Accounting Glossary

Accounting can be difficult to understand especially the terms that are often thrown around. Here are some of the ones we get the most questions about:

General Terms and Concepts

  • Accounting- the process of recording, measuring, and communicating information about financial transactions. 
  • Accounting periods- regular periods where profits and losses are calculated. Typical periods are monthly, quarterly, and yearly.
  • Business plan- a written document that lists a company's assets and liabilities and outlines a specific mission statement. It also includes a specific plan for the creation and growth of the business. It can be used to lure investors and lenders as well as a guide for the business owner as the company gets off the ground. 
  • Assets- things owned by a company that have future economic value that can be measured and expressed in dollars
    • Examples: cash, inventory, supplies, land, equipment, vehicles
  • Liabilities- obligations of a company or organization. Amounts owed to lenders and suppliers.
    • Accounts payable, loans and debt
  • Equity- the owner's share of a business

Financial Analysis

  • Breakeven point- where revenues or sales exactly equals expenses. It is part of a business plan and tells the owner and prospective investors how many sales it will take to become profitable.
  • Gross Profit- the profit a company makes after deducting the costs associated with making and selling its products. It can be calculated with the following formula:

Gross Profit = Revenue - Cost of Goods Sold

  • Net Profit- the profit a company makes after all operating expenses, interest, and taxes have been deducted from revenue. It can be calculated in multiple ways:

Net Profit = Gross Profit - Operating Expenses

Net Profit = Revenue - All Expenses

  • Forecasting- the use of a company's historic data to determine future trends. Businesses use forecasting to determine how to allocate their budgets or plan for expected expenses. 
  • Return on Investment (ROI)- used to evaluate and compare the efficiency of investments relative to other investments. This is helpful for business deciding how they want to invest their money.
    • For example, a restaurant deciding whether they want to expand their menu of offer delivery

OI = (Gain From Investment - Cost of Investment) / Cost of Investment