If you are beginner to accounting than you should absolutely read, learn and memorize these basic accounting terms I’m going to outline below.
The list includes basic accounting terms that are used very commonly while studying financial accounting.
1. Balance sheet (BS)
The balance sheet is one of the major financial statements that illustrates the assets, liabilities and equity of a company at a given point in time.
This 3 items give investors and bankers an idea about what the company owns and what it owes.
2. Cash flow (CF)
The cash flow is a record of when money comes in to and goes out of an organization. It doesn’t include non-cash income and expenses such as amortizations or depreciations. Most importantly, cash flow does include all the money that comes in and out, including transfers, loan payments, and sales of investments.
Cash flow statement example:
3. Assets (fixed and current) (FA, CA)
Assets are simply resources owned by the company and are broken out into fixed and current assets.
Fixed assets are resources that are expected to provide economic benefits for the company for more than one year, this type of assets can be found in the middle of the balance sheet with their net book value (acquisition price minus depreciation).
Examples of fixed assets: machinery, computer, vehicles, building etc…
Current assets are the type of assets that are expected to be converted in cash in less than one year or operating cycle like for example accounts receivable, inventory and bank account.
4. Accounts receivable (AR)
Accounts receivable are essentially money that you due for goods or services you provided on credit. They are classified as a current asset on the balance sheet.
5. Accounts payable (AP)
Accounts payable is money owed by a company to its creditors or suppliers. The firm is in the obligation to paying them off in less than one year.
Accounts payable appear on the balance sheet under current liabilities.
6. Cost of goods sold (COGS)
COGS is the direct cost incurred to create a product or service that has been sold.
Cost of Goods Sold Formula:
Cost of Goods Sold Beginning Inventory
+ Net Purchase (raw materials, labor, and overhead)
= Cost of Goods available for sale
– Cost of Goods Sold ending inventory
= Cost of Goods Sold
7. Liabilities (current and long-term)
Liabilities are financial debts and obligations a business owes to other entities and are classified into short-term liabilities and long-term liabilities.
Short-term liabilities are financial obligations and debts incurred by a company that is due within one year or the current company’s operating cycle.
Example: Accounts payable, Short-term bank loans, Wages etc…
Long-term liabilities are financial obligations and debts incurred by a company that is due within more than a year.
Example: long-term notes payable etc…
8. Net income (NI)
Net income is a company total profit minus all expenses during the same period (including non-cash expenses such as depreciations and amortizations) minus Taxes.
9. Fixed and variable expenses
Fixed expenses are those costs that don’t fluctuate or change from time period to time period and do not get affected by the production level like for example rent, insurance, dues and subscriptions etc…
On the other hand variable expenses are those costs that fluctuate in proportion of production level and sales volume such as raw materials, wages, sales commissions etc…
10. Return on investment (ROI)
ROI is a profitability ratio that measures the profit of an investment as a percentage of the money originally invested.
The return on investment formula:
This ratio is wildly used by investors to compare the profitability of different investments.