Financial Accounting Terms and Definitions | Complete Guide 2023

Account: A record that represents a specific category of financial transactions in a financial statement.

Accountant: A professional who is trained to handle financial records and provide financial advice.

Accounting: The process of recording, summarizing, analyzing, and interpreting financial information to aid in decision-making.

Accounts Payable Turnover: A financial ratio that measures how quickly a company pays its suppliers.

Accounts Payable: The amount owed by a company to its creditors for goods and services received but not yet paid for.

Accounts Receivable Turnover: A financial ratio that measures how quickly a company collects its accounts receivable.

Accounts Receivable: The amount owed to a company by its customers for goods and services provided on credit.

Accrual Accounting: A method of accounting where transactions are recorded when they occur, regardless of cash flow.

Accrual Basis: A method of accounting that records transactions when they occur, regardless of cash flow.

Accrued Expenses: Expenses that have been incurred but not yet paid or recorded in the accounts.

Accrued Income: Income that has been earned but not yet received or recorded in the accounts.

Accrued Interest: Interest that has been earned but not yet paid or received.

Acquisition: The purchase of one company by another.

Adjusting Entries: Journal entries made at the end of an accounting period to update accounts for items that have not been recorded.

Aging of Accounts Receivable: The process of categorizing accounts receivable by the length of time they have been outstanding.

Allowance for Doubtful Accounts: A contra-asset account used to estimate and adjust for uncollectible accounts receivable.

Amortization Expense: The periodic expense recorded for the reduction in value of an intangible asset.

Amortization: The process of spreading the cost of an intangible asset (like a patent) over its useful life.

Arm’s Length Transaction: A transaction between two unrelated parties acting in their self-interest.

Asset Turnover: A financial ratio that measures a company’s ability to generate revenue relative to its assets.

Asset: A resource with economic value that is expected to provide future benefits to a company.

Audit Trail: A documented history of accounting transactions used to verify the accuracy of financial records.

Audit: An examination of a company’s financial records and statements to verify their accuracy and compliance.

Authorized Shares: The maximum number of shares of stock that a company is allowed to issue.

Authorized Shares: The maximum number of shares of stock that a company is allowed to issue.

Bad Debt Expense: An expense recognized when it is unlikely that a debtor will pay a debt.

Bad Debt: A debt that is unlikely to be collected and is written off as an expense.

Balance Sheet: A financial statement that shows a company’s assets, liabilities, and equity at a specific point in time.

Balanced Scorecard: A strategic management tool that translates an organization’s strategy into a comprehensive set of performance measures.

Bank Reconciliation: The process of matching and comparing a company’s bank records with its accounting records.

Bank Statement: A monthly statement provided by a bank to a company, showing its account activity and balances.

Bankruptcy: A legal process that allows individuals or businesses to reorganize or discharge their debts.

Basis of Accounting: The method used to recognize revenue and expenses in financial statements.

Bond: A debt security that represents a loan made by an investor to a borrower (typically a company or government).

Bookkeeping: The process of recording financial transactions and maintaining financial records.

Bottom Line: The net income or profit of a company, often used to refer to the final figure on the income statement.

Break-Even Analysis: A financial analysis technique used to determine the sales level at which a company’s total revenue equals its total cost.

Break-Even Point: The level of sales at which total costs equal total revenue, resulting in no profit or loss.

Budget: A financial plan that outlines expected revenues and expenses over a specific period.

Budgetary Control: The process of monitoring and controlling expenses to align with a budget.

Business Entity Concept: The principle that a business’s financial transactions should be kept separate from its owners’ personal transactions.

Capital Budgeting: The process of evaluating and selecting long-term investments that align with a company’s strategic goals.

Capital Expenditure: Money spent on acquiring or improving long-term assets.

Capital Lease: A lease that transfers substantially all the risks and rewards of ownership to the lessee, treated as a purchase for accounting purposes.

Capital: The financial resources used to start or operate a business.

Cash Basis Accounting: A method of accounting where transactions are recorded when cash is received or paid.

Cash Budget: A financial plan that projects the inflows and outflows of cash over a specific period.

Cash Flow Statement: A financial statement that shows the inflows and outflows of cash during a specific period.

Cash Flow: The movement of cash in and out of a business, typically measured over a specific period.

Chart of Accounts: A list of all accounts used in a company’s accounting system.

Common Stock: The most basic form of ownership in a corporation, representing a share of ownership.

Comprehensive Income: The total change in a company’s equity from non-owner sources, including net income and other comprehensive items.

Contra Account: An account linked to another account but with an opposite normal balance.

Contribution Margin: The amount of revenue remaining after deducting variable costs, used to cover fixed costs and generate profit.

Cost Accounting: The branch of accounting that focuses on allocating costs to products or activities for better cost control.

Cost Allocation: The process of distributing indirect costs to specific cost objects, such as products or services.

Cost Center: A department or division within a company that incurs costs but does not directly generate revenue.

Cost of Goods Sold (COGS): The direct costs associated with producing goods sold by a company.

Cost of Sales: The direct cost of producing or acquiring goods sold by a company.

Cost Pool: A grouping of similar costs to simplify allocation and management.

Cost Pool: A grouping of similar costs to simplify allocation and management.

Credit Memorandum: A document issued by a seller to reduce a customer’s account balance for returned goods or other adjustments.

Credit: An entry on the right side of an account, typically representing an increase in liability or equity accounts.

Creditor: A person or entity to whom a company owes money.

Current Assets: Assets that are expected to be converted into cash or used up within one year.

Current Liabilities: Liabilities that are due to be paid within one year.

Current Portion of Long-Term Debt: The amount of long-term debt due within the next year, classified as a current liability.

Current Ratio: A financial ratio that measures a company’s ability to pay its short-term liabilities with its current assets.

Days Sales Outstanding (DSO): The average number of days it takes for a company to collect its accounts receivable.

Debit: An entry on the left side of an account, typically representing an increase in asset or expense accounts.

Debt Ratio: A financial ratio that measures the proportion of a company’s assets financed with debt.

Debt Service Coverage Ratio (DSCR): A financial ratio used to assess a company’s ability to service its debt obligations.

Debt: An obligation to repay borrowed money.

Debt-to-Equity Ratio: A financial ratio that compares a company’s total liabilities to its shareholder’s equity.

Deferred Revenue: Money received in advance for goods or services that are yet to be provided.

Deficit: The negative balance in a company’s retained earnings account.

Depreciation Expense: The periodic expense recorded for the reduction in value of a tangible asset.

Depreciation: The process of allocating the cost of tangible assets over their useful lives.

Diluted Earnings per Share: A calculation of earnings per share that includes all potential shares that could be converted into common stock.

Direct Cost: A cost that can be directly attributed to a specific cost object, such as a product or department.

Direct Labor: The wages paid to employees directly involved in the production of goods or provision of services.

Dividend Payout Ratio: A financial ratio that measures the proportion of earnings paid out as dividends to shareholders.

Dividend: A distribution of a company’s earnings to its shareholders.

Double Declining Balance (DDB) Depreciation: An accelerated depreciation method that writes off more of an asset’s value in the early years of its useful life.

Double Declining Balance (DDB) Depreciation: An accelerated depreciation method that writes off more of an asset’s value in the early years of its useful life.

Double Entry Accounting: A method of accounting where every transaction is recorded in at least two accounts.

Due Diligence: The process of investigating and evaluating the financial and operational aspects of a potential investment.

Earnings Before Interest and Taxes (EBIT): A measure of a company’s operating profitability before interest and tax expenses are deducted.

Earnings Management: The manipulation of financial information to achieve desired financial results.

Earnings Per Share (EPS): A financial ratio that measures a company’s profitability relative to the number of outstanding shares.

Economic Order Quantity (EOQ): The optimal inventory order quantity that minimizes total holding and ordering costs.

Employee Benefits: Non-wage compensation provided to employees, such as health insurance, retirement plans, and paid time off.

Employee Stock Option (ESO): A financial incentive that allows employees to purchase company stock at a specified price.

Employee Stock Option (ESO): A financial incentive that allows employees to purchase company stock at a specified price.

Equity Method of Accounting: An accounting method used for investments in which the investor has significant influence over the investee.

Equity Method: An accounting method used to account for investments in other companies when significant influence is exerted.

Equity: The residual interest in the assets of a company after deducting liabilities.

Expense Recognition Principle: The principle that expenses should be recognized in the same period as the related revenue.

Expenses: The costs incurred to generate revenue during a specific period.

Fiduciary: A person or entity legally responsible for managing assets or money for the benefit of another party.

FIFO (First-In-First-Out): An inventory valuation method that assumes the first items purchased are the first ones sold.

Financial Accounting Standards Board (FASB): The private organization that establishes accounting standards in the United States.

Financial Analysis: The examination of financial statements to assess a company’s performance and financial health.

Financial Statement: A formal record of a company’s financial activities, including the balance sheet, income statement, and cash flow statement.

Fixed Assets: Assets that are long-term and expected to be used by a company for more than one year.

Fixed Cost: A cost that remains constant regardless of production or sales volume.

Floating Exchange Rate: An exchange rate that fluctuates based on supply and demand in the foreign exchange market.

Forensic Accounting: The use of accounting skills to investigate fraud and financial misconduct.

Fraud: Intentional deception to gain an unfair advantage, often involving financial misrepresentations.

Full Disclosure Principle: The principle that requires financial statements to include all relevant information that may influence user decisions.

Full-Time Equivalent (FTE): A measure of an employee’s workload in relation to a full-time employee.

Fund Accounting: Accounting for specific pools of money, such as those held by nonprofit organizations or government agencies.

GAAP (Generally Accepted Accounting Principles): The standard framework of accounting principles used in the United States.

General Ledger: The central repository of a company’s financial transactions.

Generally Accepted Auditing Standards (GAAS): The auditing standards used by auditors in conducting financial statement audits.

Generally Accepted Auditing Standards (GAAS): The auditing standards used by auditors in conducting financial statement audits.

Going Concern Concept: The assumption that a company will continue to operate indefinitely.

Goodwill: The excess of the purchase price over the fair market value of net assets acquired in a business combination.

Government Accounting Standards Board (GASB): The organization responsible for setting accounting standards for U.S. state and local governments.

Gross Margin: The difference between sales revenue and the cost of goods sold, expressed as a percentage.

Gross Profit: The difference between sales revenue and the cost of goods sold.

Hedging: A risk management strategy used to offset potential losses by using financial instruments, such as derivatives.

Historical Cost: The original cost of an asset recorded on the balance sheet.

Horizontal Analysis: The comparison of financial data from multiple periods to identify trends and changes.

IFRS (International Financial Reporting Standards): A set of accounting standards used in many countries outside the United States.

IFRS Foundation: The organization responsible for the governance and oversight of the International Accounting Standards Board (IASB).

IFRS Foundation: The organization responsible for the governance and oversight of the International Accounting Standards Board (IASB).

Impairment: A reduction in the value of an asset due to events like obsolescence or decreased demand.

Income Before Taxes: The profit earned by a company before accounting for income tax expenses.

Income Statement: A financial statement that shows a company’s revenues, expenses, and profit or loss over a specific period.

Income Tax Expense: The amount of tax payable based on a company’s taxable income.

Indirect Cost: A cost that cannot be directly attributed to a specific cost object (e.g., a product or service).

Inflation Accounting: Accounting methods used to adjust financial statements for the effects of inflation.

Intangible Asset: An asset that lacks physical substance but has value, like patents or trademarks.

Intercompany Transaction: A transaction that occurs between two entities within the same corporate group.

Internal Control: Procedures and policies put in place to safeguard assets and ensure accurate financial reporting.

Internal Rate of Return (IRR): The discount rate at which the net present value (NPV) of an investment equals zero.

International Accounting Standards Board (IASB): The organization responsible for issuing International Financial Reporting Standards (IFRS).

Inventory Turnover: A financial ratio that measures how many times a company’s inventory is sold and replaced within a specific period.

Inventory: The goods and materials held by a company for sale.

Job Costing: A cost allocation method used to track costs associated with specific jobs or projects.

Job Order Costing: A cost allocation method used to track costs associated with specific jobs or orders.

Joint Venture: A business arrangement in which two or more parties jointly undertake a specific project or enterprise.

Journal: The chronological record of financial transactions before they are transferred to the general ledger.

Leverage: The use of borrowed funds to finance a company’s operations, increasing the potential return but also the risk.

Liabilities: A company’s financial obligations or debts.

LIFO (Last-In-First-Out): An inventory valuation method that assumes the last items purchased are the first ones sold.

Liquidity: The ability of a company to meet its short-term obligations with its current assets.

Long-Term Debt: Debt that is due to be paid back over a period exceeding one year.

Long-Term Investments: Investments in securities or other assets held for an extended period.

Management Accounting: The process of providing financial information to managers for decision-making.

Management Control System: The process used by managers to ensure that company activities are aligned with organizational goals.

Marginal Cost: The additional cost incurred by producing one additional unit of a product or service.

Marketable Securities: Short-term investments that can be easily converted to cash, such as treasury bills or commercial paper.

Markup: The amount added to the cost of goods to arrive at the selling price.

Matching Principle: The principle that requires expenses to be matched with the revenues they help generate.

Materiality Concept: The principle that financial information should be presented if it could influence the decisions of users.

Materiality: The threshold at which financial information becomes significant enough to influence the decisions of users.

Merchandise Inventory: Goods held by a company for resale.

Merger: The combination of two or more companies to form a new entity.

Minority Interest: The portion of a subsidiary’s net income not owned by the parent company.

Net Book Value: The value of an asset recorded on the balance sheet after subtracting accumulated depreciation.

Net Income: The profit earned by a company after deducting all expenses from revenue.

Net Loss: The excess of expenses over revenues in a specific period.

Net Present Value (NPV): A method of evaluating the profitability of an investment by comparing its present value to its initial cost.

Non-Controlling Interest: The portion of equity not owned by the parent company in a subsidiary.

Non-Current Assets: Assets that are not expected to be converted into cash within one year.

Non-Current Liabilities: Liabilities that are not due to be paid within one year.

Non-Profit Organization: An organization that operates for purposes other than profit-making and reinvests any surplus back into the organization’s mission.

Operating Expense: Costs incurred by a company in the regular course of its business operations.

Operating Income Margin: The percentage of revenue remaining after deducting operating expenses.

Operating Income: The profit earned by a company from its regular business operations.

Operating Lease: A lease agreement in which the lessor retains ownership of the leased asset.

Other Comprehensive Income: Items that impact a company’s equity but are not included in the net income calculation.

Outsourcing: Contracting with an external provider to perform certain business functions or operations.

Overhead Allocation: The process of distributing indirect costs to cost objects, such as products or departments.

Overhead Costs: Indirect expenses incurred to support business operations.

Participatory Budgeting: A budgeting approach that involves employees at all levels in the budgeting process.

Partners’ Capital: The portion of a partnership’s equity representing the contributions of its partners.

Payroll: The process of calculating and disbursing employee salaries and wages.

Periodic Inventory System: An inventory accounting method that calculates the cost of goods sold periodically, not after each sale.

Perpetual Inventory System: An inventory accounting method that continuously updates the cost of goods sold after each sale.

Petty Cash: A small amount of cash kept on hand for minor expenses.

Plant Assets: Long-term tangible assets used in the production of goods or services.

Preferred Stock: A class of stock with preferential rights, often regarding dividends and liquidation.

Prepaid Expenses: Expenses paid in advance but not yet consumed or used.

Price-Earnings Ratio (P/E Ratio): A valuation ratio that compares a company’s stock price to its earnings per share.

Principal: The initial amount of money invested or borrowed.

Product Cost: The direct and indirect costs associated with producing a product.

Profit and Loss Statement: Another term for the income statement, which shows a company’s revenue and expenses.

Profit Margin: A financial ratio that measures a company’s profitability relative to its sales revenue.

Proxy Statement: A document that provides shareholders with information needed for voting on corporate matters.

Proxy: A document granting one person the authority to act on behalf of another.

Purchases Journal: A book used to record credit purchases of goods for resale.

Quick Assets: The most liquid assets, including cash and cash equivalents.

Quick Ratio: A financial ratio that measures a company’s ability to meet its short-term obligations with its most liquid assets.

Ratio Analysis: The examination of relationships between financial variables to assess a company’s performance.

Ratio of Fixed Assets to Long-Term Liabilities: A financial ratio that compares a company’s fixed assets to its long-term liabilities.

Real Accounts: Accounts on the balance sheet that represent assets, liabilities, and shareholders’ equity.

Real Assets: Tangible assets used in the operations of a business.

Realization Principle: The principle that revenue should be recognized when earned and realized, not necessarily when cash is received.

Realized Gain or Loss: A gain or loss that results from the sale or disposition of an investment.

Receivables Turnover Ratio: A financial ratio that measures how quickly a company collects its accounts receivable.

Reconciliation: The process of ensuring that two sets of records (e.g., bank and book records) are in agreement.

Residual Value: The estimated value of an asset at the end of its useful life.

Retained Earnings: The accumulated earnings of a company that are not distributed to shareholders as dividends.

Return on Assets (ROA): A financial ratio that measures a company’s ability to generate profit from its assets.

Return on Equity (ROE): A financial ratio that measures a company’s profitability relative to shareholders’ equity.

Revenue Recognition Principle: The principle that revenue should be recognized when it is earned, not necessarily when cash is received.

Revenue Recognition: The process of recording revenue when it is earned, even if cash has not been received.

Revenue: The income earned by a company from its primary business activities.

Sales Invoice: A document issued to a customer detailing the sale of goods or services.

Sales Returns and Allowances: Reductions in sales revenue due to returned merchandise or customer allowances.

Shareholder: An individual or entity that owns shares in a corporation.

Shareholder’s Equity: The residual interest in a company’s assets after deducting liabilities.

Single-Entry Accounting: A basic accounting method that records only one side of a transaction.

Solvency: A company’s ability to meet its long-term financial obligations.

Statement of Cash Flows: A financial statement that shows the inflows and outflows of cash during a specific period.

Statement of Changes in Equity: A financial statement that shows the changes in a company’s equity over a specific period.

Stock Dividend: A dividend paid to shareholders in the form of additional shares of stock.

Stock Split: The division of existing shares into multiple shares, often to reduce the market price per share.

Stockholder’s Equity: The residual interest in a corporation’s assets after deducting liabilities.

Straight-Line Depreciation: A method of allocating the cost of an asset evenly over its useful life.

Subsidiary Ledger: A detailed ledger containing specific accounts that roll up into a general ledger account.

Subsidiary: A company that is controlled by another company, known as the parent company.

Tax Accounting: The specialized branch of accounting focused on tax-related matters.

Time Series Analysis: The study of data points collected over time to identify patterns and trends.

Time Value of Money: The concept that money available today is worth more than the same amount in the future due to its earning potential.

Top-Line Growth: An increase in a company’s revenue or sales.

Treasury Bills (T-Bills): Short-term debt securities issued by the U.S. government to raise funds.

Treasury Stock: Shares of a company’s stock that have been repurchased and are held by the company.

Trial Balance: A statement that lists all the general ledger accounts and their balances to check for accuracy.

Turnover Ratio: A financial ratio that measures the efficiency of a company in managing its assets.

Turnover: The number of times an asset or inventory is replaced or sold within a specific period.

Underwriting: The process of evaluating and assuming the risk of insuring a person or entity.

Unearned Revenue: Money received in advance for goods or services not yet provided.

Unfavorable Variance: The difference between actual expenses and budgeted expenses, resulting in higher costs than expected.

Unit Cost: The cost associated with producing one unit of a product.

Unqualified Opinion: A clean audit opinion without any significant concerns or qualifications.

Unrealized Gain or Loss: A change in the value of an investment that has not been sold or realized.

Variable Cost: A cost that changes in direct proportion to changes in production or sales volume.

Vertical Analysis: The comparison of financial data with a base figure, expressed as a percentage.

Vertical Analysis: The comparison of financial data with a base figure, expressed as a percentage.

Vertical Analysis: The comparison of financial data with a base figure, expressed as a percentage.

Working Capital Management: The management of a company’s short-term assets and liabilities to ensure liquidity.

Working Capital: The difference between a company’s current assets and current liabilities, representing its short-term liquidity.

Zero Coupon Bond: A bond issued at a discount to its face value and does not pay periodic interest.

Zero-Based Budgeting: A budgeting approach that requires justifying all expenses from scratch, without considering previous budgets.

Z-Score: A statistical formula used to assess a company’s financial health and risk of bankruptcy.