42 Basic Accounting Terms You Need to Know to Succeed in Business

Source: WallStreetMojo

If you are just starting out in the accounting world, there are some basic accounting terms you should familiarize yourself with. Accounting is the language of business, and understanding the fundamentals is key to success. From the basic concepts of income and expenses to more complex terms like depreciation and amortization, there is a lot to learn.

To help get you started, here is a list of 42 basic accounting terms you should know:

1. Assets: Anything of value owned by a business. Examples include cash, inventory, accounts receivable, and equipment.

2. Liabilities: Obligations of a business to another party. Examples include accounts payable, loans, and taxes.

3. Equity: The difference between a company’s assets and liabilities.

4. Income: Money earned from selling goods or services.

5. Expenses: Money spent to generate revenue.

6. Profit: The difference between income and expenses.

7. Cash flow: The movement of money in and out of a business.

8. Accounts receivable: Money owed to a business from customers for goods or services.

9. Accounts payable: Money owed by a business to suppliers for goods or services.

10. Double-entry accounting: An accounting system that requires an equal debit and credit for every transaction.

11. Balance sheet: A financial statement that summarizes a company’s assets, liabilities, and equity.

12. Trial balance: A list of all balances in the ledger accounts of a business.

13. Accrual basis of accounting: An accounting method that records revenue and expenses when they are earned, regardless of when cash is received or paid.

14. Depreciation: A systematic allocation of the cost of an asset over its useful life.

15. Amortization: A systematic allocation of the cost of an intangible asset over its useful life.

16. General ledger: A record of all financial transactions of a business.

17. Journal: A book of original entry in which financial transactions are recorded.

18. Chart of accounts: A list of all accounts used by a business.

19. Ledger: A book of accounts in which financial transactions are recorded.

20. Contingent liabilities: Potential liabilities that may or may not become actual liabilities.

21. Revenue recognition: The process of recognizing revenue from the sale of goods or services.

22. Accrual: An expense or income that has been incurred but not yet paid or received.

23. Deferred revenue: Revenue that has been earned but not yet received.

24. Allowance for doubtful accounts: An account used to estimate uncollectible receivables.

25. Bad debt expense: Expense associated with uncollectible receivables.

26. Cost of goods sold: The cost of the goods sold to customers.

27. Inventory: The goods a business has available for sale.

28. Valuation: The process of determining the value of a business or asset.

29. Cost basis: The amount paid for an asset.

30. Mark-to-market accounting: An accounting method that adjusts the value of an asset or liability to its current market value.

31. Leverage: The ability to use borrowed funds to increase returns.

32. Capital structure: The composition of a company’s long-term debt and equity.

33. Working capital: The difference between a company’s current assets and current liabilities.

34. Break-even point: The point at which a business’s revenues equal its expenses.

35. Cash flow statement: A financial statement that summarizes the movement of cash in and out of a business.

36. Leveraged buyout: The purchase of a company using a combination of debt and equity financing.

37. Internal rate of return: The rate of return that a company earns on its investments.

38. Return on investment: The amount of money earned compared to the amount of money invested.

39. Fair value accounting: An accounting method that values assets and liabilities at their current market value.

40. Ratio analysis: An analysis of a company’s financial statements that is used to evaluate its performance.

41. Present value: The value of an asset or liability at the present time.

42. Discounted cash flow: A method of valuing an asset or liability by discounting future cash flows.

Learning these basic accounting terms is the first step to understanding the fundamentals of accounting. With a basic understanding of these terms, you can move on to more complex accounting concepts.