Accounting Glossary: Terms Explained Simply

• Absorption CostingAssigns all manufacturing costs, fixed and variable, to each unit produced.
• Accounting EquationAssets = Liabilities + Equity. The formula behind every transaction.
• Accounts PayableMoney a business owes suppliers for goods and services bought on credit.
• Accounts ReceivableMoney customers owe a business for goods and services sold on credit.
• Accrual AccountingRecords revenue when earned and expenses when incurred, not when cash moves.
• Accrued ExpenseA cost incurred but not yet paid, recorded as an expense and a liability.
• Accumulated DepreciationThe running total of depreciation on an asset, deducted from its cost.
• AssetA resource a business owns or controls that is expected to bring future benefit.
• Bad DebtAn amount a customer owes that the business does not expect to collect.
• Balance SheetA statement of assets, liabilities and equity at a specific date.
• Bank ReconciliationMatches the cash book to the bank statement and explains every difference.
• Book ValueAn asset’s cost minus accumulated depreciation to date.
• Break-Even PointThe sales level where total revenue equals total costs: no profit, no loss.
• BudgetA financial plan of expected income and expenses for a future period.
• Capital ExpenditureSpending to acquire or improve a long-term asset that benefits many periods.
• Cash FlowThe movement of cash in and out of a business: operating, investing, financing.
• Contribution MarginSales minus variable costs: what each sale contributes to fixed costs and profit.
• Cost of Goods Sold (COGS)The direct cost of the goods a business sold during a period.
• Cost-Volume-Profit (CVP) AnalysisStudies how volume, price and costs affect profit.
• CreditThe right side of an account. Increases liabilities, equity and revenue.
• Current RatioCurrent assets divided by current liabilities: a quick liquidity test.
• DebitThe left side of an account. Increases assets and expenses.
• Debt-to-Equity RatioCompares what a business owes with the owners’ equity.
• DepreciationSpreads the cost of a non-current asset over its useful life.
• Direct CostA cost that can be traced to a specific product, job or department.
• DividendA distribution of a company’s profit to its shareholders.
• DrawingsCash or goods an owner takes from a sole trader or partnership business.
• EquityThe owner’s claim on assets after liabilities: Assets − Liabilities.
• ExpenseA cost incurred in earning revenue. Reduces profit and equity.
• FIFO (First In, First Out)Inventory method that assumes the oldest goods are sold first.
• Fixed CostA cost that stays the same in total however much you produce or sell.
• Going ConcernThe assumption that a business will keep operating for the foreseeable future.
• Gross ProfitRevenue minus cost of goods sold, before operating expenses.
• Gross Profit MarginGross profit as a percentage of revenue.
• Income StatementReports revenue, expenses and profit over a period.
• InventoryGoods held for sale or materials used to make products: a current asset.
• Inventory TurnoverHow many times a business sells and replaces its stock in a period.
• Journal EntryThe first record of a transaction: date, debits, credits and narration.
• LedgerGroups all transactions by account and shows each account’s balance.
• LiabilityAn amount a business owes to others, such as loans and payables.
• Limiting FactorA scarce resource that restricts output; rank products by contribution per unit of it.
• Margin of SafetyHow far sales can fall before the business reaches break-even.
• Marginal CostingUnit cost includes only variable costs; fixed costs are charged to the period.
• Matching PrincipleExpenses are recorded in the same period as the revenue they help earn.
• Net Present Value (NPV)Future cash flows discounted to today, minus the investment.
• Net ProfitProfit left after all expenses, interest and tax: the bottom line.
• Net Profit MarginNet profit as a percentage of revenue.
• Opportunity CostThe value of the next best alternative you give up when you choose.
• OverheadIndirect costs of running a business that cannot be traced to one product.
• Petty CashA small cash float for minor day-to-day expenses, often run on the imprest system.
• Prepaid ExpenseA payment made in advance, held as an asset until it is used up.
• Quick RatioA stricter liquidity test that excludes inventory.
• Reducing Balance DepreciationCharges a fixed percentage of the remaining book value each year.
• Relevant CostA future, incremental cash cost that differs between options.
• Residual ValueThe amount expected to be recovered from an asset at the end of its life.
• Retained EarningsCumulative profits a company has kept rather than paid out as dividends.
• Return on Investment (ROI)Profit earned on an investment relative to its cost, as a percentage.
• RevenueIncome earned from selling goods or services before expenses.
• Revenue ExpenditureDay-to-day running costs, charged as an expense when incurred.
• Standard CostingPredetermined costs compared with actual costs to find variances.
• Straight-Line DepreciationCharges the same depreciation each year: (cost − residual value) ÷ life.
• Sunk CostMoney already spent and unrecoverable, so ignored in future decisions.
• Suspense AccountA temporary account holding a trial balance difference until it is explained.
• Trial BalanceA list of ledger balances used to check that debits equal credits.
• Variable CostA cost that rises and falls in proportion to output.
• Variance AnalysisCompares budgeted and actual results to find favourable and adverse differences.
• Weighted Average CostGives every unit the same blended cost: total cost ÷ total units.
• Working CapitalCurrent assets minus current liabilities: a measure of short-term health.

More terms are added regularly. Learn them by doing: try the flashcards or play Debit or Credit?. New to accounting? Follow the Start Here path, or take a quiz: financial, cost or management.