs of production (i.e., the profit made on each dollar of sales).

Accounts reconciliation is the process of ensuring that two sets of records (usually the balances of two accounts) are in agreement. It’s a critical process for accurate financial reporting.

Revenue is the total amount of money generated by the sale of goods or services related to a company’s primary operations.

Operating expenses are the costs associated with running a business on a day-to-day basis, like rent, utilities, and payroll.

CapEx refers to funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment.

A ledger is a detailed record where bookkeeping entries are recorded by account. The ledger shows how each transaction affects individual accounts and is a key component of a company’s accounting system.

The general journal is the first place where financial transactions are recorded, using the double-entry bookkeeping system. Each transaction includes a date, explanation, and accounts affected.

A debit is an accounting entry that results in either an increase in assets or a decrease in liabilities on a company’s balance sheet. It’s the opposite of a credit.

In accounting, a credit is an entry that decreases an asset or expense account, or increases a liability or equity account. It’s the opposite of a debit.

Bookkeeping is the practice of recording and tracking the financial transactions of a business. It’s the basis of the company’s accounting system and includes maintaining ledgers, journals, and financial statements.

Amortization is the process of spreading the cost of an intangible asset over its useful life. It’s similar to depreciation but is used for assets like patents and software.

Working capital is crucial for day-to-day operations, as it’s used to pay for ongoing operating expenses and short-term liabilities. Effective working capital management ensures operational efficiency and financial stability.

Variance analysis is used in budgeting to measure the difference between actual and planned behavior. It helps businesses understand why financial performance deviated from expectations, allowing for better future planning.

The trial balance is used to ensure that debits equal credits after the recording of journal entries. It’s a preliminary step to preparing financial statements and helps in identifying any errors in the bookkeeping process.

Payroll refers to the process by which employers pay an employee for the work they have completed. It involves calculating wages, withholding taxes and other deductions, and issuing payment.

Net income is the final line on the income statement, showing what the business has earned after all expenses have been subtracted from revenues. It reflects the company’s profitability and is a key indicator of its financial health.

Liabilities represent what a company owes to others—debts and obligations that arise during the course of business operations. Effective liability management is crucial for maintaining a company’s liquidity and solvency.

Journal entries are the building blocks of financial accounting and record all transactions. Each entry affects at least two accounts in a double-entry bookkeeping system, ensuring the books are always balanced.

Inventory management involves overseeing the flow of items from manufacturer to warehouse and from these facilities to point of sale. Effective inventory management helps maintain the right balance of stock in a warehouse to ensure high customer order fill rates and good product availability.

Fixed assets are long-term tangible assets intended for use in the business rather than for resale. These assets play a key role in the production of income and are not easily converted into cash. Management of fixed assets includes the consideration of depreciation, maintenance, and disposal.

COGS is a critical component in calculating gross profit, which is then used to determine net profit. It includes direct costs like raw materials, labor involved in production, and overhead costs directly tied to the production process.

This method involves recording revenues when cash is received and expenses when they are paid. While simpler than accrual accounting, it might not accurately reflect the financial health of a business that engages in credit transactions.

In accrual accounting, revenues, and expenses are recorded when they are earned or incurred rather than when cash is exchanged. This method provides a more accurate representation of a company’s financial position and performance, as it includes receivables and payables.

Equity is the residual interest in the assets of the business after deducting liabilities. In a broader sense, it represents the ‘net worth’ of a business. Equity can increase through additional owner investments and profits and decrease through losses and owner withdrawals.

Liquidity refers to the ability of a company to meet its short-term obligations using its most liquid assets. High liquidity ensures that a company can promptly pay off its debts without incurring losses from selling long-term assets. It’s essential for maintaining good credit, ensuring operational stability, and preparing for unexpected expenses.

The income statement shows the company’s revenues, costs, and expenses during a specific period. This statement is vital for assessing the company’s operational efficiency and profitability. It helps in understanding which areas of the business are over or under-performing.

The general ledger is the foundation of a company’s accounting system. All transactions are recorded in the ledger as debits and credits. It’s used to create financial statements and is crucial for ensuring accurate financial reporting, compliance, and analysis.

Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. It’s used to account for declines in the value of fixed assets over time due to use and wear and tear. Depreciation helps businesses generate revenue from an asset while expensing a portion of its cost each year it is in use.

The chart of accounts is an organized list of all accounts in the general ledger, each with a unique identifier. It categorizes all transactions of a business into subcategories and helps in keeping the financial records organized and consistent.

Cash flow is the net amount of cash being transferred into and out of a business. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, and provide a buffer against future financial challenges.

The balance sheet provides a detailed snapshot of a company’s financial condition at a specific point in time. It includes assets (what the company owns), liabilities (what it owes), and shareholders’ equity (the owner’s investment in the business). This statement is vital for stakeholders to assess the company’s financial health and for making strategic decisions.

An audit is an official inspection of an organization’s accounts, typically by an independent body. It ensures the accuracy and compliance of financial records and statements according to accounting standards and legal requirements.

Accruals in accounting refer to expenses and revenues that have been incurred or earned but have not yet been recorded through a transaction. This concept is part of accrual accounting, which records financial activities when they occur rather than when cash is exchanged.

Accounts Payable are short-term liabilities representing money a business owes to suppliers or creditors for purchases or services rendered. Proper management of accounts payable involves timely payments to avoid late fees and maintaining good relationships with suppliers, which can lead to better credit terms and pricing.

Accounts Receivable represent the credit sales of a business that have not yet been collected from customers. This is a critical part of managing cash flow, as it involves the timing of revenue recognition and cash collection. Efficient management of accounts receivable ensures a steady flow of cash into the business, which is necessary for covering expenses and investing in growth opportunities.