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Twenty-One Common Accounting Terms

If you’re new to accounting one of the first things you need to do is learn some basic accounting vocabulary. We’ve put together this list of twenty-one common accounting terms for that very purpose. Whether you’re a new business owner, student, or just interested in business, this list should get you going. So, strap yourself in and check out our list of common bookkeeping terminology.

Accounts Receivable (AR): invoices that a company has already sent that have yet to be paid. AR is considered an asset on a company’s balance sheet.

Accounts Payable (AP): bills to a company which have yet to be paid. AP is considered a liability on a company’s balance sheet.

Accrual Accounting: an accounting method where revenues and expenses are recognized when sales or services occur rather than when cash exchanges hands. Accrual accounting is required to fully comply with the rules of G.A.A.P. and is used by most large companies.

Asset: something that has current or future value that a company owns. Common examples include vehicles, machinery, patents, land, equipment, or computers. Assets are found on a company’s balance sheet.

Balance Sheet: one of the primary financial statements, the balance sheet shows the balances in a company’s asset, liability, and equity accounts at a particular moment in time. It always satisfies the fundamental accounting equation which states that assets equal liabilities plus equity. (Click here to learn even more about balance sheets.)

Capitalization: the recording an asset on the balance sheet rather than expensing it. Capitalized assets are expensed through time through depreciation.

Cash Accounting: an accounting method where revenues and expenses are recognized when cash exchanges hands, rather than when billing occurs. Many small businesses use cash accounting.

Two pages in a dictionary, symbolic of our list of common accounting terms.
Don’t go searching through a dictionary to learn what accounting terms mean. Use are handy dandy guide to twenty-one common accounting terms!

Contra Account: a balance sheet account used to offset the amount in another account which it is paired with, resulting in a net value. An example is depreciation, which paired with an asset’s original value the current net value of the asset on the books.

Credit: an accounting entry that increases the value of a liability or equity account or decreases the value of an asset account. The amounts of credits in any entry must be matched by an equal amount of debits.

Current Assets: either cash or assets which are expected to be used up or converted to cash within the next twelve months or next operating cycle. Common examples include accounts receivable, inventory, and prepaid expenses. Current assets are found on a company’s balance sheet.

Current Liabilities: liabilities which are expected to be repaid over the next twelve months or next operating cycle. Common examples include accounts payable, short term debt, and accrued expenses. Current liabilities are found on a company’s balance sheet.

Debit: an accounting entry that increases the value of an account or decreases the value of a liability of equity account. The amount of debits in any entry must be matched by an equal number of credits.

Depreciation: the process by which assets on the balance sheet lose value and are expensed over time. The amount of the total depreciation is deducted from the asset value to calculate the current value on the balance sheet. There are several ways to calculate depreciation. Common methods include straight line, declining balance, and double declining balance.

Equity: the value of ownership of a company, calculated by deducting the value of a company’s liabilities from the value of its assets. Equity can be found on a company’s balance sheet.

Fixed Assets: an asset whose useful life is longer than twelve months or an operating cycle. Common examples include Property, Plant, & Equipment (PP&E), land, vehicles, and machinery.

Generally Accepted Accounting Principles (GAAP): a set of standards established by the Financial Standards Accounting Board describing how to engage in GAAP conforming accounting. GAAP is often used in audits and is required for publicly traded companies in the United States.

Income Statement: one of the primary financial statements, the income statement, (also known as the profit and loss statement), displays a company’s sources of income and expenditures through a period of time and its net profit after accounting for both.

Liability: obligations that a company owes to other companies or an individual. Common examples include loans, accounts payable, and unpaid interest. Liabilities are found on a company’s balance sheet.

Long Term Liabilities: liabilities not expected to be repaid over the next twelve months or operating cycle. Common examples include long term loans, mortgages, and bonds payable. Long term liabilities are found on a company’s balance sheet.

Statement of Cash Flows: one of the primary financial statements, the statement of cash flows displays the sources of cash in and out of a company through a period of time. The cash flows are broken down into operating, investing, and financing activities, and can be displayed user either the direct of indirect method.

Statement of Changes in Equity: a financial statement which breaks down the changes in a company’s equity account over a period of time. Examples of sources of changes in equity income net income, dividends, and proceeds from the sale of stock.

There you have it. Twenty-one common accounting terms defined. We hope this list has been informative for you and helps a bit in your business journey. Who are we? We’re My SD Bookkeeper – San Diego’s best bookkeeping and business consulting firm. We provide bookkeeping services to great companies all over the San Diego in industries ranging from eCommerce to real estate. If you need help with your bookkeeping, give us a call today and let’s chat!

Want to learn more about bookkeeping and business? Check out our great blog made with the San Diego businessperson in mind. Recent posts include a list of 5 ways outside bookkeepers can help San Diego businesses and an introduction to bank reconciliations.

Want to learn even more great accounting vocabulary? Try the NYS Society of CPA’s website for an extensive list.

Go Padres!

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