Accounting Terms Every Business Owner Should Know

Accounting Terms Every Business Owner Should Know

Understanding the language of accounting is essential for anyone managing or operating a business. Whether you're a small business owner, a startup founder, or simply trying to make sense of your company’s finances, knowing the right accounting terms can help you make smarter financial decisions and communicate better with your accountant.

In this article, we've compiled 50 of the most important accounting terms—explained in plain English—to give you a strong foundation in financial literacy. From basic bookkeeping to complex financial statements, this glossary is your go-to guide.

Core Financial Statements Terms

These are the most common terms you’ll encounter when reviewing balance sheets, income statements, and cash flow reports:

1. Revenue: The total amount of money a company earns from its business activities.
2. Net Profit: The amount left after all expenses, taxes, and costs have been subtracted from revenue.
3. Gross Profit: Revenue minus the cost of goods sold (COGS).
4. Assets: Resources owned by the company that have economic value.
5. Liabilities: The company’s financial obligations or debts.
6. Equity: The owner’s interest in the business, calculated as Assets minus Liabilities.
7. Balance Sheet: A financial statement showing a company's assets, liabilities, and equity at a specific point in time.
8. Income Statement: A report showing the company’s revenues and expenses over a period.
9. Cash Flow Statement: A financial report that shows how cash is generated and used.
10. Retained Earnings: The portion of net income not distributed as dividends but reinvested in the business.

Bookkeeping Basics

These are the everyday terms used to record and organize transactions:

1. Journal: A detailed account that records all financial transactions chronologically.
2. Ledger: A collection of accounts where journal entries are posted and categorized.
3. Debit: An accounting entry that increases assets or decreases liabilities.
4. Credit: An entry that decreases assets or increases liabilities.
5. Trial Balance: A summary of all ledger balances used to check if total debits equal total credits.
6. Posting: The process of transferring journal entries to the ledger.
7. Double-entry Accounting: A system where every transaction affects at least two accounts.
8. Chart of Accounts: A list of all account names and numbers used in a company’s accounting system.
9. Bookkeeper: The person responsible for recording day-to-day financial transactions.
10. Transaction: Any business activity involving the exchange of money.

Tax & Compliance Terms

These terms relate to government regulations, tax laws, and accounting standards:

1. GAAP: Generally Accepted Accounting Principles – the standard framework of accounting rules.
2. IRS: Internal Revenue Service – the U.S. tax collection agency.
3. Depreciation: The gradual reduction in value of an asset over time.
4. Amortization: Spreading out the cost of an intangible asset over its useful life.
5. Taxable Income: The portion of income that is subject to tax after deductions.
6. Withholding Tax: The amount an employer withholds from an employee’s wages for taxes.
7. Fiscal Year: A 12-month period used for accounting purposes, not necessarily January to December.
8. Tax Return: A form filed with a tax authority that reports income, expenses, and taxes owed.
9. Compliance: Adhering to laws, regulations, and standards set by authorities.
10. Audit: An official inspection of financial records by authorities or third-party accountants.

Cash Flow & Financial Health

These terms help evaluate how money moves through the business:

1. Cash Flow: The net amount of cash coming in and going out of a business.
2. Accounts Receivable: Money owed to the business by its customers.
3. Accounts Payable: Money the business owes to suppliers or vendors.
4. Working Capital: Current assets minus current liabilities.
5. Operating Income: Profit generated from regular business operations.
6. Liquidity: The ability to quickly convert assets into cash.
7. Burn Rate: The rate at which a company uses up its cash reserves.
8. Overhead: Ongoing business expenses not directly tied to producing goods/services.
9. Capital Expenditure (CapEx): Money spent to acquire or upgrade physical assets.
10. Operating Expenses (OpEx): Costs required to run daily business operations.

Financial Ratios & Analysis

These metrics are used to analyze business performance and guide decision-making:

1. Current Ratio: Current assets divided by current liabilities; measures short-term liquidity.
2. Gross Margin: Gross profit divided by revenue, expressed as a percentage.
3. Net Margin: Net profit divided by revenue; shows overall profitability.
4. Return on Investment (ROI): Profit from an investment divided by the cost of the investment.
5. Debt-to-Equity Ratio: Total liabilities divided by shareholder equity.
6. Inventory Turnover: Cost of goods sold divided by average inventory.
7. Break-even Point: The point where total revenue equals total expenses.
8. Earnings Before Interest and Taxes (EBIT): A measure of a firm’s profitability.
9. Accounts Receivable Turnover: Net credit sales divided by average accounts receivable.
10. Asset Turnover Ratio: Revenue divided by total assets; measures efficiency.

Conclusion:

Mastering these accounting terms will not only help you understand your business better, but also allow you to speak the language of investors, accountants, and financial advisors. Bookmark this list or download our printable glossary to keep it handy whenever you need a quick reference.