Do you know what small business owners, work-at-home Moms and Dads, and other entrepreneurs appreciate the most?
An uncomplicated approach to operating a business is what everyone welcomes.
That’s why Camino Financial put together this easily accessible dictionary of accounting terms. You can use it as a quick resource when you’re stumped on the difference between a debit or credit or don’t understand what return on investment means.
This handy dictionary of accounting terms will be your go-to source whether you’re a bookkeeper, the CEO of your small business, or a solopreneur wearing many hats.
Camino Financial’s Simple and Thorough Dictionary of Accounting Terms
This list contains the most-used accounting terms in the industry and ones that every business owner should become familiar with.
This term is central to understanding double-entry bookkeeping. Assets are equal to your business’s liabilities plus owner’s equity.
A listing on the balance sheet of amounts you owe others, which you usually pay within 30 days.
Amounts customers and others owe you. They are listed as an asset on the balance sheet.
Revenues and expenses that are recorded when incurred rather than when cash is actually received. Examples include interest on loans, costs that haven’t been paid, such as taxes and wages, or sales you’ve completed but haven’t invoiced.
Accrual Basis Accounting
Financial transactions are recorded as they happen rather than when cash is received. Example: When you receive goods and don’t pay for them, you enter the amount as an Accounts Payable.
This is one of the most important accounting terms. What your company owns and considered as either fixed or current.
There are current or liquid assets, such as cash, inventory, and accounts receivable.
There are also fixed assets, like real estate, land, and machinery.
The records providing evidence that financial transactions occurred.
These are accounts receivable that are uncollectible (customers failed to pay for your product or service). You can write off these accounts as an expense at the end of your accounting year.
A financial summary of assets, liabilities, and equity representing a company’s net worth.
Setting up a financial plan to control spending and balance cash flow.
The legal structure for a business such as Sole Proprietor, Partnership, Limited Liability Corporation (LLC), S-Corporation, and C-Corporation. Each entity has different legal and tax requirements.
Capital (also known as Working Capital)
The money that’s available to pay bills or make investments.
Cash Basis Accounting
The simplest method to track revenue and expenses. Revenue is recorded when received, and expenses are recorded when paid.
This is one of the accounting terms that you will use the most. Money that moves in and out of a business that can have a negative (more cash out) or positive value (more money in).
Certified Public Accountant
A CPA is licensed and trained to provide accounting services to the public. Business owners consult CPAs regarding strategic investments, tax planning, and financial goals.
Chart of Accounts
A listing of all accounts categorized in the general ledger.
A method to determine how much it costs to run a business compared to a budget to increase profit.
Cost of Goods Sold
Also referred to as COGS, expenses such as raw materials and labor incurred to produce goods.
Generally, an amount posted to liability, revenue, and equity, which reduces an account balance (money coming in).
Generally, an amount posted to assets and expenses which increases an account balance (money going out).
An adjusting entry made to account for vehicles and equipment that age over time. The percentage of the original value of the asset can be used as a tax deduction as long as the company owns it or it fully depreciates.
Distributions of earnings to the owner (s) of a business that can be distributed as cash or stock shares.
For each financial transaction appearing on the general ledger, a corresponding debit and credit are made to appropriate accounts.
Costs you pay to run your business that appear on the income statement.
Financial snapshots of business activities to include a balance sheet, income statement, cash flow statement, and reports of shareholders’ equity.
An accounting year divided into four quarters that cover a 12-month period, which may or may not follow a calendar year.
Fixed Cost (also known as Fixed Expenses)
Costs that don’t change regardless of whether goods or services increase or decrease. Examples include rent and salaries.
Generally Accepted Accounting Principles that accountants use to complete accounting activities.
A company’s financial history recorded as assets, liabilities, revenue, expenses, and equity.
The difference between sales and the total costs to make each product.
Revenue minus the cost of goods sold that indicates how profitable a company is.
In the Black
A company is operating at a profit.
In the Red
A company is operating at a loss.
A financial statement that shows revenue, expenses, and profit (or loss) for a specific period.
Not being able to pay your bills or lenders when debts are due.
Assets that are unsold but available for purchase, which may consist of raw materials, work in progress, and finished goods.
Tracking costs of a specific project compared to realized revenue.
A record of a business transaction recording the date, debit/credit, amount, description, and internal accounting code.
What a company owes to others, which may be short or long-term obligations.
Expenses exceed revenue. A product or service costs more to produce than it sells for.
The income available after deducting all expenses (including taxes, depreciation, and interest) from revenue. This net income represents an amount available to shareholders.
A figure derived by dividing sales revenue by net income. Before making the calculation, you’ve deducted all operating expenses, interest, taxes, and preferred dividends from the total revenue.
This accounting term is similar to net income with one difference. The amount represents the actual profit earned before dividends are distributed to shareholders.
Customers receive a product or service and arrange to pay for it on a later date.
Income after subtracting expenses from revenue without deducting interest and income tax expenditures.
The income that isn’t part of a business’s primary source of income. Examples include interest, income from the sale of assets, and rental income that isn’t tied to operating revenue.
Fixed expenses not related to manufacturing a product or providing a service. Overhead costs do not include labor, materials, and other direct expenses.
The amount an owner has invested in their business from the date it was started. The figure represents assets minus liabilities and appears on a balance sheet.
Payments to employees for salaries, wages, and bonuses. The payroll account may also include accrued unpaid vacation pay or salaries.
A summary of a business’s financial performance outlining revenue, expenses, and costs for quarterly or annual accounting periods.
Balancing your business’s bank statement with your accounting records so that debits equal credits.
An amount available to invest in a business after paying all expenses and distributing dividends to shareholders.
Employees can sign up for individual retirement accounts (IRA, Roth IRA) or 401Ks and have contributions deducted from their payroll checks. By deferring compensation, they can defer taxes until withdrawals are made.
Return on Investment
Referred to as ROI, it measures the benefit of making an investment by dividing the profit received by the amount of the cost (investment).
Total gross income received within an accounting period or year before expenses are subtracted.
Similar to using a checkbook, this system uses one entry versus debit and credit entries.
Consumable materials used to operate a business and not considered as inventory.
A reduction in the purchase price for goods which may be larger or smaller depending on the size of the order.
Debits and credit for each account in the general ledger, which must balance (debit and credit entries must balance).
Closing the books to start the next accounting year. Temporary accounts are closed, adjusting entries made, and permanent accounts carry forward balances to the next fiscal year.
Accounting isn’t hard when you have a dictionary
By having a glossary of accounting terms and implementing accounting principles, you can run your business more efficiently and productively and stay on top of finances.
One of our jobs at Camino Financial is to offer financial products to help you succeed. Because we believe in our motto, “No Business Left Behind,” we provide articles such as this one about accounting terms, as well as a library of other information to help you operate your business.