Basic Accounting Definitions

1. Accounts Receivable – AR

Definition: The amount of money owed by your customers after goods or services have been delivered and/or used. See how it works here.

2. Accounting – ACCG

Definition: A systematic way of recording and reporting financial transactions.

3. Accounts Payable – AP

Definition: The amount of money you owe creditors (suppliers, etc.) in return for good and/or services they have delivered. See how it works here.

4. Assets (Fixed and Current) – FA and CA

Definition: Current assets are those that will be used within one year. Typically this could be cash, inventory or accounts receivable. Fixed assets (non current) are more long-term and will likely provide benefits to a company for more than one year, such as a building, land or machinery.

5. Balance Sheet – BS

Definition: A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner’s equity at a given time.

6. Capital – CAP

Definition: A financial asset and its value, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities.

7. Cash Flow – CF

Definition: The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time. Having a positive cash flow is essential in order for businesses to survive in the long run.

8. Certified Public Accountant – CPA

Definition: A designation given to someone who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

9. Cost of Goods Sold – COGS

Definition: The direct expense related to producing the goods sold by a company. This may include the cost of the raw materials (parts) and amount of employee labor used in production.

10. Credit – CR

Definition: An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: a credit and a debit.

11. Debit – DR

Definition: An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.

12. Expenses (Fixed, Variable, Accrued, Operation) – FE, VE, AE, OE

Definition: The fixed, variable, accrued or day-to-day costs that a business may incur through its operations. Examples of expenses include payments to banks, suppliers, employees or equipment.

13. Generally Accepted Accounting Principles – GAAP

Definition: A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

14. General Ledger – GL

Definition: A complete record of the financial transactions over the life of a company.

15. Liabilities (Current and Long-Term) – CL and LTL

Definition: A company's debts or financial obligations it incurred during business operations. Current liabilities are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities are typically payable over a period of time greater than one year. An example of a long-term liability would be a bank loan.

16. Net Income – NI

Definition: A company's total earnings, also called net profit or the “bottom line.” Net income is calculated by subtracting totally expenses from total revenues.

17. Owner's Equity – OE

Definition: An owner’s equity is typically explained in terms of the percentage amount of stock a person has ownership interest in the company. The owners of the stock are commonly referred to as the shareholders.

18. Present Value – PV

Definition: The value of how much a future sum of money is worth today. Present value helps us understand how receiving $100 now is worth more than receiving $100 a year from now. See an example of the time value of money here.

19. Profit and Loss Statement – P&L

Definition: A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time; such a quarterly or annually.

20. Return on Investment – ROI

Definition: A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage. See an example here.