Accounting Dictionary: Basic Accounting
Terms Every Student Should Know

Accounting can feel overwhelming when you’re just starting out, especially with so many new terms to understand. This simple dictionary brings together the most important accounting concepts in one place, explained in easy language. Whether you’re a student, beginner, or revising for exams, these definitions will help you learn faster and build a strong foundation. Use it as a quick reference whenever you need clarity.

A

Accrual

Recording income and expenses when they are earned or incurred, not when cash is received or paid. This method provides a more accurate reflection of financial performance.

Accrued Expense

An expense that has been incurred but not yet billed or paid, such as wages payable or interest payable.

Accrued Revenue

Income that has been earned but not received yet, like interest earned but not collected.

Accounting

The process of recording, summarizing, and interpreting financial information to support decision-making.

Accounting Cycle

A series of steps used to record transactions, prepare financial statements, and close accounts for each reporting period.

Accounting Equation

The basic foundation of accounting:
Assets = Liabilities + Equity
It shows how every transaction affects the company’s financial position.

Accounts Payable

Amounts a business owes to suppliers for goods or services received on credit. It represents short-term obligations.

Accounts Receivable

Amounts customers owe the business for goods delivered or services rendered on credit. It is expected to convert to cash soon.

Amortization

The systematic allocation of the cost of an intangible asset over its useful life. Examples include trademarks, software, and patents.

Annual Report

A yearly publication that includes financial statements, management discussion, and performance insights.

Asset

A resource owned by the business that has value and provides future economic benefit, such as cash, buildings, or inventory.

Audit

An independent review of financial statements to ensure accuracy, fairness, and compliance with accounting standards.

B

Bad Debt

Money owed by a customer that is unlikely to be collected. It is written off as an expense.

Balance

The remaining amount in an account after total debits and credits are considered.

Bank Statement

A monthly report from the bank showing deposits, withdrawals, and balance details.

Bond

A long-term debt instrument where the issuer promises to pay interest and repay the principal at maturity.

Bookkeeping

The daily process of recording business transactions in journals and ledgers.

Break-Even Point

The sales level where total revenue equals total cost, resulting in zero profit or loss.
Break-Even = Fixed Costs ÷ Contribution Margin

Budget

A financial plan estimating income and expenses for a specific future period.

C

Capital

Funds invested by the owner(s) into the business. It represents ownership and supports operations.

Capital Expenditure

Spending on long-term assets like machinery or buildings that provide future benefits.

Capital Stock

Shares issued by a corporation representing ownership.

Cash

Currency and funds readily available for use.

Cash Flow

Movement of cash into and out of the business during a period. It helps assess liquidity.

Chart of Accounts

A complete list of all account names and numbers used by a business.

Closing Entry

Entries made at the end of the accounting period to transfer temporary account balances to capital.

Commission

Income earned based on a percentage of sales or transactions completed.

Compound Interest

Interest calculated on both the principal and accumulated interest.
A = P(1 + r/n)ⁿᵗ

Conservatism

A principle requiring accountants to report expenses and liabilities as soon as possible, but revenue only when it is certain.

Contra Account

An account that reduces the balance of a related account, such as Accumulated Depreciation reducing Fixed Assets.

Corporation

A legal business structure separate from its owners, offering limited liability.

Cost Accounting

The process of identifying, measuring, and analyzing production costs to assist management.

Cost of Goods Sold (COGS)

The direct cost of producing or purchasing goods sold.
COGS = Opening Stock + Purchases – Closing Stock

Credit

An entry on the right side of an account that increases liabilities, equity, or revenue, and decreases assets or expenses.

Creditor

A person or entity to whom the business owes money.

Current Asset

Assets expected to be converted into cash within one year, like inventory or receivables.

Current Liability

Obligations due within one year, such as accounts payable or short-term loans.

Current Ratio

Measures the company’s ability to pay short-term debts.
Current Ratio = Current Assets ÷ Current Liabilities

D

Debit

An entry on the left side of an account that increases assets and expenses and decreases liabilities and equity.

Debt

Money borrowed that must be repaid.

Debt-to-Equity Ratio

Indicates financial leverage.
Debt-to-Equity = Total Debt ÷ Total Equity

Debtor

A customer who owes money to the business.

Deficit

When expenses exceed income or liabilities exceed assets.

Deflation

A decrease in general price levels over time.

Depreciation

The gradual reduction of a tangible asset’s value over its useful life.
Straight-Line Depreciation = (Cost – Residual Value) ÷ Useful Life

Depreciation Methods

Approaches to calculating depreciation, such as straight-line or reducing balance.

Direct Labor Costs

Wages paid to workers directly involved in manufacturing products.

Disposable Income

Income left after paying taxes.

Dividend

A portion of profits distributed to shareholders.

Dividends Payable

Dividends declared but not yet paid.

Double-Entry

The accounting system where every transaction affects at least two accounts.

Draft

A written order directing one party to pay another.

E

Economics

The study of how individuals and businesses allocate resources. Included for foundational understanding.

Endorsement

A signature that transfers the rights of a check or financial document to another person.

Equity

The owner’s claim on assets after liabilities are deducted.
Equity = Assets – Liabilities

Escrow

Money or documents held by a third party until certain conditions are met.

ESOP

An Employee Stock Ownership Plan that allows employees to own company shares.

Executor

A person appointed to manage a deceased person’s estate.

Expenditure

Money spent to acquire assets or pay expenses.

Expense

Costs incurred during normal business operations that reduce profit.

F

Fiduciary

A person obligated to act in the best interest of another, often in financial matters.

Finance

The management of money, including investment and borrowing.

Financial Accounting

Preparing and reporting financial information for external users.

Financial Statements

Key reports such as the Income Statement, Balance Sheet, and Cash Flow Statement.

Finished Goods

Completed products ready for sale.

Fiscal Year

A 12-month accounting period used for reporting.

Fixed Assets

Long-term tangible assets like buildings, machines, or vehicles.

FOB (Free on Board)

A shipping term indicating when ownership transfers from seller to buyer.

Freight In

Shipping cost paid on purchases, added to the cost of goods.

Freight Out

Shipping cost paid to deliver goods to customers, treated as an expense.

G

GAAP

Generally Accepted Accounting Principles used for financial reporting.

GAAS

Generally Accepted Auditing Standards for performing audits.

General Ledger

A collection of accounts summarizing all financial transactions.

Going Concern

The assumption that a business will continue operating in the foreseeable future.

Goodwill

The intangible value of a company’s reputation, customer loyalty, and brand strength.

Gross Profit

The profit after subtracting COGS from sales.
Gross Profit = Net Sales – COGS

Gross Sales

Total sales before deducting returns or discounts.

H

Historical Cost

Recording assets at their original purchase price, not current market value.

I

Impairment

A permanent reduction in the value of an asset.

Income

Money earned from business activities.

Income Statement

A report showing revenue, expenses, and profit for a specific period.

Indirect Cost

Costs not directly tied to production, such as utilities or admin salaries.

Inflation

A general rise in prices over time.

Insolvency

When a business cannot pay its debts.

Intangible Asset

Non-physical assets like trademarks or patents.

Interest

The cost of borrowing money.
Simple Interest = Principal × Rate × Time

Interest Payable

Interest owed but not yet paid.

Interest Receivable

Interest earned but not yet received.

Interim Financial Statements

Reports prepared for periods shorter than a full year.

Inventory

Goods available for sale or production.

Invoice

A document requesting payment for goods or services.

J

Journal

A book where transactions are recorded chronologically before posting to the ledger.

L

Lease

A contract giving the right to use an asset for a specified period.

Ledger

A collection of accounts that shows cumulative transactions.

Leverage

Using borrowed funds to increase potential returns.

Liability

Obligations the business must settle in the future.

Limited Liability Company (LLC)

A business structure where owners are protected from personal liability.

Limited Liability Partnership (LLP)

A partnership where partners have limited liability.

Liquid Assets

Assets that can be quickly converted into cash.

Liquidity

A company’s ability to meet short-term obligations.

Liquidity Ratio

A measure of short-term financial health.

Loss

When total expenses exceed total income.

Long-Term Liability

Debts payable after more than one year.

M

Management Accounting

Reporting financial and non-financial information internally to support decision-making.

Margin

The difference between selling price and cost.
Margin = (Selling Price – Cost) ÷ Selling Price

Matching Principle

Expenses must be matched with the revenues they help generate.

Materiality

The principle that only information that affects decisions must be disclosed.

O

Operating Expense

Expenses related to day-to-day operations, such as rent or utilities.

Operating Profit

Profit earned after deducting operating expenses.
Operating Profit = Gross Profit – Operating Expenses

Outstanding Check

A check issued but not yet cleared by the bank.

P

P/E Ratio

Price-to-earnings ratio.
P/E = Market Price per Share ÷ Earnings per Share

Payroll

Total wages and salaries paid to employees.

Prepaid Expense

Expenses paid in advance for benefits to be received later.

Provision

An estimated amount set aside for future obligations.

Profit

The amount left after deducting all expenses from revenue.
Profit = Revenue – Expenses

Promissory Note

A written promise to pay a certain amount by a certain date.

Purchases

Goods bought for resale.

Q

Quick Assets

Highly liquid assets such as cash and receivables.

Quick Ratio

Measures liquidity excluding inventory.
Quick Ratio = Quick Assets ÷ Current Liabilities

R

Receivables

Amounts due from customers or others.

Retained Earnings

Accumulated profits not distributed as dividends.

Return on Investment (ROI)

A measure of profitability from an investment.
ROI = (Gain – Cost) ÷ Cost × 100

Revenue Recognition

Rules determining when revenue should be recorded.

Revenues

Income earned from normal business operations.

S

Salary / Wage

Payment to employees for work performed.

Sale

Exchange of goods or services for money.

Share

A unit of ownership in a company.

Simple Interest

Interest calculated only on the principal amount.

Solvency

A company’s ability to meet long-term obligations.

Stockholder

An individual or entity that owns shares in a company.

Surplus

An excess of income or assets.

T

T-Account

A visual representation of an account used to illustrate debits and credits.

Trade Discount

A reduction in selling price given to customers, usually for bulk purchases.

Transaction

Any financial event recorded in the accounting system.

Trial Balance

A list of all account balances used to verify that debits equal credits.

Turnover

The total sales or the speed at which inventory is sold.

U

Unearned Income

Money received before a service is performed or goods are delivered.

V

Value

The worth of an asset or item.

VAT

Value Added Tax charged on goods and services.

Vendor

A supplier selling goods or services to the business.

Void

To cancel a transaction or document.

W

Working Capital

A measure of short-term financial health.
Working Capital = Current Assets – Current Liabilities

Write-Off

Removing an uncollectible or worthless amount from the accounts.

Y

Yield

The return earned on an investment, usually expressed as a percentage.