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A
Accounts Payable (AP)
Money a business owes to its suppliers or vendors for goods and services received but not yet paid for. It's recorded as a current liability on the balance sheet.
Accounts Receivable (AR)
Money owed to a business by its customers for goods or services already delivered but not yet paid for. It's recorded as a current asset.
Accrual Accounting
An accounting method that records revenue when it's earned and expenses when they're incurred, regardless of when cash actually changes hands. This is the method required under GAAP for most companies.
Accrued Expenses
Costs a business has incurred but hasn't yet paid or recorded an invoice for, such as wages earned by employees but not yet paid. Recorded as a current liability.
Adjusting Entries
Journal entries made at the end of an accounting period to update account balances before financial statements are prepared — for example, recording depreciation or accrued interest.
Allowance for Doubtful Accounts
A contra-asset account that estimates the portion of accounts receivable a business expects it won't collect. It reduces accounts receivable to its expected realizable value.
Amortization
The gradual write-off of an intangible asset's cost over its useful life, similar to depreciation for tangible assets. Common examples include patents and loan origination fees.
Assets
Anything a business owns that has economic value, such as cash, inventory, equipment, or accounts receivable. Assets are listed on the balance sheet and are financed by either liabilities or equity.
Audit
An independent examination of a company's financial statements and records to verify their accuracy and compliance with accounting standards.
B
Bad Debt Expense
The cost recognized when a business determines that a customer's outstanding receivable will not be collected.
Balance Sheet
A financial statement that shows a company's assets, liabilities, and equity at a specific point in time. It's built on the equation Assets = Liabilities + Equity.
Book Value
The value of an asset as recorded on the balance sheet, calculated as its original cost minus accumulated depreciation or amortization.
Break-even Point
The level of sales at which total revenue equals total costs, meaning the business is neither making a profit nor a loss.
C
Capital Expenditure (CapEx)
Money spent to acquire, upgrade, or maintain long-term physical assets like equipment, buildings, or vehicles. Unlike operating expenses, CapEx is capitalized and depreciated over time rather than expensed immediately.
Cash Flow Statement
A financial statement that shows how cash moved in and out of a business during a period, broken into operating, investing, and financing activities.
Chart of Accounts
A complete list of all the accounts a company uses to record financial transactions, organized by category (assets, liabilities, equity, revenue, expenses).
Closing Entries
Journal entries made at the end of an accounting period to transfer temporary account balances (revenue, expenses, dividends) into retained earnings, resetting them to zero for the next period.
Contra Account
An account that offsets the balance of a related account, reducing its net value on the financial statements — for example, Accumulated Depreciation offsets a fixed asset account.
Cost of Goods Sold (COGS)
The direct costs of producing the goods or services a company sells, including materials and direct labor. COGS is subtracted from revenue to calculate gross profit.
Credit
An entry on the right side of a ledger account. Credits increase liability, equity, and revenue accounts, and decrease asset and expense accounts.
Current Ratio
A liquidity ratio calculated as current assets divided by current liabilities, measuring a company's ability to pay short-term obligations.
D
Debit
An entry on the left side of a ledger account. Debits increase asset and expense accounts, and decrease liability, equity, and revenue accounts.
Debt-to-Equity Ratio
A leverage ratio calculated as total liabilities divided by total shareholders' equity, showing how much a company relies on debt versus equity financing.
Deferred Revenue
Money received from a customer before the related goods or services have been delivered. It's recorded as a liability until the business fulfills its obligation.
Depreciation
The systematic allocation of a tangible asset's cost over its useful life, reflecting wear and tear or obsolescence. Common methods include straight-line and declining balance.
Dividends
Distributions of a company's earnings to its shareholders, typically paid in cash or additional shares. Dividends reduce retained earnings.
Double-Entry Bookkeeping
The accounting system in which every transaction affects at least two accounts, with total debits always equal to total credits.
E
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of a company's core operating profitability that excludes the effects of financing and accounting decisions.
Equity
The owners' residual claim on a business's assets after liabilities are subtracted, also called net assets or shareholders' equity.
Expenses
The costs a business incurs in the process of earning revenue, such as rent, salaries, and utilities. Expenses reduce net income.
F
Fiscal Year
A twelve-month period a company uses for financial reporting and budgeting purposes, which may or may not align with the calendar year.
Fixed Assets
Long-term tangible assets used in business operations, such as buildings, machinery, and equipment, that are not expected to be converted to cash within a year.
G
GAAP (Generally Accepted Accounting Principles)
The standard framework of accounting rules and guidelines used in the United States for preparing financial statements.
General Ledger
The master record that contains all of a company's financial accounts and transactions, summarizing entries from journals by account.
Going Concern
The assumption that a business will continue operating for the foreseeable future, which underlies most financial statement preparation.
Goodwill
An intangible asset that arises when a company acquires another business for more than the fair value of its identifiable net assets, representing factors like brand reputation and customer relationships.
Gross Margin
Gross profit expressed as a percentage of revenue, calculated as (Revenue − COGS) ÷ Revenue.
Gross Profit
Revenue minus the cost of goods sold, before subtracting operating expenses.
I
Income Statement
A financial statement that shows a company's revenues, expenses, and net income (or loss) over a period of time. Also called a profit and loss (P&L) statement.
Intangible Assets
Non-physical assets with economic value, such as patents, trademarks, and goodwill.
Inventory Turnover
A ratio that measures how many times a company sells and replaces its inventory over a period, calculated as COGS divided by average inventory.
L
Liabilities
Obligations a business owes to outside parties, such as loans, accounts payable, and accrued expenses. Liabilities are settled over time through the transfer of assets or services.
LIFO (Last-In, First-Out)
An inventory valuation method that assumes the most recently purchased or produced items are sold first.
O
Operating Expense (OpEx)
The day-to-day costs of running a business, such as rent, salaries, and utilities, that are expensed in the period they're incurred rather than capitalized.
Owner's Equity
The owner's claim on the assets of a sole proprietorship or partnership after liabilities are subtracted, equivalent to shareholders' equity in a corporation.
R
Retained Earnings
The cumulative net income a company has kept (not distributed as dividends) since it began operating, reported in the equity section of the balance sheet.
Return on Assets (ROA)
A profitability ratio calculated as net income divided by total assets, measuring how efficiently a company uses its assets to generate profit.
Return on Equity (ROE)
A profitability ratio calculated as net income divided by shareholders' equity, measuring the return generated on shareholders' investment.
Revenue Recognition Principle
The accounting principle that dictates revenue should be recorded when it's earned, not necessarily when cash is received.