accounting terms definitions


Do you wish there were accounting terms definitions for a lot of the words they use in accounting tutorials?  

Well, here is a glossary of some basic accounting terms definitions.  When you're setting up a small business accounting system, you'll probably come across some if not all of these terms.  How can you keep the books in your small biz if you don't know what the words mean?  I'm all about teaching you what you need to know to keep your books.

This isn't textbook accounting.  This is small biz accounting.


Here goes...


a list of accounting terms definitions


Accounting

The process of recording, classifying, reporting, and interpreting financial data of an organization. Huh??  Let's try that in simpler language.  Putting business transactions down on paper, separating them by type of transaction (receipts, disbursements, etc), corralling them all together in the form of a Profit & Loss or Balance Sheet, and then looking at the numbers and seeing how your business is doing.

Account

An accounting device used to record and summarize increases and/or decreases in revenue, expense, asset, liability, and owners equity items.

Accounting Equation

An expression stating that assets = liabilities + owners equity.

Account Payable

A debt owed to a creditor / vendor for goods and services purchased on credit.

Account Receivable

An amount due your company from a customer for goods and services purchased from you on credit.

Asset

A property or resource owned by your business.  This could be cash or the promise of cash, or it could be a tangible touchable item like materials or a car or a building.

Balance Sheet

A basic accounting financial report showing the assets, liabilities, and owners equity of your company as of a specific date.

Bookkeeping

The record making phase of accounting. Entering transactions into journals, paying bills, preparing sales invoices.

Budgeting

The process of planning the activities of your company and giving those activities corresponding dollar values, and then comparing actual performance to what was budgeted. For example, planning to make sales of $100,000 next year.  Then comparing the actual sales for the year with that number.  Also part of this process would be analyzing why you didn't hit that sales figure.

Business Transactions

An exchange of goods, services, money, or the right to collect/give money.  A sale, a purchase, a loan, etc.

Capital Stock

Ownership equity in a corporation, the result of selling shares of corporate stock to its shareholders.

Chart of Accounts

A list of all accounts being used in a particular standard accounting system, in this order: assets, liabilities, owners equity, revenue, and expenses.

Controller

The top accounting officer of a large enterprise. This person would be responsible for the entire accounting function and all other accounting personnel.  They would report to the owner(s) or possibly, in a very large corporation, to a VP of Finance.

Cost Accounting

The part of basic accounting that focuses on collecting and controlling the costs of producing a product or service.

Cost of Good Sold

The cost of producing a good to sell, or the cost of offering a service to your customer. It includes materials to make the goods, labor costs to manufacture the goods, subcontracted services used to make the goods, and freight or shipping costs to deliver the goods to the customer.  This would be referred to as Cost of Sales in a service business.

Equity

A right, claim, or interest in a property. As far as Owners Equity, it refers to the claim to part or all of the organization.

Expense

Goods or services used in running your business.

Gross Profit

Revenue less Cost of Goods Sold, before any expenses are deducted.  This represents the amount of money made strictly from the sale and manufacture of goods/resale of products/offering of services in your business.  

Income Statement

A basic accounting financial statement showing revenues earned by your business, the expenses used in running your business, and the corresponding profit or loss for a certain period of time.

Inventory

Items purchased and stored for use in your business.  This could be items used to make products, or products purchased for resale, or supplies used in your business, like office supplies.

Invoice

An itemized statement showing goods or services bought or sold.

Journal

A book of original entry in your basic accounting system, in which business transactions of a like kind are recorded.  This could be sales, or cash received, or cash spent.

Ledger

A book in which like transactions are recorded (summarized from journals) into each account for your business.  This used to be an actual book, but has been replaced by accounting software.

Liability

A debt owed by your business.  It could be for a purchase of goods/services or for an asset.

Posting

The act of transcribing business transaction amounts into a journal or a ledger.

Purchase Order

A standard accounting form used when your business orders a good or service from a vendor.  It authorizes the supplier to ship the goods.

Trial Balance

This is a list of all your accounts in your Chart of Accounts with their current balances.  This report is mainly used by accountants.

Voucher

A business form that summarizes a business transaction, verifies a change, and approves payment. The most widely used voucher is a bill received for goods or services purchased. This is used in large companies, and in accounting software.  In QuickBooks, for example, a bill for a materials purchase is entered as a 'voucher' in the software.  You would then pay the bill from the voucher.



I hope this list of accounting terms definitions helps you understand the process of accounting better.

If there are other accounting terms definitions you'd like to see here, please let me know!  This list is for you, and if you were looking for a term here that you didn't find, chances are others are looking for it too.

Thanks!