Basic Accounting Terms

Accounting Dictionary

Below are some of the basic accounting terms I see covered in first semester accounting classes. I’ve even seen MBA accounting classes cover the same terms early in the first semester. This partial accounting dictionary contains simplified definitions I use with my students. They are more practical and I like these definitions because they are simple. Use this list as a supplement to your book or professor’s notes to help solidify your understanding of these accounting terms.

Accounts Payable - the amount owed to creditors on account

Accounts Receivable - the amount customers owe on account

Accrued Expense - when an expense is incurred but not yet paid. An accrued expense is a liability (payable)

Accrued Revenues - when a service is performed, and payment hasn’t been received yet. An accrued revenue is an asset (receivable)

Adjusted Trial Balance - the list and balances of general ledger accounts at a given time after adjustments are made

Amortization - a way to allocate the cost of an intangible asset to an expense over the asset’s useful life

Assets - resources owned by a business

Authorized Stock - the number of shares a corporation is permitted to sell

Balance Sheet - Financial Statement reporting Assets, Liabilities, and Stockholders’ Equity at a specific date

Basic Accounting Formula - Assets = Liabilities + Stockholder’s Equity

Chart of Accounts - the list of general ledger accounts used by a company

Compound Entry - a journal entry using more than two accounts

Cost of Goods Sold (COGS) - total cost of merchandise sold in a given period

Credit - right side of an account

Current Assets - assets expected to be used or converted to cash within the longer of one year or the operating cycle

Current Liabilities - liabilities expected to be paid within the longer of one year or the operating cycle

Debit - left side of an account

Depletion - a way to allocate the cost of a natural resource to an expense over the resource’s useful life

Depreciable Cost - plant asset cost less its salvage value

Depreciation - a way to allocate the cost of an asset to an expense over the asset’s useful life

Dividend - corporate distribution to its stockholders

Expenses - cost incurred or money spent by an entity to generate revenue

First In, First Out (FIFO) - inventory valuation method that records the earliest purchased/produced items as sold first

Fraud - intentional deception resulting in personal gain

Fraud Triangle - financial pressure, opportunity, and rationalization

Gross Profit -   Net Sales – Cost of Goods Sold = Gross Profit

Gross Profit Percentage -   Gross Profit ÷ Net Sales = Gross Profit Percentage

Income Statement -  Financial Statement reporting revenues, expenses, and net income (loss) for a specific period of time

Income Summary - temporary account used to close revenue and expense accounts

Last In, First Out (LIFO) - inventory valuation method that records the most recently purchased/produced items as sold first

Liabilities - amounts owed by a business to creditors

Long-Term Liabilities - liabilities expected to be paid after one year or the operating cycle, whichever is longer

Net Income - when revenues exceed expenses

Net Loss - when expenses exceed revenues

Net Sales -   Gross Sales - Sales Returns and Allowances - Sales Discounts = Net Sales

Normal Balance - where an increase to an account is recorded, either Debit or Credit

Outstanding Stock -  issued stock that is held by stockholders

Permanent Accounts - (also called Real Accounts) these are all the balance sheet accounts. Permanent accounts are carried forward to the next accounting period.

Prepaid Expense - future expenses that have been paid in advance. Prepaid expenses are assets.

Revenues - amount earned from customers for services performed or sale of goods

Salvage Value  - an asset’s estimated value at the end of its useful life

Simple Entry - a journal entry using only two accounts

Statement of Cash Flows - Financial Statement reporting cash inflows and outflows for a specific period of time relating to net change in cash from operating, investing, and financing activities

Stockholders’ Equity - amounts owed by a business to its investors

T-Account - a simplified general ledger that lists the account name (top), debits (left), and credits (right)

Temporary Accounts -  (also called Nominal Accounts)  these are all the income statement accounts and the dividends account. Temporary accounts are closed, or zeroed out, at the end of the accounting period.

Treasury Stock - a corporation’s issued stock that has been reacquired from stockholders by the corporation

Trial Balance - the list and balances of general ledger accounts at a given time

Unearned Revenues - a liability account used to record cash received before services are performed

Useful Life - an asset’s estimated productive life

These are just some of the terms you'll want to learn for your accounting class. If you're struggling learning these basic accounting terms or need any other help with your accounting class, you can always reach out to me. In addition to my monthly membership plan here, I'm available for one-on-one tutoring here or check out some of my free videos on YouTube here. I'm here to help you pass your accounting class!