Accounting terms consist of all the processes and items involved in accounting procedures every year. There are different types of accounting terms and concepts for different accounting types and activities. The concepts of bookkeeping, and the terms for payroll, are different from each other. Thus, an accountant should know especially the fundamental accounting terms for his or her own area of accounting. Some accounting terms are more common and important for all the accountant and accounting genres. There are 5 main accounting terms, and these are Accountants, Accounts Receivable, Accounts Payable, Assets, and Balance Sheet.
Some terms are more common than others, such as accounts payable (AP), accounts receivable (AR), and asset (A). These terms are some of the most crucial aspects of the accounting industry, so numerous accountants use them frequently.
Learn about more fundamental accounting terms below.
1. Accountant
An accountant is someone skilled in recording and reporting financial transactions. Certain accountants may need to have specific certifications as proof of their expertise. But, this depends on the needs of the company. Countless businesses have employed college graduates with accounting degrees to document financial activity.
2. Accountants’ report
An accountant’s report is a financial document prepared by an independent accountant. It includes financial statements, review reports, agreed-upon procedures reports, compilation reports, and attestation reports. An accountant’s report is not produced due to the outcome of an audit. An example of this is a business reviewing an accountant’s report to determine the company’s financial health.
3. Accounting
Accounting involves tracking a business’s financial records. It also reports, analyzes, and summarizes financial information for tax, investment, and other official reasons. A real estate company using accounting to prepare financial statements for its investors is one instance of accounting.
4. Accounts payable
Accounts payable (AP) is the debt a company owes, which is recorded under liability on its balance sheet. Accounts payable consist of all unpaid business expenses. An example of this is a restaurant receiving lettuce on credit from its supplier and billed for the amount owed.
5. Accounting period
An accounting period is the amount of time covered by a financial statement or operation. Some examples of common accounting periods are fiscal years, calendar years, and three-month calendar quarters. Some organizations use monthly periods since it is more convenient. Each accounting period only covers one cycle. The accounting cycle is eight-step system accountants use to track transactions for a certain period.
6. Accounts receivable
Accounts receivable (AR) represents money others owe to a business, and it is the functional opposite of accounts payable. Accounts receivable are sometimes called “trade receivables.” Accounts receivable derive from products or services supplied on credit or without an upfront payment. Accountants track accounts receivable money as assets.
7. Accrual
An accrual is an expense or revenue that has occurred but has not been recorded yet. Accruals (ACCR) occur before an exchange of money resolves the transaction.
For example, a company that hired an external consultant would recognize the cost of that consultation in an accrual. The cost would then be acknowledged. This happens regardless of whether or not the consultant had invoiced the company for its services. Accounts payable and accounts receivable are accrual types. Others are accrued costs (costs incurred but not resolved during a particular accounting period) and accrued expenses (expenses or liabilities incurred but not settled during a specific accounting period).
8. Accrual basis accounting
Accrual basis accounting (or accrual accounting) involves recording financial transactions rather than when the buyer pays. For instance, a customer purchases a $2,000 product on credit. Accrual basis accounting acknowledges that $2,000 in revenue on the purchase date. The method differs from cash basis accounting, which would only record the $2,000 in revenue after receiving the money. Generally, large businesses and publicly traded companies prefer accrual accounting, and small companies and individuals prefer cash basis accounting.
9. Accrued expense
An accrued expense is a business expense that has not been paid. The accrual method recognizes expenses when they are incurred, not when they are paid.
For example, a company that hired an external consultant would recognize the cost of that consultation in an accrual. The cost would be identified whether the consultant invoiced the company for their services or not. Accounts payable and accounts receivable are accrual types. Others are accrued costs (costs incurred but not resolved during a particular accounting period) and accrued expenses (expenses or liabilities incurred but not resolved during a certain accounting period).
10. Allocation
Allocation refers to the process of assigning funds to different accounts or periods. A cost can be allocated over multiple months (ex., insurance) or multiple departments (which is often done with administrative costs for companies with multiple divisions).
11. Asset
An asset is any company’s possession with monetary value. Assets can reduce expenses, generate cash flow, or enhance sales. Some asset types are fixed, current, liquid, and prepaid expenses. Liquid means how quickly a business can convert the asset into spendable revenue without losing value. Cash is the most liquid asset, while the land is the least.
12. Auditors
Auditors are professionals who determine an entity’s financial condition by studying the accuracy of its financial accounts and records. Businesses often hire auditors to review financial records to ensure accuracy for shareholders.
13. Balance sheet
A balance sheet (or statement of financial position) is a standard financial statement. It specifies a business’ current state relating to assets, liabilities, and owner’s equity. Accountants use various formats when creating balance sheets: classified, common size, comparative, and vertical balance sheets. Each format presents data in line items to summarize the company’s financial standing.
14. Bank statement
A bank statement is a periodic report that banks send to account holders that illustrates the monthly balance in the account. One example is a company receiving a monthly bank statement documenting deposits, withdrawals, and an account balance.
15. Book value
As assets depreciate, they lose value. The book value shows the original value of an asset minus its accumulated depreciation or liability. A business with $100 million in total assets and $80 million in total liabilities will have a company book value of $20 million.
16. Budgeting
Budgeting consists of creating and maintaining a financial plan to control cash flow. It is essential to budget to be aware of your spending limits. Businesses and individuals should plan budgets to have more control of their money. Accountants are often requested to help companies gauge their spending budget. You can learn more about budgeting in our What is Budgeting related articles.
17. Business Entity
A business entity is the legal structure of a business. Several examples are a partnership, S corporation, C corporation, limited liability company, and sole proprietor. Also, each legal entity has distinct tax and legal obligations. “Business entity” is a broad term whose referents include all types of companies and corporations. All types of companies and corporations may be referred to as business entities.
18. Capital
Capital (CAP) is any asset or resource a business can use to generate revenue. Another definition considers capital as the level of owner investment in a business. The latter definition adjusts these investments for any gains or losses the owners have already noticed.
Accountants recognize multiple subcategories of capital. Working capital is the sum that remains after subtracting current liabilities from current assets. Equity capital specifies the money paid into a business by investors in exchange for the stock company. Meanwhile, debt capital covers money acquired through credit instruments (loans).
19. Cash basis accounting
Cash basis accounting is one of the most common forms of business accounting. It focuses on cash transactions, so it does not recognize accounts payable or receivable. It differs from accrual accounting which acknowledges revenue and expenses when they occur without regard to whether associated funds have been exchanged. Cash accounting is easy to maintain because you can quickly track the expenses and revenue by looking at the cash balance.
20. Cash flow
Cash flow (CF) refers to the balance of cash that moves into and out of a company during a specific accounting period. Accountants track CF on cash flow statements. Net cash flow is the sum of all money a business makes. Cash flow statements include all the cash a company receives from its operations, investments, and financing. It is not uncommon for car dealerships to share cash flow statements with investors to show money made through operations, investments, and financing.
21. Certified Public Accountant (CPA)
A certified public accountant (CPA) is the title of an accountant who has passed a standardized CPA exam. Additionally, they have met government-mandated work experience and educational requirements. Once someone achieves this position, they are licensed to offer auditing, taxation, accounting, and consulting services. CPAs can work for businesses and individual clients.
22. Chart of accounts
Accountants document financial transactions in a bookkeeping system known as a general ledger. A chart of accounts (COA) is a master list of all the accounts in an organization’s general ledger. The five main accounts in a COA are: assets, equity, expenses, liabilities, and revenues. A publishing company may use a chart of accounts to organize information for investors.
23. Closing the books
Closing the books describes when an accountant closes or zeroes out a business’s revenue, expense, and income summary reports. It typically occurs at the end of each year. Whenever an accountant “closes the books,” they endorse relevant financial records. The same records can be used in official financial reports like balance sheets and income statements.
24. Cost of goods sold (COGS)
Cost of goods sold (COGS) refers to the total costs a company incurs in creating a product or offering a service. For products, the associated costs belong to three broad categories: materials, labor, and overhead. For services, costs include expenses related to employee compensation, materials, and equipment. Accountants may sometimes use the term “cost of sales.” They use a basic formula to calculate COGS for a specific period (Initial Inventory + Purchases – Ending Inventory). Cost of goods sold is considered an expense in accounting and it can be found on a financial report called an income statement.
25. Credit
A credit is an accounting entry that increases liabilities or decreases assets. It is listed on the right column of a firm’s balance sheet and is one of the two entries on a double-entry accounting method. Debit is the other entry listed. Suppose a company pays its employees with cash every two weeks, reducing its cash balance on the asset section of the balance sheet. A decrease on the asset side would indicate a credit. Debits and credits are equally important to a company’s accounting and bookkeeping practices.
26. Debit
A debit is an accounting entry that increases assets or decreases liabilities. Debits are listed on the left column of a company’s balance sheet. The other is listed on a double-entry accounting method. If a company pays its employees with cash, there will be a decrease (credit) on the asset section of a balance sheet. This means the company has to show the salary expense as a debit on the income statement. An equal debit must balance every credit.
27. Departmental accounting
Departmental accounting is used for financial records that show individual departments’ income, expenses, and net profit. Suppose a department store has several sale areas, including cosmetics, groceries, and medicine. Departmental accounting will show the profit and loss for each sales area.
28. Depreciation
Depreciation (DEPR) is the decrease of an asset’s value over time, and it applies to fixed assets. Fixed assets are long-term owned resources of economic value that organizations use to generate income or wealth. Some common examples are real estate, equipment, and machinery, and only assets with considerable value can be depreciated. Depreciation is considered a non-cash expense and listed as an expense under an income statement.
29. Diversification
Diversification is a risk-management strategy that avoids overexposure to a certain industry or asset class. A mix of assets and investments can help lower the risk of any single asset or issue. With this method, the performance of individual assets will not affect the results of others.
30. Dividends
Dividends are profits returned to a corporation’s shareholders. They are distributed as part of a company’s earnings and issued as cash payments, stock shares, or even property. Dividends are voluntarily paid out and may abide by a regular monthly, quarterly, or annual payment schedule. Additionally, they can be offered as one-time bonuses.
31. Double-entry bookkeeping
Double-entry bookkeeping consists of entries of credits and debits for each financial transaction. When the sum of all recorded debits and credits is zero, the accounting books are deemed balanced.
This process is also known as double-entry accounting. It is a more complete and exact alternative to single-entry accounting, which only records transactions once. While single-entry systems only apply to revenues and expenses, double-entry systems add assets, liabilities, and equity to the organization’s financial tracking.
32. Enrolled agent
An enrolled agent is a finance professional legally allowed to represent people and businesses in Internal Revenue Service (IRS) encounters. EAs have to earn a license from the IRS by passing a three-part exam or gaining direct experience from an IRS employee. EAs help companies file taxes according to Internal Revenue Service rules. For example, someone’s accountant who is an EA can represent their floral shop during an IRS audit.
33. Equity
Equity is the amount of money that would remain if a business sold all its assets and paid off its debts. Corporations and shareholders own it. “Owner’s equity” covers the stake belonging to the owner of a privately held company. Meanwhile, “shareholder’s equity” describes the ownership stake of publicly traded companies collectively owned by shareholders.
34. Expense
An expense is spent on a specific item or for a particular purpose. There are four main ones a company can incur through daily operations: fixed, variable, accrued, and day-to-day.
- Fixed Expenses (FE): Payments like rent that will happen regularly.
- Variable Expenses (VE): One example is labor costs, which can change at any given time.
- Accrued Expense (AE): An incurred expense that has not been paid yet
- Operation Expenses (OE): Business expenditures not directly connected to the production of goods or services (Ex. Advertising costs, property taxes, or insurance expenditures
35. Fixed asset
A fixed asset is used for an extended period. It will likely offer benefits to a company for more than a year. Buildings and equipment are a couple of examples.
36. Fixed cost
A fixed cost remains constant despite the volume of sales. Salary and rent are some instances of fixed costs compared to variable costs. Variable costs change according to production levels. Fixed cost is also used alongside “operating cost” or “operating expense” (OPEX). OPEX refers to costs that arise from a company’s daily operations. These costs can be fixed or variable.
37. Generally accepted accounting principles (GAAP)
Generally accepted accounting principles (GAAP) are rules and guidelines created by the accounting industry for companies to follow when reporting financial data. They provide a framework for studying an entity’s financial reports. GAAP is only one of many standards accountants have to follow, and another alternative is International Financial Reporting Standards (IFRS).
Example: A chief financial officer at a publishing company would have to follow GAAP standards when gathering financial reports for the national company.
38. General ledger
A general ledger is a complete record of the financial transactions over a company’s term. It is the master account that contains all ledger accounts. Primary examples of individual accounts in a ledger are asset accounts, liability accounts, and equity accounts. Each transaction listed in a general ledger or one of its sub-accounts is a journal entry.
39. Gross margins
Gross margins refer to a company’s profitability after subtracting the cost of goods sold. It is determined by dividing the same period of gross profit by revenue for the same period. Suppose a company reports a quarterly gross margin of 35%. That means it retained 35 cents from each dollar of generated revenue.
40. Gross profits
Gross profit (or gross income) is the value of products and services sold by a business before tying in the cost of goods sold. If the gross profit is a negative number, it is called a gross loss. This differs from “net profit,” which describes the actual profit earned after accounting for those costs. Gross margin relates to gross profit since it clarifies the value of an organization’s net sales minus the cost of goods sold. The net sale is achieved by correcting gross sales for adjustments like discounts and allowances.
If a sewing supply company has $10,000 in revenue and $4,000 in COGS, its gross profit is $6,000.
41. High-low method
The high-low method is a customary and straightforward way to separate variable costs from fixed costs. You take the highest and lowest activity levels, then compare the total costs at each level. For instance, a widget supply store sells widgets for 12 months, and it sold 125 in October for $5,550 – the most, and 50 in August – the least. An accountant has to use the high-low method to gauge the total costs for each level.
42. Income statement
An income statement is a financial document that businesses create. It states the total revenues earned by the company in a given accounting period, minus all expenses collected during the same period.
Other terms for income statements are:
- Earnings statement
- Profit and loss statement
- Statement of financial results
- Statement of operation
The two other standard financial sheets companies use are balance sheets and cash flow statements.
43. Inflation
Inflation is the rising costs of goods and services over time, decreasing purchasing power. Inflation is not always a negative thing since it depends on an individual’s viewpoint and the rate of change. People with tangible assets such as property or stocked commodities may appreciate seeing inflation because it will raise the value of their assets.
Overall, inflation aims to measure the total impact of price changes for a diverse set of products and services. At the same time, it allows for a single-value representation of the increase in the price level of goods and services in an economy. Suppose Tim’s Top Hats store sold its first hat in 1980, and it cost $10 to make and sold for $25. Twenty years later, it costs $100 to make and sells for $2,500 due to inflation.
44. Insolvency
Inflation is the rising costs of goods and services over time, decreasing purchasing power. Inflation is not always a negative thing since it depends on an individual’s viewpoint and the rate of change. People with tangible assets such as property or stocked commodities may appreciate seeing inflation because it will raise the value of their assets.
Overall, inflation aims to measure the total impact of price changes for a diverse set of products and services. At the same time, it allows for a single-value representation of the increase in the price level of goods and services in an economy. Suppose Tim’s Top Hats store sold its first hat in 1980, and it cost $10 to make and sold for $25. Twenty years later, it costs $100 to make and sells for $2,500 due to inflation.
45. Insured account
An insured account is an account at a bank, savings and loan association, credit union, or brokerage firm. A federal or private insurance organization covers it. A company may deposit its money in a bank insured by the Federal Deposit Insurance Corporation (FDIC) for protection from bank failure or theft.
46. Internal audit
Internal audits analyze a company’s internal controls, including its corporate governance and accounting processes. They comply with laws and regulations while maintaining accurate and timely financial reporting and data collection. Internal audits provide management with the tools to operate efficiently before any problems arise in an external audit. Internal audits can occur daily, weekly, monthly, or annually.
47. Inventory
Inventory is a company’s assets that it plans to sell to clients. This includes assets being held for sale, those in the process of being made, and the materials used to make them. A company’s inventory is one of its most important assets since inventory turnover represents one of the primary sources of revenue generation and subsequent earnings for its shareholders. The three kinds of inventory are raw materials, work-in-progress, and finished goods.
One example of inventory is the fashion retailer Zara since it is under pressure to sell inventory rapidly while operating on a seasonal schedule. Fabric and other production materials are considered raw material forms of inventory.
48. Invoice
An invoice shows the amount of money payable for goods and services a company provides to clients. Suppose goods or services are purchased on credit. In that case, an invoice will specify the terms of the deal and offer the available payment methods. Types of invoices include a paper receipt, a bill of sale, a debit note, a sales invoice, or an online electronic record.
Invoices illustrate payment terms, unit costs, shipping, handling, and other terms outlined during transactions. If any changes are discovered on an invoice, they have to be approved by the proper management personnel.
49. Journal entry
A journal entry must have a unique identifier (to record the entry), a date, a debit/credit, an amount, and an account code (which determines which account has been altered). Updates and changes are applied to a company’s books with journal entries. If a company makes a sale on credit, a journal entry for accounts receivable is debited, so the sales account is credited.
50. Last in, first out (LIFO)
Last in, first out (LIFO) is an accounting method for valuing inventory. The costs of the last goods acquired are the first amounts charged to expense records. Suppose a company has ten widgets that cost $100 each and arrived five days ago. If five more come the next day and cost $200 each, the last ones received will be the first to be sold based on the LIFO method.
51. Ledger
A ledger is a book of accounts with debit and credit entry summaries. Ledger accounts are crucial for preparing a company’s financial statement. If an accountant provides a ledger for a construction company, information about assets, liabilities, and revenue sources will be presented.
52. Liability
A liability is something a person or company owes (usually a sum of money). Liabilities are settled through the transfer of economic benefits such as money, goods, or services. They are documented on the right side of the balance sheet. Loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses are included.
There are current and long-term liabilities. Current liabilities are short-term obligations of a company that is due within one year or a typical operating cycle (accounts payable). Long-term liabilities are obligations listed on balance sheets that are not due for more than a year. Liabilities are a significant aspect of a company since they help finance operations and pay for large expansions.
53. Liquidity
Liquidity indicates how quickly a business can convert something into cash without losing value. The most liquid asset is cash, and tangible items are less liquid. The two main types of liquidity are market liquidity and accounting liquidity. Market liquidity refers to the extent to which a market allows assets to be bought and sold at stable, transparent prices. In contrast, accounting liquidity measures the ease a company or individual has in meeting financial obligations with liquid assets available to them. Which is the ability to pay off debts as they are due.
For instance, if someone wants a $1,000 refrigerator, cash is the best asset that can easily be used to get it. However, suppose that person has no cash but a rare book collection priced at $1,000. In that case, they will likely not be able to obtain the refrigerator. The book collection has to be sold so the cash can apply toward the refrigerator.
54. Materiality principle
The materiality principle represents the information that influences a company’s decision-making process. The information, size, and nature of transactions are considered material. But only if the omission or error of it could lead to decisions by its users. A business has to disclose all material considerations in its reports in accounting practices. While there is no rule for determining the materiality of an amount, most accountants view an amount as immaterial if it is less than 2 or 3 percent of net income.
For example, a large company has a building that was destroyed in a hurricane. After insurance reimbursement, it reports a loss of $10,000. Since the company has a net income of $10 million, the loss is immaterial since it is only .1% of its net income.
55. Net income
Net income (NI) is calculated by sales minus the cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. It helps investors project how much revenue exceeds the expenses of an organization. This number appears on a company’s income statement and indicates a company’s profitability.
Analysts often refer to net income as the bottom line since it appears at the bottom of the income statement. Investors have to review the numbers used in calculating NI since expenses can be hidden in accounting methods, or revenues can be inflated. Suppose a wholesaler has revenues of $1 million and expenses of $900,000. By using the equation, the business has a net income of $100,000.
56. Net margin
Non-operating income is the percentage of a company’s profit relative to its revenue. It is also called “net profit margin.” Accountants assess the net margin by dividing net income by total revenue and multiplying by 100 to gain a percentage of income that remains after all expenses.
For example, a large manufacturer has $61 billion in revenue and $13.8 billion in net income. By using the formula above, its net profit margin is 23%. For every dollar earned in sales, the company retains $0.23 as profit.
57. Non-operating income
If a printing company sells old machinery for $20,000, that amount would be considered non-operating income. Non-operating income is not related to the sale of a company’s product or its services. Some examples are dividend income, profits or losses from investments, and gains or losses incurred by foreign exchange and asset write-downs.
Whenever non-operating and operating income is separated, investors have a clearer picture of how efficiently a company turns revenue into profit.
58. On credit/on account
Accountants track partial payments on debts and liabilities on credit (or “on account”). Both versions refer to products or services sold to customers without receiving payment upfront. For instance, Tony’s Taco Truck buys produce on credit, and he uses the lettuce and tomatoes, but he does not have to pay for them until 30 days later.
60. Payroll
Payroll accounting tracks operations that record, administrate, and analyze the compensation paid to employees. Payroll also involves fringe benefits distributed to employees and income taxes withheld from their paychecks. Suppose Josh is on duty to prepare payrolls on Thursdays. In addition to paying for raw materials to make its cakes, ABC Bakery has monthly overhead costs like rent, administrative costs, utilities, and insurance.
61. Present value
Present value assumes inflation makes cash lose value over time. It compares the buying power of money in the future to today’s purchasing power. People within a business can understand the impact of future projections (revenues, expenses, and debt for inflation). Present value is sometimes called discounted value (DV).
Suppose someone has the choice to receive $1,000 today or $1,000 in five years. They can choose to take the money now based on interest/return rate and inflation/purchasing power.
62. Profit
Profit is the financial benefit gained when the revenue generated from a business activity exceeds the expenses, costs, and taxes involved in maintaining the particular activity. Any profits earned will go to business owners, who will either pocket the cash or reinvest it back into the business. Accountants calculate the profit by total revenue – total expenses.
The three major types of profit are gross profit, operating profit, and net profit. They all can be found on an income statement and offer more information to analysts about a company’s performance.
63. Profit and loss statement
A profit and loss statement (P&L) is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period (generally a quarter or fiscal year). The records offer information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. The statements are submitted on a cash or accrual basis.
A company can issue a P&L quarterly and annually along with its balance sheet and cash flow statement. The P&L document is crucial since it shows how much a business generated profit or loss.
64. Receipt
A receipt is a written record of a purchase or financial transaction. It is proof that a transaction occurred and allows it to be processed for tax purposes. Along with the receipts customers usually receive from vendors and service providers, receipts are also issued in business-to-business dealings and stock market transactions. Receipts should be saved according to IRS requirements. Companies should catalog them so they can prove any incurred expenses are accurate.
65. Reconciliation
Reconciliation compares two sets of records to ensure figures are correct and agree with each other. It also confirms that accounts in a general ledger are consistent, accurate, and complete. Companies generally use it to reconcile their records, but individuals can use account reconciliation too. People can use it to view the accuracy of their checking and credit card accounts. There is no standard way to proceed with account reconciliation, but GAAP does require double-entry accounting. So this is a prevalent tool in reconciliation.
66. Report release date
A report release date is a date when a company releases its financial statements. For example, Company Toys R Fun releases its quarterly financial statements on the first Monday of every fourth month.
67. Retained earnings
Retained earnings (or earnings surplus) clarify the profits that remain after a business has paid all costs in a given accounting period. All indirect and direct expenses are included, such as the cost of goods sold, dividend payments, and tax liabilities. When retained earnings (RE) are positive, they increase the organization’s equity. The equity can be reinvested back into the business to fuel its future growth.
68. Return on investment
Return on investment (ROI) describes the level of profit or loss generated by an investment. Accountants gauge ROI by dividing the net profit of an investment by its cost, then multiplying by 100 to get a percentage. Suppose a person invests $10,000 in a company’s stock, then sells the stock for $12,000. That means the exchange would equal an ROI of 20%. When an investor incurs a loss, the ROI results in a negative number.
Remember that return on investments does not factor in the holding period or passage of time. It can miss the opportunity costs of investing elsewhere.
69. Revenue
Revenue (REV) is the income a business earns by selling products or services related to its main operations. Suppose a restaurant’s revenue covers all food and beverage sales. It will not cover additional forms of income (liquidation of equipment or real estate owned by the business). While revenue and sales can be synonymous, revenue establishes the data point comprising the sales component of a price-to-sales calculation.
70. Single-entry bookkeeping
Single-entry bookkeeping records all revenues and expenses with a single entry in the company’s books. Another name for it is single-entry accounting. Single-entry systems are simplified financial tracking methods that small businesses exclusively use. The transactions are listed in a “cash book,” which differs from the more precise and accurate double-entry accounting method. Double-entry accounting records all transactions twice (once as a debit and once as a credit).
71. Tax
Tax is the amount levied by a governmental entity on income, consumption, wealth, or other things. There are three types of tax:
- Taxes on what is earned
- Taxes on what is bought
- Taxes on what is owed
If Samantha wants to buy a smartwatch for $300, and the sales tax is 5% in her area, she will pay $300 for the watch. Plus $15 in taxes.
72. Taxable earnings
Taxable earnings are the number of an employee’s earnings subject to tax. Some inclusions are wages, salary, tips, bonuses, commission, net self-employment income, and alimony payments. Employees will pay taxes to federal, state, or local agencies based on their wages, withholding preference, and tax filing status.
73. Taxable income
Taxable income is the portion of your gross income used to calculate how much tax you owe in a given year. It can be expressed as adjusted gross income (AGI) minus allowable itemized or standard deductions. Wages, salaries, bonuses, tips, and investment income are some examples of taxable income. Since deductions reduce it, taxable income is often less than adjusted gross income. When businesses file taxes, they do not address revenue directly as taxable income. Instead, they subtract their business expenses from their revenue to determine their business income. Afterward, they subtract deductions to calculate their taxable income.
74. Trial balance
A trial balance (TB) is a report of the balances of all general ledger accounts at a certain point in time. Accountants prepare trial balances after a reporting period to ensure all accounts add up properly. In professional practice, trial balances serve as test runs for balance sheets. Also, the debits must equal the credits when they are balanced.
75. Turnover
Turnover calculates how quickly a business conducts its operations. It is used to comprehend how fast a company collects cash from accounts receivable or how quickly it sells its inventory. In the investment industry, turnover is classified as the percentage of a portfolio sold in a particular month or year. Quick turnover rates generate more commissions for trades placed by a broker.
76. Unearned income
Unearned income (also known as passive income) is not gained through work. Interest from savings accounts, bond interest, alimony, and dividends from stocks are examples of unearned income. Taxation will vary for this type of income due to qualitative differences. Most unearned income sources are not subject to payroll taxes. None of them is subject to employment taxes (Social Security or Medicare). It is vital for individuals to know and understand the origin and taxation of their income.
77. Value
Value is how much something is worth. In accounting, value is the monetary worth of an asset, business, goods sold, services rendered, or liability/obligation acquired. The procedure of calculating and assigning value to a company or asset is valuation. Common value types are market value, book value, enterprise value, and value stock.
78. Variable cost
Variable costs (VC) change with the volume of sales and differ from fixed costs. Variable costs increase with more sales since they are an expense that incurs to deliver the sale. If a company produces a product and sells more of that product, it will need more raw materials to meet the increase in demand. On the other hand, fixed costs remain the same regardless of production. They can include lease payments, insurance, and loan interest.
79. Worksheet
A worksheet is working paper accountants use as a preliminary step for preparing a financial statement. It assists bookkeepers and accountants in completing the accounting cycle and gathering year-end reports (adjusting trial balance and financial statements). Numerous people use worksheets to maintain accuracy and spot errors before compiling final reports.
80. Write-off
A write-off is action companies use to account for unpaid loan obligations, receivables, or losses on stored inventory. It can help lower an annual tax bill. Write-offs are not the same as write-downs, which partially reduce an asset’s book value.
Suppose Metro Hospital knew that certain accounts would never be paid. They have the option to write them off.
