Accounting Concepts and Terms

• Accounting period


  Initial Inventory + Purchases - Ending Inventory
• Credit


  Accounting entries that increase liabilities or decrease assets
• Debit


  Accounting entries that increase assets or decrease liabilities
• Depreciation


  Applies to fixed assets, which are long-term owned resources of economic value that an organization uses to generate income or wealth. Accountants record declines in fixed asset value as depreciation.
• Diversification


  A risk-management strategy that avoids overexposure to a specific industry or asset class by spreading capital across multiple types of financial holdings and economic areas
• Dividends


  Portions of a company's profits voluntarily paid out to investors, often in cash but may also be issued as stock, real property, or liquidation proceeds
• Double-Entry Bookkeeping


  Records each financial transaction twice: once as a credit, and once as a debit. When the sum total of all recorded debits and credits equals zero, the accounting books are considered "balanced".
• Enrolled Agent


  A finance professional legally permitted to represent people and businesses in Internal Revenue Service (IRS) encounters. EAs must earn licensure from the IRS by passing a three-part exam or accruing direct experience as an IRS employee.
• Equity


  The amount of money that would remain if a business sold all its assets and paid off all its debts, defining the stake in a company collectively held by its owner(s) and any investors
• Fixed Cost


  A cost that stays the same regardless of increases or decreases in a company's output or revenues, such as rent, employee compensation, and property taxes
• General Ledger


  The master account containing all ledger accounts, holding a complete record of all transactions taking place within a specified accounting period
• Generally Accepted Accounting Principles (GAAP)


  A standard set of accounting practices endorsed by organizations including the Financial Accounting Standards Board and the U.S. Securities and Exchange Commission
• Gross Profit


  The value of the products and services sold by a business before factoring in the cost of goods sold
• Income Statement


  A financial document that specifies the total revenues earned by the company in a given accounting period, minus all expenses incurred during the same period
• Inventory


  Assets that a company intends to liquidate through sales operations, including assets being held for sale, those in the process of being made, and the materials used to make them
• Liability


  When an individual or business owes money to another person or organization, including both current liabilities due within one year and long-term liabilities with due dates of more than one year
• Liquidity


  The relative ease with which an asset can be sold for cash, with liquid assets being those that can easily be converted into cash
• Net Profit


  The amount of money left over after subtracting the cost of taxes and goods sold from the total value of all products or services sold during a given accounting period
• On Credit


  Accountants track partial payments on debts and liabilities, describing products or services sold to customers without receiving upfront payment
• Overhead


  Expenses necessary to sustain business operations that do not directly contribute to a company's products or services, such as rent, marketing and advertising costs, insurance, and administrative costs
• Payroll


  Tracking operations that record, administrate, and analyze the compensation paid to employees, including fringe benefits and income taxes withheld
• Present Value


  Calculated adjustments that express future revenues, expenses, and debts in present-day dollars, allowing others to understand their potential impacts in relatable terms
• Receipt


  An official written record of a purchase or financial transaction, serving as proof that the transaction took place and allowing it to be processed for tax purposes
• Retained Earnings


  The profits that remain after the business has paid all costs in a given accounting period, including the cost of goods sold, dividend payments, and tax liabilities
• Return on Investment (ROI)


  The level of profit or loss generated by an investment, calculated by dividing the net profit of an investment by its cost and multiplying by 100 to generate a percentage
• Revenue


  The income a business earns by selling products and/or services associated with its main operations
• Single-Entry Bookkeeping


  Records all revenues and expenses with a single entry in the company's books, a simplified financial tracking method often used exclusively by small businesses
• Trial Balance


  A report of the balances of all general ledger accounts at a point in time, prepared by accountants at the conclusion of a reporting period to ensure all accounts and balances add up properly
• Variable Cost


  Expenses that can change depending on the volume of goods produced or sold by a company, in contrast with fixed costs that remain the same regardless of production output or sales volume