If you're just entering an accounting degree program, you've probably started to encounter a lot of unfamiliar accounting terminology. Whether you're running into industry titles and acronyms or finance terminology you haven't yet covered in your coursework, you don't want to let all this new language create confusion and anxiety. Some initial familiarity with basic accounting terms—especially those referring to the industry you hope to enter after obtaining your degree—can help you focus on the work at hand.
While you'll probably cover much of this common accounting terminology at some point while pursuing your degree, we've put together a quick-reference list of some of the basic terms you may want to familiarize yourself with prior to Accounting 101.
(*While technically bookkeeping and accounting are different, you'll still need to be familiar with these key terms.)
Balance Sheet – A financial document that reconciles all the company's assets with their liabilities and equity. The balance sheet provides a real-time view of the current profit/loss status of the company.
- Current Assets – Capital that has immediate value (typically that which will be used within one year), including cash, sellable products, or accounts receivable.
- Fixed Assets – Assets with long-term value, such as land and property, tools and machinery, or vehicles.
- Liabilities – All money and outstanding debts owed by the company. This could include accounts payable, loans, liens on property, or other long-term investments.
- Equity – All capital currently invested in the company, including any profits that have been re-invested as retained earnings.
- Accounts Receivable – Outstanding payments the company is currently owed by all customers/clients. (This is essentially anything the company bills out.)
- Accounts Payable – Outstanding payments the company currently owes to suppliers, vendors, and creditors. (Essentially any bills the company still has yet to pay.)
Income Statement – A report that tracks the company's revenues, costs, and expenses over a set period (typically quarterly or annually). This is also called a "profit and loss statement."
- Revenue – All incoming money from selling products and services or generated through a company's additional assets. Also referred to as "gross income."
- Costs (of Goods Sold) – The total money spent to produce goods and services, including production, labor, storage, and material costs.
- Expenses – Any additional money spent operating the company that's not associated with the production of sellable products and services. (Expenses are often divided into four categories: fixed, variable, accrued, and operation).
- Net Income – The company's total profit (or loss, if negative) once costs and expenses are subtracted from revenue.
General Ledger – Record of all financial transactions across all of a company's accounts, which is maintained continuously for the entire life of the company.
Terminology Used in Calculations
Credit – An entry on a balance sheet that decreases asset values and/or increases liability and equity values. (Outgoing payments)
Debit – An entry on a balance sheet that increases asset values and/or decreases liability and equity values. (Incoming payments)
Return on Investment (ROI) – Used to determine how much of the money spent producing goods/services was recouped in profits. You find ROI by dividing net income by the cost of investment on an income statement.
Present Value (PV) – The amount a future sum of money is currently worth today. Because a company can invest existing funds in order to collect interest or ROI in the future, a set sum of money is not worth the same thing now that it will be in, for example, 2 years. Accountants may use present value calculations to determine the true value of sales to be paid in the future, or to aid in investment decisions.
Types of Accountants
Certified Public Accountant (CPA) – CPAs are accountants who have passed the American Institute of Certified Public Accountants' (AICPA) Uniform CPA Examination and have been licensed by their state's Board of Accountancy. Certified Public Accountants may work with individuals or large corporations to prepare all relevant tax and financial documents required by the IRS.
Certified Management Accountant (CMA) – Certified Management Accountants work on a company's internal financial records and processes to aid in business planning, cost/revenue analysis, and management of financial operations.
Auditors – Auditors evaluate a company's financial records for accuracy, check for mistakes and discrepancies, and some may issue evaluations of profitability. Auditors may be internal or external (independent) of the company being audited.