Top 15 Basic Accounting Terms You Should Know

Traci Williams

accounting student reviewing accounting terms

A career in accounting can be extremely rewarding. If you like working with numbers and technology, then accounting might be right for you. Accountants must be great communicators who are detail-oriented and can work well under pressure. If this sounds like you, then you might consider getting an accounting degree.

Accounting Terms Aren’t Just for Accountants

Whether you are a prospective student, accounting major, business major or in a managerial position, you will benefit from familiarizing yourself with key accounting jargons. Use the directory of terms below to understand basic accounting concepts you are likely to use in the business world.

15 Basic Accounting Terms

1. Accounting

Accounting refers to keeping, organizing and analyzing financial records for an individual, organization or business. This is especially important in the business world because companies use financial statements to tell if they are making or losing money.

2. Accounts Payable

Accounts payable keeps track of how much money a business is making as well as how much they are spending. Accounts payable also tracks the money a business owes to any creditors or suppliers, and ensures the numbers are accurate and can be paid off on schedule.

3. Accounts Receivable

Accounts receivable refers to any money that is owed to the company from customers or other businesses that have received their requested goods or services. It is important for businesses to keep track of who owes them money, and how much they are owed, so they can ensure they are paid on time for the goods and services they provided.

4. Accruals

Accruals are a type of record-keeping adjustment. It recognizes expected businesses’ expenses and revenues before exchanges of money take place.

5. Balance Sheet

To keep track of the company’s finances, a balance sheet is used to report what the business owns, what it owes and other financial matters related to the company’s profitability.

6. Capital

Capital refers to cash and other assets that business owners can put into the company to help it succeed and grow. The four major types of capital include debt, equity, trading and working capital.

7. Cash Flow

Cash flow refers to money coming into a business from customers and where money is being spent by a business. A positive number (net gain) indicates that more cash flowed into the business than out, whereas a negative number (net loss) indicates the opposite.

8. Current Assets

Different types of assets are listed on the balance sheet, including current and fixed assets. Current assets are those that are likely to be turned into cash within one fiscal year, including cash, debt securities, accounts receivable and inventory.

9. Diversification

Investments play an important role in every business. Diversification refers to the process of spreading money into several different investments instead of investing large sums of cash in one place. This can protect businesses from losing a lot of money on a risky investment.

10. Equity

Equity refers to the business owner’s interest in a company and how much it is worth. It is measured by calculating the difference between assets and liabilities on the balance sheet. The difference represents the value of a business, which can be a positive or negative number.

11. Fixed Assets

Unlike current assets, fixed assets are those that are likely to last longer than one fiscal year. These are long-term assets, such as buildings, land, company vehicles, machinery and equipment.

12. Liabilities

Another aspect of accounting involves keeping track of how much a business owes, also referred to as its liabilities or debts.

13. Net Income

Net income, also commonly referred to as net profit, describes the total amount of money a business has earned within a certain period. This can be calculated by subtracting all expenses from a company’s revenue.

14. Profit and Loss Statement

A profit and loss statement, also referred to as a P&L statement or income statement, shows the expenses, costs and revenues for a company during a specific time period. This is used, along with the cash flow statement and balance sheet, to provide a snapshot of a business’s financial health and ability to generate profit.

15. Return on Investment

Accountants help companies build bigger profits by finding the best ways to spend less and make more. This includes calculating the return on investment, or ROI. This term refers to how much money is made in relation to how much was spent.

Understanding accounting terms will help you when earning an accounting degree, in an accounting career or even in other related positions. Further, this knowledge can be helpful when doing your own taxes and finances.

Learn more about an accounting career with the Bachelor of Science in Accounting degree program offered by the Colangelo College of Business at Grand Canyon University. This program can prepare you to apply for many rewarding job opportunities, including an accountant, revenue agent, financial analyst, bookkeeper or credit analyst. If you would like to learn more about our accounting degree programs, click on the Request Info button located at the top of this page.

The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy or position of Grand Canyon University.

The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy or position of Grand Canyon University. Any sources cited were accurate as of the publish date.