A List of Basic Accounting Terms and Their Meaning

A List of Basic Accounting Terms and Their Meaning

Working with a bookkeeper or an accountant can be tricky when you do not speak their language. Often you have a bookkeeper because you need their expertise but wouldn’t working with them be easier if you knew the basics of their language? The answer is most likely, so we made a list of accounting terms and their meaning. This is something you can have near when communicating with your bookkeeper if you come across a word you are unfamiliar with.

General Terms:

Accounting Period

This relates to the time that is being reported throughout various financial statements. This could be a monthly report, quarterly report, or an annual report. If your bookkeeper is asking for a specific accounting period, they are requesting the period in which you need the report.

Allocation

The term Allocation outlines the procedure of the transfer of funds from accounts or accounting period. A specific cost could be allocated throughout various months or within different departments in your business.

Cash Flow

Cash Flow means how money is flowing into your business and how money is exiting your business is the costs you pay to keep the business open. Within this term lies net cash flow, which subtracts the ending cash balance from the beginning cash balance. This is where it is extra essential to have a positive number to show that your company is profitable.

Credit

As this term relates to accounting, this means an increase in a liability or equity account. This can also mean a decrease in an asset or expense account. A debit is the opposite of the first two sentences. A debit is a decrease in a liability or equity account. Or an increase in an asset or expense account.

Diversification

Diversification is the method by which you are reducing your risk as a business. You do this by allocating capital across a large number of assets. This ensures that the performance of any one asset does not determine the performance of the total.

Fixed and Variable Cost

A fixed cost is something that stays constant across multiple months and accounting periods. Whereas a variable cost changes across accounting periods. Often due to do volume or price fluctuations of your product or service.

Journal Entry

A Journal Entry is how businesses stay up to date and make changes in their books before building the report for the accounting period. Each Journal Entry consists of a unique identifier to record the entry, a date, a debit/credit, an amount, and an account code. This entry tells us which accounts have changed throughout the accounting period.

Liquidity

The term describes how fast an asset can be converted into cash. An excellent example of this is stocks. They are more liquid than a house because selling and receiving money for that sale is much faster. You want to be sure your company is liquid enough so that you need cash. You can get it quickly.

Overhead

Overhead means the expenses you are paying to run your business, not to create your product or service. These are the expenses that keep the roof over your head, but they do not buy the groceries.

Present Value

A term that means the value of an asset today as opposed to a different accounting period. Many investments have a depreciation over time, meaning the asset is worthless over time. Like the theory, a dollar is worth more today than tomorrow because of constant inflation.

Return on Investment (ROI)

ROI means if you invest money towards something, you do it because, over time, you will get me back out of it. This can relate to projects and objectives as well. If you put X amount of money towards advertising, you are hoping the advertising campaign drives sales to an XX amount of money. You have to spend some to get some, but the goal is to get more than you put it.

General Ledger

General Ledger is an account of every financial transaction and is used the build the financial statements. This is where you take your receipts and document where you have spent money on your business.