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During your accounting studies, you’ll likely run into various unfamiliar words, phrases, and acronyms. By getting acquainted with these top accounting terms, you can become much more comfortable with the accounting process. These are just a few of the most common and basic terms that students and professionals should be familiar with.

Accounts Receivable (AR)

Accounts receivable is the balance of money owed by customers for a company’s goods or services. They are created when a company lets a customer purchase their goods or services on credit. On the balance sheet, AR appears under current assets.

Accounts Payable (AP)

Accounts payable is similar to accounts receivable, but instead of money to be received, it’s money owed. In a company, an AP department is responsible for making payments owed by the company to suppliers and other creditors. On a balance sheet, AP is listed as a current liability.

Accounting Period

An accounting period refers to the time at which a series of financial statements are issued. Businesses and investors evaluate financial performance by comparing different accounting periods over time. Accounting cycles track accounting activities—all within unique accounting periods—from when the transactions first occur to when they conclude.

Accrual Accounting

Accrual accounting is a method where income or expenses are recorded when a transaction occurs rather than when payment is received. The technique follows the matching principle, which says that revenues and expenditures should be recognized in the same period.

Asset (fixed and current) (FA, CA)

Current assets are benefits that will be converted to cash within one year. Generally, those assets could be cash, accounts receivable, or inventory.

Fixed assets are long-term and will likely provide benefits to a company for more than one year, such as real estate, land, or significant machinery.

Balance Sheet (BS)

A balance sheet is a financial statement that states a company’s assets, liabilities, and shareholders’ equity. It represents the state of a company’s finances at the moment in time. The balance sheet is one of the three—besides income statement and statement of cash flows—core financial statements used to evaluate a business.

Bank Reconciliation Statement

A bank reconciliation is a process to ensure that a company’s cash balance on the balance sheet corresponds to the amount on its bank statement. This process aims to ascertain the differences between the two to know whether accounting changes are needed. The bank statement’s information outlines the deposits, withdrawals, and other activities affecting a bank account for a specific period.

Capital (CAP)

Capital refers to the financial assets of a person or organization. Credit can include funds in deposit accounts or money from sources of funding. The working capital indicates a business’ overall health and potential to meet financial obligations due within a year. Additionally, it refers to a company’s liquid capital that can be used by the owner to pay for everyday or ongoing expenses.

Cash Accounting

Cash accounting is a method where payment receipts are recorded during the period in which they are received, and expenses are recorded during the period in which they are paid. Cash accounting doesn’t work well for larger companies or companies with a large inventory because it can obscure the actual financial position.

Cash Flow (CF)

Cash flow is the total of money that comes into and goes out of a business. Net cash flow refers to the amount of money a company makes. Cash flow statements are financial statements, and they include all cash a business receives from its operations, investments, and financing.

Cost of Goods Sold (COGS)

COGS refers to the direct expenses related to producing the goods sold by a business. For instance, this may include the cost of materials or parts plus the amount of employee labor used in production. The formula for calculating COGS will depend on what is being manufactured.

Cost per Unit (CPU)

Cost per unit is a calculation of a company’s cost to build or manufacture one product unit. Usually, cost per unit involves costs that vary with the number of units made (variable cost) and expenses that don’t change with the number of units produced (fixed costs).

Credit (CR)

In the most common definition of the term, credit refers to an agreement to buy a good or service with the guarantee to pay for it later. There are many different credit forms, with the most popular form being bank credit or financial credit. It is also an accounting entry made on the right side of an account. It either decreases assets or increases equity, liability, or revenue account.

Debit (DR)

A debit is an entry made on the left side of an account. It either decreases equity, liability, or revenue accounts or increases an asset or expense account. In fundamental accounting, debits are balanced by credits, which operate in the exact opposite direction.

Depreciation

Depreciation is a procedure of allocating the cost of a tangible asset over its useful life expectancy. Depreciation suggests how much of an asset’s value has been used up. Depreciating assets helps companies earn revenue from an investment while expensing a portion of its cost each year the asset is in use.

Equity (E)

Equity is the value of an owner’s interest in a firm after all obligations have been subtracted. It can be referred to as stockholders’ equity or owner’s equity. Equity is one of the most common pieces of data employed by analysts to assess a company’s financial health.

Generally Accepted Accounting Principles (GAAP)

GAAP refers to a common set of accounting standards and procedures issued by the Financial Accounting Standards Board (FASB). The purpose of these Generally Accepted Accounting Principles is to improve the accuracy, consistency, and comparability of the communication of financial information. It makes it easier for investors to analyze and extract useful information from the company’s financial statements.

General Ledger (GL)

A general ledger is a record-keeping system that provides a company’s financial data. This account provides a record of each financial transaction during the life of an operating company.

Gross Profit (GP)

Gross profit—also called gross income—assesses a company’s efficiency at using its labor and supplies in producing goods or services. It appears on a company’s income statement and can be calculated by subtracting the cost of goods sold from revenue.

Inventory

Inventories are the goods and raw materials used to produce those goods that are available for sale. Inventory represents one of the most critical assets of a business because inventory turnover depicts one of the primary income generation sources.

Journal Entry (JE)

A journal entry is a record of transactions in a company’s accounting books. What makes an accurately documented journal entry consists of the correct date, the sums to be debited and repaid, a description of the transaction, and a unique reference number.

Liability (current and long-term) (CL, LTL)

Liability refers to something a person or company owes, usually a sum of money. Liabilities are resolved through the transfer of economic benefits such as money, goods, or services. Current liabilities are a company’s short-term financial obligations due within one year or a standard operating cycle. Long-term liabilities are a business’s financial obligations that are due in the future for more than one year.

Limited Liability Company (LLC)

An LLC is a business structure in the United States whereby the owners are not personally liable for the company’s debts or liabilities. The regulations surrounding LLCs vary from state to state. Any entity can form an LLC, including individuals and corporations; however, banks and insurance companies cannot.

Net Income (NI)

Net income (NI)—also named net earnings—is calculated as sales minus the cost of goods sold, expenses, and taxes for an accounting period. Net earnings are useful for investors to assess how much revenue exceeds the costs of an organization.

Profit and Loss Statement (P&L)

The profit and loss (P&L) statement is a financial report that compiles the revenues, costs, and expenses acquired during a specified period. Some refer to the P&L statement as expense statement, income statement, or earnings statement, among others.

Revenue (Sales) (Rev)

Revenue—frequently called sales—is the income earned from business operations and business projects. Income derived from business operations, such as sales of goods or services, is called operating income, whereas infrequent or nonrecurring income derived from secondary sources is referred to as non-operating income.

Return on Investment (ROI)

Return on Investment (ROI) is a measure used to estimate an investment’s efficiency or compare several different investments’ efficiency. The formula to calculate ROI divides the benefit (or return) of an investment by its cost.

 

There you have it, some of the fundamental accounting terms and their definitions. This guide on basic accounting terminologies and abbreviations can help guide prospective students or serve as a resource and study guide for current students while completing accounting coursework. If you are considering whether to pursue an accounting degree, check out our Bachelor of Arts in Accounting program. 

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