150+ terms — every definition, formula, and example you need to master accounting.
Amounts a business owes to suppliers or vendors for goods and services received but not yet paid. Accounts payable is a current liability on the balance sheet representing short-term obligations.
Example
A company purchases $5,000 of inventory on credit — the $5,000 is recorded as accounts payable until payment is made.
A ratio measuring how quickly a company pays its suppliers. A higher ratio means faster payment.
Formula
AP Turnover = Cost of Goods Sold ÷ Average Accounts Payable
Money owed to a business by its customers for goods or services already delivered on credit. Accounts receivable is a current asset because it is expected to be collected within one year.
Example
A consulting firm invoices a client $10,000 for services rendered — the $10,000 appears as accounts receivable until the client pays.
A ratio measuring how efficiently a company collects its receivables. Higher turnover means faster collection.
Formula
AR Turnover = Net Credit Sales ÷ Average Accounts Receivable
An accounting method where revenues and expenses are recorded when earned or incurred, regardless of when cash is actually received or paid. Required by GAAP for most businesses.
Example
A law firm records $8,000 of revenue in December even though the client pays in January, because the work was performed in December.
Expenses that have been incurred but not yet paid or recorded in the accounting system. They are recorded as a liability at period-end through an adjusting journal entry.
Formula
Adjusting Entry: Debit Expense / Credit Accrued Liability
Example
Salaries earned by employees in December but paid in January must be accrued at December 31.
The total depreciation expense recorded against a long-term asset since it was placed in service. It is a contra-asset account that reduces the gross cost of the asset on the balance sheet.
Formula
Book Value = Cost − Accumulated Depreciation
Example
Equipment costing $50,000 with $20,000 of accumulated depreciation has a book value of $30,000.
Journal entries made at the end of an accounting period to bring account balances up to date before financial statements are prepared. They ensure revenues and expenses are recorded in the correct period.
Example
Recording one month of prepaid insurance as expense, or accruing unpaid wages, are both adjusting entries.
A contra-asset account used to estimate the portion of accounts receivable that will not be collected. It is used with the allowance method for bad debts (as opposed to the direct write-off method).
Formula
Net AR = Gross AR − Allowance for Doubtful Accounts
The systematic allocation of the cost of an intangible asset over its useful life. Similar to depreciation but applied to intangibles such as patents, trademarks, and goodwill.
Formula
Annual Amortization = Cost ÷ Useful Life (years)
Example
A $60,000 patent with a 10-year life is amortized at $6,000 per year.
Economic resources owned or controlled by a business that are expected to provide future benefits. Assets are reported on the balance sheet and include cash, receivables, inventory, equipment, and more.
Formula
Assets = Liabilities + Equity
The cost recognized when a business determines that some portion of its accounts receivable will not be collected. It is recorded as an expense to match the revenue earned from those sales.
Formula
Bad Debt Expense = Estimated Uncollectible Receivables
Example
A company estimates 2% of its $500,000 receivables will be uncollectable → Bad Debt Expense of $10,000.
A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time. It shows what the company owns, what it owes, and the residual interest of owners.
Formula
Assets = Liabilities + Shareholders' Equity
The net value of an asset as recorded on the balance sheet, equal to its original cost minus accumulated depreciation. Also refers to total shareholders' equity (assets minus liabilities) for a whole company.
Formula
Book Value of Asset = Cost − Accumulated Depreciation
Example
A truck purchased for $80,000 with $30,000 accumulated depreciation has a book value of $50,000.
A calculation determining the level of sales at which total revenues equal total costs, resulting in zero profit or loss. Above this point, a business generates profit; below it, a loss.
Formula
Break-Even Units = Fixed Costs ÷ (Selling Price per Unit − Variable Cost per Unit)
Example
Fixed costs $60,000 ÷ (Price $20 − Variable cost $8) = 5,000 units to break even.
Spending on acquiring, upgrading, or maintaining physical or intangible long-term assets. Unlike operating expenses, CapEx is capitalized on the balance sheet and expensed gradually through depreciation.
Example
Purchasing new manufacturing equipment for $200,000 is a capital expenditure; paying the monthly lease for office space is not.
An accounting method where revenues are recorded when cash is received and expenses are recorded when cash is paid. Simpler than accrual accounting but not compliant with GAAP for most businesses.
Example
Under cash basis, a December sale paid in January would be recorded as revenue in January.
A financial statement that shows the sources and uses of cash during an accounting period across three categories: operating, investing, and financing activities.
A complete list of all accounts used by a business in its general ledger, organized by category (assets, liabilities, equity, revenues, expenses). Each account has a unique number for easy identification.
Example
Account 1000 = Cash, 1100 = Accounts Receivable, 2000 = Accounts Payable, 4000 = Sales Revenue.
Journal entries made at the end of the accounting period to transfer balances from temporary accounts (revenues, expenses, dividends) to retained earnings and zero out those accounts for the next period.
An accounting principle that directs accountants to choose solutions that result in lower asset values and lower income when faced with uncertainty. "When in doubt, record losses but not gains."
Example
Writing inventory down to market value when it falls below cost, but not writing it up when market rises above cost.
An account that carries a balance opposite to its related (parent) account and is used to reduce the net value of that account on the financial statements. Examples include accumulated depreciation and allowance for doubtful accounts.
Example
Accumulated Depreciation is a contra-asset that reduces the gross cost of equipment on the balance sheet.
The amount of revenue remaining after deducting variable costs. Contribution margin "contributes" to covering fixed costs and generating profit.
Formula
Contribution Margin = Revenue − Variable Costs CM Ratio = Contribution Margin ÷ Revenue
Example
Revenue $20 per unit − Variable cost $8 per unit = $12 contribution margin per unit.
A legal business entity separate from its owners (shareholders), providing limited liability protection. Corporations pay income tax at the entity level (C-Corp) or pass through income to owners (S-Corp).
The direct costs of producing the goods that a company sells. Includes raw materials, direct labor, and manufacturing overhead. Subtracted from revenue to determine gross profit.
Formula
COGS = Beginning Inventory + Purchases − Ending Inventory
Example
Beginning inventory $40,000 + Purchases $120,000 − Ending inventory $35,000 = COGS $125,000.
An entry on the right side of a T-account. Credits increase liabilities, equity, and revenue accounts, and decrease asset and expense accounts. Every transaction has at least one debit and one credit.
Assets that are expected to be converted to cash, sold, or consumed within one year or one operating cycle. Common examples include cash, accounts receivable, prepaid expenses, and inventory.
Obligations expected to be settled within one year using current assets. Common examples include accounts payable, accrued expenses, short-term notes payable, and the current portion of long-term debt.
A liquidity ratio that measures a company's ability to pay short-term obligations using its short-term assets. A ratio above 1.0 means current assets exceed current liabilities.
Formula
Current Ratio = Current Assets ÷ Current Liabilities
Example
Current Assets of $300,000 ÷ Current Liabilities of $150,000 = Current Ratio of 2.0
Measures the average number of days it takes to collect payment after a sale. Lower DSO indicates faster collection.
Formula
DSO = (Accounts Receivable ÷ Net Credit Sales) × 365
An entry on the left side of a T-account. Debits increase asset and expense accounts, and decrease liability, equity, and revenue accounts. Every transaction has at least one debit and one credit.
A leverage ratio comparing total liabilities to shareholders' equity. It indicates how much debt a company uses relative to equity to finance its assets. Higher ratios mean more financial leverage and risk.
Formula
Debt-to-Equity = Total Liabilities ÷ Shareholders' Equity
Cash received from a customer before the related goods or services have been delivered. It is recorded as a liability because the company still owes the customer the product or service.
Formula
Adjusting Entry: Debit Deferred Revenue / Credit Revenue (as earned)
Example
A software company receives $1,200 for a 12-month subscription — $100 is recognized as revenue each month.
The systematic allocation of a tangible long-term asset's cost over its useful life. Depreciation is an expense that reduces net income and the book value of the asset each period.
Formula
Straight-Line: Annual Depreciation = (Cost − Salvage Value) ÷ Useful Life
Example
Equipment costs $50,000, salvage value $5,000, life 5 years → Annual depreciation = $9,000.
The tax savings resulting from being able to deduct depreciation expense. Because depreciation reduces taxable income, it reduces the amount of tax owed.
Formula
Tax Shield = Depreciation Expense × Tax Rate
A distribution of a portion of a company's earnings to its shareholders. Dividends reduce retained earnings and are not an expense on the income statement.
Example
A company declares a $2 per share dividend on 100,000 shares → total dividend of $200,000 reduces retained earnings.
An accelerated depreciation method that applies twice the straight-line rate to the asset's declining book value each year. Results in higher depreciation in early years and lower in later years.
Formula
DDB Rate = (1 ÷ Useful Life) × 2; Annual Depr. = Book Value × DDB Rate
Example
Asset with 5-year life: DDB rate = 40%. Year 1: $50,000 × 40% = $20,000 depreciation.
The fundamental accounting system where every transaction affects at least two accounts — for every debit there is an equal credit. This keeps the accounting equation in balance.
Formula
Total Debits = Total Credits
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company's core operational profitability, widely used for valuation and comparing companies.
Formula
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
The residual interest in the assets of a business after deducting its liabilities. Also called shareholders' equity, net assets, or book value. Includes paid-in capital and retained earnings.
Formula
Equity = Assets − Liabilities
An accounting method used when an investor holds significant influence (typically 20–50% ownership) in another company. The investor records its share of the investee's net income/loss as an adjustment to the investment account.
The cost of resources consumed or services used in generating revenue. Expenses reduce net income and are reported on the income statement in the period they are incurred.
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
An inventory costing method assuming the oldest inventory items are sold first. Under FIFO, ending inventory reflects the most recent costs and COGS reflects the oldest costs.
Example
If you buy 10 units at $10 then 10 at $12, FIFO assumes the $10 units are sold first.
Formal reports summarizing the financial activities and position of a business. The four primary statements are the income statement, balance sheet, statement of cash flows, and statement of changes in equity.
Section of the cash flow statement showing cash flows related to raising capital and repaying debt. Includes proceeds from issuing stock or bonds, repayment of loans, and dividend payments.
A 12-month accounting period used for financial reporting and tax purposes. A fiscal year does not have to coincide with the calendar year — many companies end their fiscal year on dates other than December 31.
Example
Apple's fiscal year ends in late September; a retail company might end its fiscal year in January after the holiday season.
Long-term tangible property used in business operations and not expected to be converted to cash within one year. Also called property, plant, and equipment (PP&E).
Example
Buildings, machinery, vehicles, and computer equipment are all fixed assets.
Costs that remain constant regardless of the level of production or sales. Fixed costs must be paid even if output is zero.
Example
Rent, insurance premiums, and annual software licenses are typically fixed costs.
Cash generated from operating activities after subtracting capital expenditures. Represents the cash available to a company to repay debt, pay dividends, or fund growth.
Formula
Free Cash Flow = Operating Cash Flow − Capital Expenditures
Generally Accepted Accounting Principles — the standard framework of guidelines, rules, and procedures for financial accounting in the United States. Established by the Financial Accounting Standards Board (FASB).
The master set of all accounts in a company's accounting system. Every transaction is eventually posted to the general ledger, which provides the complete financial record of the business.
An accounting assumption that a business will continue to operate for the foreseeable future and does not have the intention or need to liquidate. Financial statements are prepared on this basis unless there is evidence to the contrary.
An intangible asset representing the excess of the purchase price paid for a business over the fair value of its identifiable net assets. Arises only in business acquisitions and is not amortized under US GAAP (but tested for impairment).
Formula
Goodwill = Purchase Price − Fair Value of Net Assets Acquired
Often used interchangeably with gross profit margin — the percentage of revenue remaining after subtracting cost of goods sold.
Formula
Gross Margin % = (Revenue − COGS) ÷ Revenue × 100%
Revenue minus cost of goods sold. Gross profit represents the profit earned before deducting operating expenses, interest, and taxes.
Formula
Gross Profit = Revenue − Cost of Goods Sold
Example
Revenue of $500,000 − COGS of $300,000 = Gross Profit of $200,000.
A profitability ratio showing the percentage of revenue remaining after deducting cost of goods sold. Indicates how efficiently a company produces or procures its products.
Formula
Gross Profit Margin = Gross Profit ÷ Revenue × 100%
Example
Gross Profit $200,000 ÷ Revenue $500,000 = 40% gross margin.
International Financial Reporting Standards — accounting standards developed by the International Accounting Standards Board (IASB) and used in over 140 countries. US companies primarily use GAAP, not IFRS.
A permanent reduction in the value of an asset when its book value exceeds its recoverable amount (the higher of fair value less costs of disposal or value in use). Impairment losses are recognized immediately in the income statement.
A financial statement that shows a company's revenues, expenses, and net income (or net loss) over a specific accounting period. Also called the Profit and Loss Statement (P&L).
Formula
Net Income = Revenue − Expenses
Tax levied by federal and state governments on taxable income. For businesses, income tax is an expense on the income statement. The effective tax rate can differ from the statutory rate due to deductions and credits.
Long-term assets that lack physical substance but have value because of legal rights or competitive advantages. Examples include patents, trademarks, copyrights, customer lists, and goodwill.
The cost incurred by a company for borrowed funds. Interest expense is calculated based on the outstanding principal balance and the interest rate, and is recorded on the income statement.
Formula
Interest Expense = Principal × Interest Rate × Time
Example
$100,000 loan at 6% annual interest → $6,000 interest expense per year ($500/month).
Goods held for sale in the normal course of business, or materials used in producing goods for sale. Inventory is a current asset on the balance sheet and flows to cost of goods sold when sold.
A ratio measuring how many times inventory is sold and replaced during a period. Higher turnover indicates more efficient inventory management.
Formula
Inventory Turnover = COGS ÷ Average Inventory
Example
COGS $400,000 ÷ Average Inventory $80,000 = Inventory Turnover of 5x.
Section of the cash flow statement showing cash flows from acquiring and disposing of long-term assets and investments. Includes purchases of equipment, proceeds from asset sales, and investment purchases.
The first step in the accounting cycle where a business transaction is recorded using debits and credits. Every journal entry must have total debits equal to total credits.
Example
To record a cash sale of $1,000: Debit Cash $1,000 / Credit Revenue $1,000.
The use of borrowed capital (debt) to increase the potential return on equity. While leverage can amplify gains, it also amplifies losses and increases financial risk.
Present obligations of a business arising from past events, the settlement of which is expected to result in an outflow of economic resources. Divided into current (short-term) and non-current (long-term) liabilities.
Formula
Liabilities = Assets − Equity
An inventory costing method assuming the most recently purchased inventory items are sold first. LIFO is permitted under US GAAP but not under IFRS. It results in lower net income during periods of rising prices.
Example
If you buy 10 units at $10 then 10 at $12, LIFO assumes the $12 units are sold first.
A measure of how quickly and easily assets can be converted to cash. High liquidity means a company can meet its short-term obligations; low liquidity can signal financial distress.
Obligations not expected to be settled within one year. Common examples include bonds payable, long-term notes payable, pension obligations, and deferred tax liabilities.
An accounting rule requiring inventory to be reported at the lower of its historical cost or current market value. If market value falls below cost, the inventory is written down to market.
The purchase of multiple assets for a single combined price. The total cost is allocated to each individual asset based on their relative fair market values.
An accounting principle requiring that expenses be recorded in the same period as the revenues they help generate. This is fundamental to accrual accounting and ensures the income statement accurately reflects profitability.
Example
Sales commissions earned in December must be recorded in December, even if paid in January.
An accounting concept stating that financial information is material if omitting or misstating it could influence the economic decisions of users. Small, immaterial amounts may be treated differently for practical reasons.
Costs that have both a fixed component and a variable component. Also called semi-variable costs. Examples include utility bills with a fixed base charge plus variable usage rates.
Formula
Total Cost = Fixed Cost + (Variable Rate × Activity Level)
The "bottom line" profit of a company after deducting all expenses, including operating expenses, interest, and income taxes, from total revenue. Net income increases retained earnings.
Formula
Net Income = Revenue − All Expenses (COGS + Operating + Interest + Tax)
A profitability ratio showing the percentage of revenue that remains as net income after all expenses. It measures overall profitability.
Formula
Net Profit Margin = Net Income ÷ Revenue × 100%
Example
Net Income $50,000 ÷ Revenue $500,000 = 10% net profit margin.
The side of an account (debit or credit) where increases are recorded. Assets, expenses, and dividends have normal debit balances; liabilities, equity, and revenues have normal credit balances.
Written promissory notes to repay borrowed money, usually with interest. Notes payable can be current (due within a year) or long-term (due beyond a year).
Section of the cash flow statement showing cash generated or used by the primary business operations. Includes cash received from customers, and cash paid for inventory, salaries, rent, and other operating expenses.
Expenses incurred in the normal course of running a business, excluding cost of goods sold. Examples include salaries, rent, utilities, depreciation, and marketing costs.
The extent to which a company uses fixed costs in its cost structure. High operating leverage means a large proportion of fixed costs — profits are more sensitive to changes in sales volume.
Indirect costs not directly tied to producing a specific product or service. Includes factory rent, supervisor salaries, and utilities in a manufacturing context. Must be allocated to products for cost accounting.
The owner's residual claim on business assets after all liabilities are settled. In a sole proprietorship, it is called owner's equity; in a corporation, it is shareholders' equity; in a partnership, it is partners' equity.
Formula
Owner's Equity = Assets − Liabilities
A business owned by two or more individuals who share profits, losses, and management responsibilities. Partners report their share of income on personal tax returns. Partners may have unlimited liability (general) or limited liability (limited partners).
Taxes withheld from employees' paychecks and/or paid by employers based on employee wages. Includes federal income tax withholding, Social Security (6.2%), and Medicare (1.45%) taxes.
Balance sheet accounts (assets, liabilities, equity) whose balances are carried forward at the end of each accounting period. They are not closed at year-end, unlike temporary accounts.
A small amount of cash kept on hand for minor day-to-day business expenses. The petty cash fund is replenished periodically by recording the expenses and writing a check to bring the fund back to its established balance.
Payments made in advance for goods or services not yet received. Prepaid expenses are initially recorded as assets and then expensed as the benefit is consumed.
Formula
Adjusting Entry: Debit Expense / Credit Prepaid Asset
Example
A 12-month insurance policy paid upfront for $12,000 → $1,000 expensed each month.
A valuation ratio comparing a company's share price to its earnings per share. Widely used by investors to assess whether a stock is overvalued or undervalued relative to earnings.
Formula
P/E Ratio = Market Price Per Share ÷ Earnings Per Share
A liquidity ratio measuring a company's ability to meet short-term obligations using only its most liquid assets (excluding inventory and prepaid expenses). More conservative than the current ratio.
Formula
Quick Ratio = (Cash + Short-Term Investments + Accounts Receivable) ÷ Current Liabilities
Example
(Cash $50,000 + AR $80,000) ÷ Current Liabilities $100,000 = Quick Ratio of 1.3
The cumulative net income of a company that has not been distributed to shareholders as dividends. Retained earnings are part of shareholders' equity and represent earnings reinvested in the business.
Formula
Ending RE = Beginning RE + Net Income − Dividends
A profitability ratio measuring how efficiently a company uses its assets to generate net income. Higher ROA indicates more efficient asset utilization.
Formula
ROA = Net Income ÷ Average Total Assets × 100%
Example
Net Income $80,000 ÷ Average Total Assets $800,000 = ROA of 10%.
A profitability ratio measuring the return generated on shareholders' equity. Shows how effectively management uses equity financing to generate profit.
Formula
ROE = Net Income ÷ Average Shareholders' Equity × 100%
Income earned by a business from its primary operating activities — the sale of goods or provision of services. Revenue is recorded at the top of the income statement and is the starting point for measuring profitability.
The principle determining when revenue should be recorded. Under GAAP (ASC 606), revenue is recognized when (or as) a company satisfies a performance obligation by transferring goods or services to a customer.
A business owned and operated by one individual, with no legal distinction between owner and business. The owner reports business income on their personal tax return (Schedule C) and has unlimited personal liability.
Another name for the Cash Flow Statement. Summarizes cash inflows and outflows from operating, investing, and financing activities during an accounting period.
The most common depreciation method that allocates an equal amount of depreciation expense each year over the asset's useful life.
Formula
Annual Depreciation = (Cost − Salvage Value) ÷ Useful Life
Example
Machine: Cost $100,000, Salvage $10,000, Life 9 years → $10,000/year depreciation.
A visual accounting tool shaped like the letter "T" used to illustrate the effect of transactions on individual accounts. Debits are recorded on the left; credits on the right.
Income statement accounts (revenues, expenses) and the dividends account that are closed to retained earnings at the end of each accounting period. Their balances start fresh each period.
A list of all general ledger account balances at a specific date, organized to show that total debits equal total credits. Used to detect errors before preparing financial statements.
Another term for deferred revenue — cash received from customers before services are rendered or goods are delivered. Recorded as a liability until the performance obligation is met.
A depreciation method where expense is based on actual usage or output rather than time. Useful for assets whose wear depends on activity level rather than age.
Formula
Depreciation per Unit = (Cost − Salvage) ÷ Total Estimated Units Annual Expense = Units Produced × Depreciation per Unit
Costs that change in direct proportion to changes in production volume or sales. As output increases, total variable costs increase; as output decreases, total variable costs decrease.
Example
Direct materials and direct labor are typical variable costs — more units produced means more materials used.
An inventory costing method that assigns the same per-unit cost to all inventory by dividing total cost of goods available for sale by total units available. Smooths out price fluctuations.
Formula
Weighted Average Cost per Unit = Total Cost of Goods Available ÷ Total Units Available
The difference between current assets and current liabilities. Positive working capital means a company can cover its short-term obligations. Negative working capital can signal financial trouble.
Formula
Working Capital = Current Assets − Current Liabilities
Example
Current Assets $250,000 − Current Liabilities $150,000 = Working Capital $100,000.
The removal of an uncollectible account receivable or worthless asset from the books. Under the direct write-off method, the bad debt expense is recorded when the account is determined to be uncollectible.
Example
When a customer's $2,000 account is determined uncollectible: Debit Bad Debt Expense $2,000 / Credit AR $2,000.
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