A Comprehensive Glossary Of The Most Common Accounting Terms

The number of students enrolling in accounting programs has grown by more than 100,000 since the year 2000, according to the Association of International Certified Professional Accountants. While a majority of these are bachelor-level students, the number of master’s accounting students has actually more than doubled (16,770 to 35,620). Students going after their PhDs in accounting have increased slightly over this timeframe as well, rising from 800 in 2000 to 946 in 2016.

The good news for these higher-level students is that the Bureau of Labor Statistics reports that the U.S. is going to need more professionals working in the accounting field in the years ahead. Specifically, whereas the average growth rate across all jobs in the U.S. is 7 percent, jobs in the accounting field are growing at a 10 percent rate, with an additional 139,900 positions expected to be added by the year 2026.

If you’re interested in becoming an accountant, it’s important to become familiar with the terms and phrases that are rather commonplace in this industry. Here are many of them, listed in alphabetical order.

401k: A 401k is an employer-sponsored retirement savings plan in which taxes are not paid when the money is put in, but rather when withdrawals are made on the account. Some employers also offer Roth 401ks, enabling the money placed in it to grow tax-free.

Accounting cycle: The accounting cycle is “a methodical set of rules to ensure the accuracy and conformity of financial statements,” according to Investopedia. Additionally, it’s recorded by journal entries placed within a general ledger account.

Accounts payable : This refers to money that a company owes to its creditors.

Accounts receivable : This is the money due and owed to a business by its customers.

Accrued expenses : This is any expense that has been incurred but not yet paid.

Assets: Assets are anything a person or business owns that can be converted into cash.

Asset classes: This term refers to a set of securities that tend to react similarly. The three most notable asset classes are stocks, bonds, and money market accounts.

Balance sheet: This is a summary report that outlines a company’s assets, liabilities, and shareholder equities.

Bonds and coupons: The ‘bond’ in this phrase refers to monies lent to an entity and the ‘coupon’ is the interest paid annually on that bond.

Capital: Capital is a blanket term for all of an individual or company’s assets that have financial value.

Cash flow: The money that goes into and out of a business over a specified amount of time is its cash flow.

Cost of goods sold: “The direct costs attributable to the production of the goods sold in a company,” according to Investopedia. These costs include raw materials and employee labor and exclude distribution and sales costs, which are more indirect expenses.

Credit: Any accounting entry that decreases company assets or increases company liabilities is considered a credit.

Creditors: These are the individuals and entities a person or company owes money to.

Current assets: Assets that fall under this category are those typically liquidated within a one-year timeframe. Accounts receivable, inventory, and cash would all be considered current assets for a business.

Current liabilities: Just as current assets are assets that are typically liquidated within a year, current liabilities are liabilities that are generally paid within a year. For example, supplier debts fall into this category.

Debit: This type of accounting entry either increases a company’s assets or decreases its liabilities.

Diversification: Diversification involves spreading capital over a variety of investments, thereby reducing a person’s or company’s risk. Essentially, this method of investing follows the adage of “not keeping all your eggs in one basket.” This way, if one of the investments declines in value, it doesn’t take your entire portfolio down with it.

Enrolled agent: Enrolled agents are “federally-licensed tax practitioners who represent taxpayers before the IRS [Internal Revenue Service] when it comes to collections, audits and appeals,” according to the National Association of Enrolled Agents (NAEA). In addition to representing individuals, EAs can also represent partnerships, corporations, trusts, and estates—basically any entity that is required to file taxes. Additionally, they’re bound by the NAEA’s Code of Ethics and Rules of Professional Conduct of the Association.

Equity: This term is used to denote ownership in a business.

Expenses: Expenses are all of the costs of living and/or doing business, and can generally be divided into four different categories: fixed, variable, accrued, and operational.

Fixed assets: These are assets are held by a company or individual for a long-term period (more than a year). These assets include those related to property, buildings and residences, and major business equipment.

Fixed expenses: Fixed expenses occur regularly and are the same amount from one billing cycle to the next, such as a mortgage payment. If your phone bill or internet charge is the same from month to month, that is a fixed expense, too.

General ledger: A company’s complete financial transaction history, from inception to present day, is known as its general ledger.

Generally accepted accounting principles: Created by the accounting industry, these are the rules and guidelines recommended for businesses (especially publicly traded companies) when reporting all of their financial data.

Income statement: This financial statement shows a company’s revenues minus expenses for a specific period of time.

Insolvency: Technically, insolvency refers to “the situation where the liabilities of a person or firm exceed its assets,” according to Business Dictionary. However, in every-day terms, if a company or individual is insolvent, it means that there is not enough cash to pay all of the debts or meet current monetary obligations.

Individual retirement account (IRA): This type of retirement account is one where people can put aside a portion of their income with the goal of saving it and letting it grow until they’re ready to retire. There are two types of IRAs: traditional and Roth. Traditional IRAs are funded with pre-tax dollars, with taxes taken out when the monies are withdrawn. Roth IRAs, on the other hand, grow tax-free, with no taxes taken out when the money is removed.

Liabilities: Any debt that is owed or any financial obligation that has yet to be paid is considered a liability.

Liquidity ratios: These ratios show how liquid an organization is (whether it can pay all of its bills on time) and they include current ratio, quick ratio, quick assets, and net working capital ratio.

Long-term liabilities: Any liability with a repayment period in excess of one year is known as a long-term liability. Examples of this include a car payment and a multi-year lease on a building or residence.

Net income: This is the amount of money a person makes after taxes and other mandatory deductions. While net income typically appears on an individual’s paycheck stubs, if you look at your tax forms you’ll notice that there is no dedicated line for this, as noted by Investopedia.

Net loss: The amount of money lost by a person or business during a specified period of time is net loss.

Net profit: The amount of money a business has made once expenses have been deducted from revenues is net profit.

Operational expenses: Expenses in this category include any business costs that are not directly associated with product manufacturing. These can include advertising and insurance.

Owner’s equity: The amount of equity, or ownership, someone has in a company is owner’s equity.

Present value: Sometimes called the “discounted value,” present value is “the current value of a future sum of money or stream of cash flows given a specified rate of return,” according to Investopedia. In other words, if someone gave you $1,000 today, the money’s present value is worth more than if that same person gave you $1,000 years from now, because receiving it at a later date keeps you from investing it and increasing its return.

Profit and loss statement (P&L): This is a financial statement that provides a summary of a business’s performance by tallying up its revenues and expenses over a specified timeframe, deducting one from the other to determine whether the company is profitable or losing money.

Profitability ratios: These are ratios used by businesses to show their returns on investments (ROI), and they include profit margin, return on assets, and return on equity.

Return on investment (ROI): This unit of measurement is used to identify how much money was gained on a particular venture based on the original investment. For instance, if a company spent $100 on a marketing campaign and had a net profit of $1,000, the ROI would be $900 (the difference between the two). Sometimes, this number is expressed in percentage form.

Shareholders: Individuals who own shares of stock in a company are known as its shareholders.

Statement of retained earnings: This financial statement is the earnings retained by a company minus the dividends paid from those earnings to the company’s shareholders.

Trial balance: A trial balance is a business document that separates all of a company’s ledgers into either debits or credits, making it possible to verify that its bookkeeping system is accurate.

Variable expense: A variable expense is an expense with an amount that changes from one billing cycle to the next. Personal examples include electric, gas, and water bills. A common variable expense in business is labor costs.

Working capital: This number indicates the amount of money a company has to work with, and it’s calculated by subtracting current liabilities from current assets.

While there is more technical and specific language in the field, the above are some of the most common terms used in accounting today.