Basic Accounting Terms for Business Leaders

 

“The beginning of wisdom is the definition of terms.”

– Socrates

In any field of study, the road to success begins with learning certain fundamental concepts. In business, this means becoming familiar with terms used to describe money and commerce. Below are 20 common accounting terms and their definitions.

 

List of Basic Accounting Terms

Accounts Payable

The amount owed to a creditor (a party that loans money or assets to another party) for delivered goods or completed services.

Accounts Receivable

Invoices or dollar amounts that a company is owed from its clients.

Assets

Anything of value to which a particular party has legal claim. Cash, securities, inventory, stocks and bonds are all considered assets.

Balance Sheet

A financial statement that presents a company’s financial position at a particular moment in time. A balance sheet includes information such as assets, liabilities and stockholder’s equity and allows people to see what a company owns and what it owes to others.

Capital

Wealth that is owned by a company in the form of money or other assets.

Cash Flow

The net amount (what remains after expenses are deducted) of cash that moves in and out of a company during a given period of time.

Credit

This term has several definitions. Commonly, it is either (1) an agreement in which a borrower receives cash or something of value and agrees to repay the lender at a later date (usually with interest) or (2) an accounting entry that shows a decrease in assets or increase in liabilities.

Debt

An amount of money one party owes to another.

Dividends Paid

The total amount a company pays regularly to its shareholders from its profits. 

Earnings Per Share

The measure of how a stock performs on the market during a certain period of time. Earnings per share are calculated by dividing the net earnings of a company by the average number of “shares outstanding” (shares still in circulation).

Goodwill

A word that describes intangible assets of a company, such as the value of its brand name, a solid customer base, good relations with customers and employees or proprietary technology.

Gross Profit

A company’s total revenue after deducting the costs associated with making and selling its products or providing its services.

Income Statement

A summary of both a company’s income (in the form of sales, earnings, etc.) and expenses over a specific period of time.

Inventory

Physical items (either completed products or materials used in the production process) that a company holds for sale.

Journal

A book containing original entries of daily financial transactions. Journal transactions are arranged in order by dates.

Liabilities

Any debts or other financial obligations owed by one entity to another. Liabilities can be paid in money, goods or services.

Property, Plant and Equipment

A term that describes the long-term tangible assets that a business uses while continuing its operations for an extended period of time, such as buildings or computers.

Retained Earnings

Any earnings a company has accumulated that are retained for future business needs or future distribution to company owners.

Shareholders’ Equity

A measure of a company’s net worth (the funds that remain after all the debts and creditors are paid). Shareholders’ equity is calculated by subtracting a company’s total liabilities from its assets.

Stock Compensation Plans

A benefit sometimes given to employees that allows them to purchase their employer’s stock at a specified price during a particular time period.

Sources: New York Society of Certified Public Accountants, Investopedia and AccountingCoach

 

The Basic Accounting Equation

The basic accounting equation is a key concept in understanding how money functions in a business setting. It is necessary, The Balance explains, in order to understand the relationship between assets, capital and liabilities.

It looks like this:

 

Assets = Capital + Liabilities

The equation expresses that a company’s assets (or its total value) is equal to its capital (the total of what it owns) plus its liabilities (the total of what it owes to other parties). Shareholders’ equity (a company’s net worth) can also be calculated using the same quantities:

Shareholders’ Equity = Assets – Liabilities

After grasping the basic concepts listed above, individuals can begin to acquire the advanced knowledge needed to succeed in higher-level business roles.

 

Your Business Education

For those wishing to earn their business degree, Husson University provides multiple options for students to customize their education. The online BSBA in Management and online BSBA in Marketing both provide a practical curriculum that graduates can immediately apply to the real world. In addition, both programs can be completed in as little as one year, making it easier than ever for students to reach their career goals.