We’ve all heard the basics – audits, liabilities, due diligence, but do we really know what they mean? Accounting can already be challenging enough without the convoluted language making it harder to understand. Don’t worry though – TrustRadius has you covered with a comprehensive list of some of the top accounting terms to make life (and your job) a whole lot easier. Keep this list handy while searching for the right accounting software too!

Like most things, accounting is a multifaceted subject that impacts multiple aspects of a business. With that in mind, we’ve organized these accounting terms in a way that highlights their specific role and responsibilities within an organization. While there’s most definitely other tax terms out there, this list was compiled with your most important and most utilized accounting terms in the workplace. They’re broken down into the following categories:

• Basic
• Cost
• Financial
• Managerial
• Tax

Basic Accounting Terms

More than likely you’ve heard or seen the terms listed below, but here’s your chance to get a good idea of what they mean. The following set of basic accounting terms are what you can consider foundational concepts and are used in multiple facets of business.

1. Asset: a resource a company owns that has a monetary value. Assets can be physical like equipment and inventory or non-physical like intellectual property and trademarks.
2. Accounts Payable: describes a business’s short-term debts owed to suppliers for goods and services purchased with credit. 
3. Accounts Receivable: used to describe a business’ owed revenue from its consumers for goods and services purchased with credit
4. Audit: an official investigation into a company’s finances, records, and compliance to ensure they are accurate and legal. Audits can be done internally, externally or by the Internal Revenue Service (IRS).
5. Closing the Books: used to describe the end of accounting periods, when financial records and statements need to be finalized and closed to properly verify balances, discrepancies, and highlight any profit or loss.
6. Double Entry Bookkeeping: is an accounting system used to track business transactions in at least two different accounts, usually one for debts and the other for credits, with each transaction affecting each account.
7. Equity: the value of a company after subtracting the total amount of liabilities (debts) from the total amount of assets.
8. Expenses: the various costs incurred by a business to generate revenue. If you’d like to learn more about business expenses and ways to manage them, see our expense management software page.
9. Liabilities: the total amount a business owes (money, goods, or services) and includes everything from wages, loans, cost of producing goods, etc. Balancing a company’s liabilities with its assets is how you get stable equity.
10. General Ledger: the sheet used to track a business’s financial transactions – both credit and debit. Pivotal for bookkeeping purposes, a general ledger is divided into assets, liabilities, equity, revenue, and expenses.

Cost Accounting Terms and Definitions

While most people don’t need to know the intricacies of what it costs to run a business, you should at least have a general understanding of how expenses and budgets work in a corporate setting. The following set of terms is focused on tracking, analyzing, and managing costs in a business.

1. Cost Allocation: is the process of distributing, identifying, and assigning costs to various departments, projects, and people for a company. 
2. Cost of Goods Sold: the total cost of producing a product or service. This number will usually appear on a company’s income statement and includes the price of raw materials, labor, packaging, depreciation, sales commissions, and any additional overhead due to production.
3. Direct Costs: the expenses directly related to the cost of a specific product or service a company sells. 
4. Fixed Cost: an expense a company pays for its business. Fixed costs are stable and don’t fluctuate based on production like rent, wages, and insurance.
5. Indirect Cost: is a company expense that can’t be directly traced to producing a product or service. It is usually an overhead or operating expense that is tied to multiple aspects of the business.
6. Inventory: is the stock of raw materials and goods a company has on hand. Inventory can include raw materials, works in progress, finished goods, and safety stock.
7. Overhead Cost: the total expense that is required to run a business, essentially how much to “keep the lights on.” These costs can be either fixed or variable, and they include items such as rent, utilities, and insurance.
8. Operating Cost: the total expense a company pays relating to their production or sales. These costs can be either fixed or variable, and they include items such as materials and supplies, equipment, and employee salaries.
9. Variable Costs: expenses that are based on how much a company is producing or selling. Variable costs are based on things like production costs, supplies and raw materials, and utilities.
10. Work in Progress (WIP): refers to the cost of products or projects that are still in the process of being developed, like labor, raw materials, and any overhead costs. If projects take place over multiple fiscal periods, companies will fill out a WIP section in their balance sheet to account for these expenses. 

Financial Accounting Vocabulary 

Financial accounting is what it sounds like: accounting and financial reporting for a business. I know it’s probably not the most exciting subject in the world, but understanding these concepts has its merits. The list below encompasses terms related to preparing and analyzing financial statements for a business or organization.

1. Balance Sheet: is a financial statement disclosing an organization’s assets, liabilities, and equity. Depicting the relationship between assets and liabilities, a balance sheet is used to evaluate an organization’s financial position.
2. Cash Flow Statement: describes the movement of cash into and out of a business over time. Generated from day-to-day operations, cash flow helps companies manage their obligations and financial investments.
3. Dividends: the percentage of company profits that is paid out to its shareholders as their portion of revenue. This usually occurs quarterly and can be paid out in either cash or additional shares.
4. Income Statement: a financial statement generated by the company that tracks their profits and losses over a period of time. It is sometimes called a profit & loss statement (P&L).
5. Net Profit: the total amount of money a company has after deducting their total amount of expenses. It is sometimes called the “bottom line” in business and is one of the most important indicators of company profitability.
6. Net Profit Margin: is the measure of how much net profit a company makes from the percentage of their revenue. It’s almost always in percentage form due to its formula: net income/revenue.
7. Gross Profit: the total amount of money a company has after deducting the cost of producing and selling their goods or service.
8. Gross Margin: the percentage of revenue a company has after subtracting the costs of production for its service or product. It’s almost always in a percentage form, as the formula for gross margin is gross profit/revenue.
9. Revenue: is the total amount of money a business brings in throughout the year, and is usually the first figure amount on an income statement.
10. Retained Earnings: refers to the earnings kept by a company after accounting for all dividends, taxes, and costs. Sometimes also referred to as earnings surplus, this money is usually earmarked for future activities or growth.

Managerial Accounting Terminology

Although it sounds like you have to be a manager to know what these words mean, you actually don’t. The managerial accounting terms listed below are meant to focus on internal business planning and decision making processes needed to understand business operations and performance.  

1. Acquisition: when one company buys out more than 50 percent of another company’s assets and shares. The acquiring company becomes a parent company and starts tracking the acquired business on their balance sheet.
2. Budget: the monthly or yearly financial plan that estimates how much money is spent over a period of time on different teams, projects, materials, etc. for a company. 
3. Capital Expenditure (Cap Ex): are expenses made by an organization that are used to upgrade, maintain or purchase long-term assets. 
4. Due Diligence: is a comprehensive appraisal and audit of a company’s liabilities and assets. This usually occurs before an acquisition, sale, or investment into the company. 
5. Liquidity: refers to a company’s ease at being able to pay off debts and liabilities when they are due without it affecting the market price. 
6. Net Present Value (NPV): the estimated value of all future cash flows over the entire lifetime of the investment discounted to the present value. Generally, businesses with a positive NPV are worth investing in while those with a negative are not.
7. Present Value (PV): refers to the estimated calculation of what a future sum of money is worth right now. Also referred to as present discounted value, this tells you what you’d need in today’s dollars to earn a specific amount in the future.
8. Research & Development (R&D): the cost incurred by a company when they are actively researching and exploring new ways to improve and create their products or services. 
9. Return on Investment (ROI): a financial ratio that is used to measure the profitability of an investment. It can be calculated by taking your net profit from investment and dividing it by the cost of the actual investment.
10. Variance Analysis: the analysis that compares the projected financial performance to the actual performance of a business. This analyzes the reasoning behind under or over spending on budgets and costs for the year or quarter.

Tax Accounting Terms to Know

Like you, corporations and businesses are also subject to federal and state taxes, however, their taxes go a little differently. Sometimes businesses have a certified public accountant (CPA) prepare and file their taxes since they are an accountant licensed by the state. Other times, members of the finance team from your business will do them. The following list of terms is related to key concepts and prep work that individuals filing taxes need to effectively navigate corporate tax regulations. 

1. Accounting Period: the time a company uses to sort, organize, and file their financial statements and reports for the year. Accounting periods follow the end of a calendar year or a fiscal year, depending on the organization, and they are used to determine the financial health of the company.
2. Adjusted Gross Income: a business’ total taxable income for the year, after subtracting certain deductions, and it can either be a gain or loss. 
3. Alternative Minimum Tax (AMT): this allows for a minimum of 15% tax on the adjusted financial statements for corporations (income statement after deductions). This law generally applies to large corporations with an income statement over 1 billion.
4. Basis: when acquiring an asset, there is a basis associated with it – during the sale of that asset, the basis is used to calculate the profit made by the sale.
5. Capital Gains: is an increase in an asset’s value over time once it becomes more valuable than its original price, usually after it is sold.
6. Deductions: an amount that can be subtracted from a company’s income when filing corporate taxes, so that tax is not paid on it. Sometimes it is referred to as a tax write-off.
7. Depreciation: refers to the decrease in value of an asset over its lifetime. In accounting, it’s a method used to spread the cost of physical assets over some time for tax and accounting purposes.
8. Exemptions: a type of deduction that lowers the amount of taxable income for a corporation. The Internal Revenue Service (IRS) has a variety of exemptions allowed for corporations and businesses.
9. Form 1120: the corporate tax form needed to file taxes in the United States. It is used to report the income, gains, losses, credits, and deductions of a company to find the income tax liability of that company.
10. Net Operating Loss (NOL): describes a period in a company when its allowed deductions are greater than its taxable income. There is also a tax credit that can be applied to companies that have an NOL.

Turn Common Accounting Terms into Action with the Best Software

TrustRadius is committed to helping buyers make confident software purchase decisions. This article was created to make accounting terminology easier to understand and more applicable to everyday business. Keep these accounting terms in mind when browsing through TrustRadius’ list of best accounting software and product reviews.