Basic Accounting Terms

This accounting dictionary includes dozens of important basic accounting terms. Business owners and accounting students can find detailed explanations of accounting terminology, accounting acronyms, and accounting vocabulary words. This guide includes definitions, alternative word uses, explanations of related terms, and the importance of particular words or concepts to the accounting profession as a whole.

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We also explain relevant etymologies or histories of some words and include resources further exploring accounting terminology.

• Account Payable: Accounts payable refers to the money a business owes to its suppliers, vendors, or creditors for goods or services bought on credit. A short-term debt that must be paid back quickly to avoid default, accounts payable shows up as a liability on an organization’s balance sheet. An example of accounts payable includes when a restaurant receives a beverage order on credit from an outside supplier. Accounts payable acts as an IOU to another company
• Account Receivable: Essentially the opposite of accounts payable, accounts receivable refers to the money owed to a business, typically by its customers, for goods or services delivered. An example of accounts receivable includes when a beverage supplier delivers a beverage order on credit to a restaurant. While the restaurant records that transaction to accounts payable, the beverage supplier records it to accounts receivable and a current asset in its balance sheet.
• Accounting Period: An accounting period refers to the span of time in which a set of financial statements are released. Businesses and investors analyze financial performance over time by comparing different accounting periods. Accounting cycles track accounting events from when the transactions first occur to when they end, all within given accounting periods. Publicly held companies must report to the Security and Exchanges Commission every three months, so they go through four accounting periods per year. Other organizations use different accounting periods, but no matter the length, accounting periods should remain consistent over time.
• Accrual Basis Accounting:  Accrual basis accounting deals with anticipated expenses and revenues by incorporating accounts receivable and accounts payable. In contrast, cash basis accounting focuses more on immediate expenses and revenues and does not document transactions until the company pays or receives cash. Most people find cash basis accounting easier, but it does not offer as accurate a portrayal of an organization’s financial health as accrual basis accounting.
• Assets:  Assets are resources with economic value which companies expect to provide future benefits. These can reduce expenses, generate cash flow, or improve sales for businesses. Companies report assets on their balance sheets. Asset types include fixed, current, liquid, and prepaid expenses. Assets may include long-term resources like buildings and equipment. Current assets include all assets a company expects to use or sell within one year. Liquid assets can easily convert to cash in a short timeframe. Prepaid expenses include advance payments for goods or services a company will use in the future.
• Liabilities: A liability is when someone owes someone else money. Someone can fulfill the obligation of settling a liability through the transfer of money, services, or goods. Types of liabilities can include loans, mortgages, accounts payable, and accrued expenses. Short-term liabilities conclude in less than a year, while businesses may expect long-term liabilities to take longer than a year to resolve.
• Balance Sheet: Balance sheets are financial statements providing snapshots of organizations’ liabilities, assets, and shareholders’ equity at specific moments in time. Balance sheets represent one type of financial statement used to evaluate companies’ financial health and worth. Accountants use the accounting equation, also known as the balance sheet equation, to create balance sheets: “Assets = Liabilities + Equity.”
• Capital: Capital refers to a person’s or organization’s financial assets. Capital may include funds in deposit accounts or money from financing sources. Working capital refers to a business’s liquid capital, which the owner can use to pay for day-to-day or ongoing expenses. A company’s working capital indicates its overall health and ability to meet financial obligations due within a year.
• Cash Basis Accounting: Cash basis accounting is an accounting method that does not incorporate transactions until the business receives or pays cash for goods and services. This method focuses on immediate revenues and expenses. Alternatively, accrual basis accounting includes future revenues and expenses, documenting accounts payable and accounts receivable.
• Certified Public Accountant: Certified public accountants (CPAs) are accounting professionals certified to practice public accounting by the American Institute of Certified Public Accountants. These professionals must meet education and experience requirements and pass the uniform CPA exam. State requirements for the CPA exam vary, but applicants typically need bachelor’s degrees in accounting with at least 150 credit hours of coursework.
• Cost of Goods Sold: The total cost of producing the goods sold by a business is called cost of goods sold (COGS). COGS includes the direct costs of creating goods, including materials and labor, and it excludes indirect costs, such as distribution expenses.
• Credit: Accountants using double-entry bookkeeping systems record numbers for each business transaction in two accounts: credit and debit. Credits are accounting entries that either increase an equity or liability account or decrease an expense or asset account. Credits are made on the right side of an account. Debits must equal credits for an account to be in balance.
• Debit: The opposite of a credit, a debit is an accounting entry made on the left side of an account. Used in double-entry bookkeeping systems, debits either increase expense or asset accounts or decrease equity or liability accounts.
• Depreciation: The depreciation accounting method determines the decreasing value of a tangible asset over its lifetime. A business can make money from a depreciating asset by expensing or deducting part of the asset each year it is in use, for accounting and tax purposes. The Internal Revenue Service (IRS) requires companies to spread out the cost of depreciating assets over time.
• Double-Entry Bookkeeping: A type of bookkeeping system that keeps the accounting equation (“Assets = Liabilities + Equity”) in balance, double-entry bookkeeping requires every entry to an account to have an opposite, corresponding entry in another account. Every transaction impacts at least two accounts in double-entry bookkeeping, including liability, asset, revenue, equity, or expense accounts. Credits and debits make up the two types of entries, with credits entered on the left side and debits entered on the right. A much more simplified system, single-entry bookkeeping records only one entry per transaction.
• Single-Entry Bookkeeping: Single-entry bookkeeping is a type of accounting system that records the financial transactions of a business. The system uses one entry per transaction to record cash, taxable income, and tax-deductible expenses going in or out of the business. Businesses can use accounting software or even simple tables to perform single-entry bookkeeping. Single-entry bookkeeping is much simpler than double-entry bookkeeping, which requires two entries per transaction.
• Journal-Entry: A journal entry refers to a business transaction recorded in a business’s general ledger. A journal entry may include the journal entry date and number, account name and number, debit, and credit. The recorder may also include a description or miscellaneous information about the entry.
• Profit & Loss Statement: A profit and loss statement, also called an income statement, shows the expenses, costs and revenues for a company during a specific time period. This financial statement, along with the cash flow statement and the balance sheet, provides information about a business’s financial health and ability to generate profit.
• Trail Balances: A periodical bookkeeping worksheet, a trial balance compiles the balance of ledgers into credit and debit columns that equal each other. Companies create trial balances to ensure the mathematical accuracy of their bookkeeping systems entries.

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