The Ultimate Accounting Glossary for Beginners: 100 Essential Terms

Accounts Payable (AP)

Money the business owes to suppliers for goods or services already received but not yet paid for. It appears as a current liability on the balance sheet. Example: the invoice your designer sent last week that’s due in 30 days.

Accounts Receivable (AR)

Money owed to the business by customers for goods or services already delivered. It sits as a current asset until it’s collected. Example: an invoice you issued to a client that they haven’t paid yet.

Accrual Accounting

A method that records revenue when earned and expenses when incurred — regardless of when cash actually changes hands. Required under most accounting standards and considered more accurate than cash accounting for businesses of any scale.

Accrued Expense

An expense that has been incurred but not yet paid or invoiced — recognised on the books to match it to the period in which it occurred. Example: your December electricity bill that arrives in January is accrued into December.

Amortisation

The gradual writing-off of the cost of an intangible asset (like a patent or software licence) across its useful life. The conceptual twin of depreciation, which applies to tangible assets.

Asset

Anything the business owns or controls that has economic value. Cash, inventory, equipment, buildings, and accounts receivable are all assets. Divided into current (usable within a year) and non-current (longer-term).

Audit

An independent examination of a company’s financial records by a qualified third party to confirm they are accurate and comply with applicable standards. External audits are required for most listed companies and many private ones above certain size thresholds.

Balance Sheet

A snapshot of what the business owns, owes, and is worth on a specific date. Follows the equation Assets = Liabilities + Equity. One of the three core financial statements.

Bank Reconciliation

The process of matching the transactions in your accounting records to those on your bank statement, and investigating any differences. Done monthly at minimum, and now largely automated by modern accounting software.

Bookkeeping

The day-to-day recording of financial transactions — entering bills, logging receipts, categorising expenses. The foundation on which all accounting is built.

Budget

A formal plan of expected revenues, expenses, and cash flows over a future period. Used to set targets, allocate resources, and measure performance.

Burn Rate

The rate at which a business is spending cash, usually expressed monthly. Particularly important for early-stage businesses operating before they reach profitability.

Capital Expenditure (CapEx)

Money spent on long-term assets that will benefit the business for more than one year — buildings, vehicles, machinery. CapEx is capitalised on the balance sheet rather than expensed immediately.

Cash Accounting

A simpler accounting method that records revenue and expenses only when cash actually changes hands. Common for very small businesses, but generally not permitted for companies above certain size thresholds.

Cash Flow

The movement of money in and out of the business. Positive cash flow means more is coming in than going out; negative cash flow is the opposite. A business can be profitable on paper and still fail from bad cash flow.

Cash Flow Statement

One of the three core financial statements, tracking cash movements across three categories: operating activities, investing activities, and financing activities.

Chart of Accounts (COA)

The master list of every account a business uses to categorise transactions — revenue accounts, expense accounts, asset accounts, and so on. The backbone of an accounting system; a messy COA creates messy books.

Close (Closing the Books)

The formal process of finalising the accounts for a period — reconciling, adjusting, and locking the numbers so financial statements can be produced. Usually done monthly, quarterly, and annually.

Cost of Goods Sold (COGS)

The direct cost of producing the goods or services a business sold during a period — raw materials, direct labour, manufacturing overhead. Subtracted from revenue to give gross profit.

Credit

An entry on the right side of a double-entry ledger. Increases liabilities, equity, and revenue; decreases assets and expenses. The opposite of a debit.

Current Asset

An asset expected to be converted to cash, sold, or used within one year. Cash, accounts receivable, and inventory are typical examples.

Current Liability

A debt or obligation due within one year. Accounts payable, short-term loans, and accrued expenses are typical examples.

Debit

An entry on the left side of a double-entry ledger. Increases assets and expenses; decreases liabilities, equity, and revenue. Every debit must have an equal and opposite credit.

Deferred Revenue

Money received before the corresponding service or product has been delivered. Sits as a liability until the obligation is fulfilled. Example: an annual software subscription paid upfront in January.

Depreciation

The systematic allocation of the cost of a tangible asset across its useful life. A $10,000 machine with a 10-year life might depreciate at $1,000 per year. Reduces reported profit and the book value of the asset.

Double-Entry Bookkeeping

The universal method of accounting in which every transaction is recorded twice — once as a debit and once as a credit — so the books stay in balance. In use since the 1400s and still the foundation of modern accounting.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortisation. A measure of operating profitability that strips out the effects of financing decisions, tax jurisdictions, and non-cash accounting choices. Widely used but widely criticised when treated as a substitute for cash flow.

Equity

The owners’ stake in the business after all liabilities are subtracted from all assets. Also called shareholders’ equity or net worth. The third term in the fundamental accounting equation.

Expense

A cost incurred in the course of running the business. Rent, salaries, utilities, and professional fees are all expenses. Reduces net income in the period it’s incurred.

Financial Statements

The formal output of the accounting process. Three core statements: the balance sheet, the income statement, and the cash flow statement. Most businesses produce a fourth — the statement of changes in equity.

Fiscal Year

The twelve-month period a business uses for financial reporting. Often matches the calendar year but doesn’t have to — many retailers use a fiscal year ending in late January or early February.

Fixed Asset

A long-term tangible asset used to generate revenue — buildings, machinery, vehicles, equipment. Depreciated over its useful life rather than expensed immediately.

Fixed Cost

A cost that stays the same regardless of production volume — rent, salaries, insurance premiums. Contrasts with variable costs, which scale with activity.

GAAP

Generally Accepted Accounting Principles. The set of rules and conventions used for financial reporting in the United States. Most other countries use IFRS instead.

General Ledger (GL)

The master record of all the business’s financial transactions, organised by account. Every journal entry ultimately posts to the GL, and the financial statements are produced from it.

Goodwill

An intangible asset that arises when one business acquires another for more than the fair value of its identifiable net assets. Represents things like brand, customer relationships, and expected synergies.

Gross Profit

Revenue minus cost of goods sold. The first profit line on the income statement; shows how profitable the core product or service is before any other operating costs.

Gross Margin

Gross profit expressed as a percentage of revenue. A software business might run at 80% gross margin; a grocery store at 25%.

Hedging

The use of financial instruments (often derivatives) to offset an existing business risk — typically currency exposure, interest rate changes, or commodity prices. Accounted for under specific standards called hedge accounting.

Historical Cost

The original purchase price of an asset, used as its value on the balance sheet regardless of what it might be worth today. A conservative accounting convention.

IFRS

International Financial Reporting Standards. The global accounting framework used in most of the world outside the United States, including the EU, UK, Australia, and much of Asia.

Income Statement

Also called the profit and loss statement (P&L). Shows revenue, expenses, and the resulting profit or loss over a period. One of the three core financial statements.

Intangible Asset

An asset without physical form — trademarks, patents, software, goodwill, customer lists. Often amortised over its useful life rather than depreciated.

Inventory

Goods held for sale in the normal course of business, plus raw materials and work-in-progress for manufacturers. A current asset that is often the largest item on a retailer’s balance sheet.

Invoice

A formal document sent to a customer requesting payment for goods or services delivered. Creates an account receivable on the seller’s books and an account payable on the buyer’s.

Journal Entry

The individual record of a single transaction, with equal debits and credits. Journal entries are the raw material of bookkeeping; they post into the general ledger.

Ledger

A book or electronic file containing accounts — historically physical, now almost always digital. The general ledger is the master; subsidiary ledgers hold detail for specific areas like AR and AP.

Liability

A debt or obligation the business owes to someone else. Divided into current (due within one year) and long-term (due beyond one year). The middle term in the accounting equation.

Liquidity

How quickly an asset can be converted into cash without losing value. Cash is the most liquid asset; real estate is among the least. Also used to describe a business’s ability to meet short-term obligations.

Matching Principle

The accrual accounting rule that says expenses should be recorded in the same period as the revenues they helped generate. Drives most of the adjusting entries at month-end.

Materiality

The concept that information matters if it could reasonably influence the decisions of someone reading the financial statements. Something immaterial can be handled simply; something material requires full rigour.

Month-End Close

The monthly routine of finalising transactions, posting adjusting entries, reconciling accounts, and producing financial statements. Historically a multi-week slog; increasingly compressed toward days through automation.

Net Income

The bottom line. Revenue minus all expenses, taxes, and interest. Also called net profit or net earnings. What actually flows to the owners.

Net Margin

Net income as a percentage of revenue. A more conservative profitability measure than gross margin or operating margin; what’s left after everything.

Net Working Capital

Current assets minus current liabilities. Indicates whether a business has enough short-term resources to cover its short-term obligations.

Notes to Financial Statements

Supplementary disclosures that sit alongside the main financial statements and provide detail the numbers alone cannot. Accounting policies, contingent liabilities, segment information, and so on.

Operating Expenses (OpEx)

The ongoing costs of running the business that are not directly tied to producing a specific product — rent, utilities, salaries for administrative staff, marketing. Contrasts with CapEx.

Operating Income

Gross profit minus operating expenses. Shows how profitable the core operations are before interest and tax. Also called operating profit or EBIT.

Overhead

Indirect costs that cannot be traced to a specific product or service. Rent, utilities, insurance, and administrative salaries are typical overhead items.

Payroll

The process of paying employees, including calculating gross pay, deductions, and taxes, and remitting the withheld amounts to tax authorities. A heavily regulated area that is particularly complex across jurisdictions.

Petty Cash

A small amount of physical cash kept on hand for minor expenses. Increasingly rare as businesses move to cards for all small purchases.

Prepaid Expense

An expense paid in advance of when it’s incurred — annual insurance premiums, software subscriptions, rent deposits. Sits as a current asset until it’s expensed over time.

Profit and Loss Statement (P&L)

Another name for the income statement. Shows revenue, expenses, and profit or loss for a period.

Profit Margin

Profit as a percentage of revenue. Can be calculated at the gross, operating, or net level — each tells a different story.

Quick Ratio

A liquidity measure: (cash + receivables) divided by current liabilities. Shows whether a business could pay its short-term bills without selling inventory. Also called the acid-test ratio.

Reconciliation

The process of comparing two sets of records — typically the accounting system and a bank or supplier statement — to confirm they agree, and investigating any discrepancies. The monthly check that keeps the books honest.

Retained Earnings

The cumulative profits the business has kept rather than distributed to owners. Sits in the equity section of the balance sheet and grows (or shrinks) by the net income (or loss) of each period.

Revenue

The money a business earns from its core activities, recognised when the product is delivered or the service is performed. Also called sales or turnover. The top line of the income statement.

Revenue Recognition

The accounting rules that govern when revenue can be booked. Under modern standards (ASC 606 / IFRS 15), revenue is recognised when control of a product or service transfers to the customer.

Sales Tax / VAT

A tax on the sale of goods and services, collected by the seller and remitted to the tax authority. Called sales tax in the US; VAT (value-added tax) in most of Europe; GST in several other jurisdictions.

Shareholders’ Equity

The owners’ residual claim on the assets after all liabilities are paid. The third term in Assets = Liabilities + Equity. Synonymous with equity and net worth.

SOX (Sarbanes-Oxley)

US legislation passed in 2002 that tightened corporate governance and internal control requirements for public companies. Section 404, requiring management to certify internal controls, is the most widely-known provision.

Statement of Retained Earnings

A secondary financial statement showing how retained earnings changed during a period — opening balance, net income, dividends, closing balance.

Tangible Asset

An asset with physical form — buildings, machinery, inventory, vehicles, computers. The opposite of intangible.

Tax Liability

The amount of tax a business owes to a tax authority. Can be current (due in the current year) or deferred (arising from timing differences between accounting and tax rules).

Three-Way Matching

A control procedure for accounts payable that compares the purchase order, the receiving document, and the supplier’s invoice before a payment is approved. Catches many common fraud patterns and invoice errors.

Trial Balance

A list of every account in the general ledger and its balance at a point in time. Used to check that total debits equal total credits before producing financial statements.

Valuation

The process of determining what a business, asset, or security is worth. A specialist discipline that sits between accounting, finance, and judgement.

Variable Cost

A cost that changes with the level of production or activity — raw materials, direct labour, sales commissions. Contrasts with fixed costs.

Working Capital

Current assets minus current liabilities. A measure of short-term financial health; a business with negative working capital may struggle to pay its bills.

Write-Off

The removal of an uncollectable receivable or a worthless asset from the books. Reduces assets and increases expenses in the period of the write-off.

Work-in-Progress (WIP)

Inventory that has been started but not yet finished. Sits between raw materials and finished goods on a manufacturer’s balance sheet.