How to use this glossary

Bookmark this page as your quick, plain-English reference for accounting terms and definitions. Each entry includes what the term means, why it matters, and, when helpful, a simple formula or example. Whether you’re new to basic accounting, polishing your skills for a new role, or just want to read a financial statement without guessing, you’ll find practical clarity here.

Tip: Scan the A–Z list, then come back to dive deeper into areas that connect to your work—cost accounting, income statements, or metrics like gross margin and return on investment (ROI).

Foundations you should know first

• Accounting period. The time window in which results are measured—month, quarter, or year. Many companies use calendar years; some use fiscal years that end in a different month.
• Double-entry bookkeeping. Every transaction hits at least two accounts: one debit and one credit. The system keeps the books balanced.
• Assets, liabilities, and equity. The big three on a balance sheet. Assets are what you own or control; liabilities are what you owe; equity is the residual (assets – liabilities).
• Revenue and expense. Revenue is what you earn from products or services; expenses are costs incurred to earn that revenue.
• Accrual vs. cash. Accrual accounting records revenue when earned and expenses when incurred; cash accounting records when cash changes hands. Large firms in the United States typically use accrual under GAAP.

The A–Z glossary of accounting terms and definitions

A

Accounts payable (AP). Money you owe suppliers for goods or services already received. Appears as a current liability.

Accounts receivable (AR). Money customers owe you for goods or services already delivered. Considered a current asset. Healthy AR turns into cash quickly.

Accrual. An entry that recognizes revenue earned or expenses incurred before cash moves. Example: You record salary expense at month-end even if payday is next week.

Accumulated depreciation. The total depreciation taken on a fixed asset since it was placed in service. It’s a contra-asset that reduces the asset’s book value.

Amortization. Systematic expense recognition for intangible assets (like patents) over their useful lives.

Assets. Resources with future economic benefit. Common classes: cash and equivalents, receivables, inventory, property and equipment, and intangibles.

Audit. An independent review of financial statements. In the U.S., public companies are audited annually. Tax audits are separate and may involve the Internal Revenue Service (IRS).

B

Bad debt expense. The estimated amount of AR you won’t collect.

Balance sheet. A snapshot of assets, liabilities, and equity at a point in time. Equation: Assets = Liabilities + Equity.

Book value. Asset cost minus accumulated depreciation (for tangibles) or amortization (for intangibles). For companies, some use “book value” to mean equity.

Break-even point. Sales level where total revenue and expense are equal; profit is zero. Break-even units = Fixed Costs ÷ (Price – Variable Cost).

Budget. A financial plan that allocates expected revenue and spending. Useful for variance analysis later.

C

Capital expenditure (CapEx). Spending on long-term assets (equipment, software, buildings) that provide benefits beyond the current period.

Capitalization. Recording a spend as an asset (to be depreciated/amortized) rather than an immediate expense.

Cash flow. Net movement of cash in a period. The statement of cash flows shows operating, investing, and financing activity.

Chart of accounts. The organized list of all accounts used by a company.

COGS (Cost of goods sold). Direct costs to produce and deliver products or services (materials, direct labor, manufacturing overhead). For services, often called “cost of sales.” Basic formula over a period: Beginning Inventory + Purchases – Ending Inventory = COGS.

Cost accounting. The discipline of measuring and analyzing product, service, and process costs to support pricing and operational decisions.

Costs incurred. The total of costs recognized in a period—paid or unpaid.

Credit. In double-entry, an entry on the right. Increases liabilities and equity; decreases assets and expenses.

Current ratio. Liquidity metric: Current Assets ÷ Current Liabilities. >1 generally indicates short-term solvency.

D

Debit. In double-entry, an entry on the left. Increases assets and expenses; decreases liabilities and equity.

Deferred revenue. Cash received before earning it (e.g., annual subscriptions). A liability until you deliver the service.

Depreciation. The method of expensing a tangible asset over its useful life. Common methods: straight-line and accelerated. See also gross profit and gross margin for how depreciation may or may not be included depending on your cost model.

Direct vs. indirect costs. Direct costs tie to a specific product or service (materials, direct labor). Indirect costs (overhead) support the business broadly (rent, utilities).

Dividend. A distribution of earnings to shareholders, typically cash.

Diversification. In finance, spreading investments to manage risk. In managerial accounting, diversifying products or services can reduce concentration risk.

E

EBIT / EBITDA. Earnings before interest and taxes; EBITDA adds back depreciation and amortization. Useful for comparing operating performance.

Equity. Owner’s residual claim: Assets – Liabilities. For corporations: shareholders’ equity; for sole proprietors: owner’s equity.

Expense recognition (matching). Record expenses in the same period as the related revenue (e.g., recognize sales commission expense when the related sale is recognized).

F

FIFO / LIFO. Inventory cost flow assumptions: First-In, First-Out vs. Last-In, First-Out. Affects inventory valuation and COGS.

Financial statement. The standard set: income statements, balance sheet, and cash flow statement. Notes provide crucial context.

Fixed vs. variable costs. Fixed don’t change with output (rent); variable do (materials).

Forecast. A forward-looking projection of results; often updated more frequently than budgets.

G

GAAP. U.S. Generally Accepted Accounting Principles—the framework for preparing financial statements in the United States.

General ledger (GL). The master record of all accounts and transactions.

Going concern. The assumption a business will continue operating for the long term.

Gross profit. Revenue – COGS.

Gross margin. Gross Profit ÷ Revenue (expressed as a percentage). Signals pricing power and cost efficiency.

H–I

Impairment. A write-down when an asset’s recoverable amount drops below its carrying value.

Income statements (P&L). Shows revenue, cost of goods sold, gross profit, operating expenses, and net income for a period.

Inventory. Goods held for sale (finished), in production (WIP), or the materials to make them (raw). Ties tightly to COGS and cash flow.

Invoice. A billing document you send for products or services delivered.

J–L

Journal entry. The recorded debits and credits for a transaction.

KPI. Key performance indicator; for finance, think gross margin, days sales outstanding (DSO), or ROI.

Leverage. Using debt to finance assets. Increases returns when things go well; magnifies losses when they don’t.

Liquidity. How easily assets convert to cash and how well you can meet obligations. Current and quick ratios are common checks.

M–N

Materiality. Whether an amount or disclosure could influence decisions. Guides how precisely you need to track and report items.

Multi-step income statement. A format that shows gross profit and operating income subtotals before net income.

Net income (net profit). Bottom line: the profit after all expenses, interest, and taxes.

Notes to the financial statements. Explanatory details that add context—policies, contingencies, and breakdowns.

O

Operating expense (Opex). Day-to-day costs not directly included in COGS (e.g., marketing, admin, R&D).

Overhead. Indirect costs needed to run the business (rent, insurance, utilities). Allocated across products or services in cost accounting.

P

Payback period. Time required for an investment’s cumulative cash inflows to equal its outflows. Simple, but ignores value of time.

Payroll. All wages, salaries, and related taxes/benefits. Payroll compliance intersects with the IRS.

Prepaid expense. Payment made for a future benefit (e.g., annual software). Recorded as an asset and expensed over time.

Present value (PV). The value today of future cash flows discounted at a rate that reflects risk. Cousin to ROI and NPV.

Q–R

Quick ratio. (Current Assets – Inventory) ÷ Current Liabilities. A stricter liquidity test than the current ratio.

Reconciliation. Matching account balances to supporting details (e.g., bank recs match GL cash to bank statements).

Retained earnings. Cumulative profits kept in the business rather than paid out as dividends.

Return on investment (ROI). A profitability ratio: (Gain from Investment – Cost of Investment) ÷ Cost of Investment. Use consistent definitions and time frames.

Revenue recognition. Under accrual, you recognize revenue when control of a good or service transfers to the customer (not just when cash arrives).

S

SG&A. Selling, general, and administrative expenses—overhead outside production.

Stockholders’ equity. Ownership interest in a corporation; includes common stock, additional paid-in capital, and retained earnings.

Straight-line depreciation. Evenly spreads an asset’s cost over its useful life.

Subsidiary. An entity controlled by another (the parent). Consolidated statements combine parent and subs.

T

Tax basis vs. book basis. “Book” follows GAAP; “tax” follows the tax code. Differences create deferred tax assets/liabilities. Corporate filings go to the Internal Revenue Service (IRS) using forms like 1120.

Trial balance. A report listing ending balances of all GL accounts to check that debits equal credits before preparing statements.

Turnover ratios. Activity metrics like inventory turnover (COGS ÷ average inventory) and AR turnover (net credit sales ÷ average AR).

U–Z

Unearned revenue. See deferred revenue.

Variance analysis. Investigation of differences between budget/forecast and actuals—price vs. volume, rate vs. efficiency.

Weighted average cost (WAC). Inventory method averaging costs across all units.

Write-off / write-down. Removing or reducing the carrying value of an asset that has lost value (e.g., bad AR, obsolete inventory).


Put the pieces together: one mini-example

Imagine a small e-commerce business in the United States selling custom planners.

1. Sale. You sell 1,000 planners at $25 each.
• Revenue: $25,000 (recognized at shipment).
• If customers buy “on account,” you record accounts receivable instead of immediate cash.

2. COGS. Each planner costs $10 to produce (paper, printing, packaging, direct labor).
• Cost of goods sold: $10 × 1,000 = $10,000.
• Gross profit: $25,000 – $10,000 = $15,000.
• Gross margin: $15,000 ÷ $25,000 = 60%.

3. Operating expenses. Advertising ($3,000), software ($500), rent allocation ($1,000), and payroll ($5,000).
• Operating income: $15,000 – $9,500 = $5,500.

4. Cash flow. If half of sales were on credit, you’ll have $12,500 in AR. Cash flow from operations will be lower than net income until collections arrive.

5. ROI check (consistent with the scenario). If the advertising campaign was responsible for all 1,000 units, incremental gross profit is $15,000 and ad spend is $3,000. ROI = ($15,000 − $3,000) ÷ $3,000 = 400%. If the campaign drove only a portion of sales, compute ROI using only the incremental revenue and incremental COGS attributable to that campaign.

This mini-story shows how income statements, the balance sheet, and cash flow connect—and how everyday decisions flow through to metrics like gross profit and gross margin.

Essential formulas at a glance

• Gross Profit = Revenue – COGS
• Gross Margin = (Revenue – COGS) ÷ Revenue
• Net Profit = Revenue – (COGS + Operating Expenses + Interest + Taxes)
• Current Ratio = Current Assets ÷ Current Liabilities
• Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities
• Inventory Turnover = COGS ÷ Average Inventory
• ROI = (Gain – Cost) ÷ Cost

Reading the big three financial statements (without stress)

1) Balance sheet

Think of this as a photo at a moment in time. Confirm that assets, liabilities, and equity reconcile (they must). Scan for:

• Liquidity. Are there enough current assets to cover near-term bills?
• Leverage. How much debt is funding assets?
• Asset quality. Is inventory ballooning faster than sales? Are accounts receivable aging?

2) Income statement

This tells the story of performance over a period:

• Top line. Revenue growth—volume vs. price.
• Cost discipline. Track cost of goods sold and gross margin trends.
• Operating efficiency. Watch SG&A leverage: are expenses growing slower than revenue?

3) Cash flow statement

The reality check:

• Operating cash flow. Is the core business producing cash?
• Investing. Capital expenditures for future growth?
• Financing. Debt raises/repayments and dividends.

Practical tips for better day-to-day accounting

• Close on a cadence. Monthly closes keep AR, AP, inventory, and payroll tight. A clean trial balance makes quarterly and annual reporting smoother.
• Document policies. Write simple rules for revenue recognition, capitalization thresholds, inventory methods (FIFO/LIFO/WAC), and depreciation (useful lives and salvage values).
• Age receivables. Track AR buckets (current, 30, 60, 90+ days). Escalate early to protect cash flow.
• Standardize SKUs and cost layers. In cost accounting, consistent item codes and routing steps make margin analysis trustworthy.
• Separate Opex from COGS. Misclassifications blur gross margin and hide pricing or production issues.
• Measure what matters. Pick a few KPIs—Gross Margin, DSO, Inventory Turnover, Operating Margin, and ROI on big campaigns—and review them every month.
• Mind tax vs. book. Expect differences between GAAP and tax (e.g., depreciation methods). Keep a schedule so the IRS return ties back to your books.

Short definitions you’ll see in the wild (rapid-fire)

• Allowance for doubtful accounts. Estimate of uncollectible AR; reduces AR to net realizable value.
• APIC (Additional paid-in capital). Amount investors paid above par value for shares.
• Bond. A long-term borrowing instrument paying interest to holders.
• Carrying amount. Net value of an asset on the books (cost – depreciation/amortization/impairment).
• Compound interest. Earning interest on prior interest; central to present value math.
• Contra-account. Offsets another account (e.g., accumulated depreciation).
• Deferred tax. Future tax effects from timing differences between book and tax.
• Earnings quality. How sustainable and cash-backed the reported profits are.
• JIT (Just-in-time). Inventory approach that minimizes on-hand stock by syncing purchases with demand.
• Lease (finance vs. operating). Classification affects balance sheet presentation and expense pattern.
• Material requisition. Document authorizing materials to move to production.
• Non-controlling interest. Ownership in a subsidiary not held by the parent.
• Obsolescence. Inventory that is no longer sellable at full value; may require a write-down.
• Par value. Nominal value on a stock certificate; not market value.
• Receipts vs. revenue. Not all cash receipts are revenue (e.g., a loan).
• Segment reporting. Disclosing performance by business line or geography.
• Variance. Difference between standard/budgeted and actual cost or volume.
• Working capital. Current Assets – Current Liabilities; the lifeblood of operations.

Applying the concepts across roles

Entrepreneurs and operators

• Price using margin math. Start with COGS, add a target gross margin, sanity-check with the market.
• Protect cash. Accelerate accounts receivable collections and negotiate longer AP terms where feasible.
• Invest with discipline. Use ROI and payback period to compare projects and marketing bets.

Students and career-switchers
• Master the flows first: a sale → AR → cash; a purchase → inventory → COGS.
• Practice journal entries until they’re muscle memory. It speeds up every other concept.
• Read real statements. Pick a public company, read its 10-K, and reconcile the three statements for a recent year.
Analysts and finance pros

• Recast statements for comparability (normalize one-offs, align depreciation policies).
• Track gross margin and operating margin cohorts by products or services line to find hidden winners.
• Use sensitivity tables for price, volume, and cost drivers to quantify risk and upside.

Seminal concepts that tie it all together

Matching principle. Recognize costs incurred in the same periods as related benefits. This fuels accurate gross profit and net income.

Conservatism. When in doubt, avoid overstating assets or income. Write down inventory that’s obsolete; record losses when probable and estimable.

Relevance and reliability. Information must be timely (relevant) and dependable (reliable). Good accounting balances both.

Comparability and consistency. Use consistent policies over time, and disclose changes. It lets users compare income statements and balance sheets meaningfully across periods.

Where to deepen your knowledge next (authoritative & educational)

If you’re ready to move beyond reading definitions and start mastering how accounting really works in practice, it’s time to dive into Ledgeroo — the world’s most effective way to learn accounting online. Ledgeroo turns these accounting terms and definitions into interactive lessons, real-world problem solving, and gamified practice that cements your understanding for life.

By training daily on Ledgeroo, you’ll build fluency in everything from double-entry bookkeeping and financial statements to ROI, gross margin, and cost accounting — the concepts that drive real business decisions. The platform’s bite-sized lessons, progress tracking, and review challenges make it easy to stay sharp whether you’re a student, professional, or entrepreneur.

Ledgeroo also helps you prepare for certifications and real-world accounting work by guiding you through simulations that reinforce how concepts like assets, liabilities, and equity connect inside a business. Each session brings accounting to life in a way textbooks and glossaries can’t.

Start with the free courses, then explore Ledgeroo’s full curriculum to master accounting step-by-step — from basics to brilliance.

Frequently asked questions about accounting terms

What’s the fastest way to improve financial literacy?
Start using Ledgeroo daily. Spend a few minutes reviewing this glossary, then jump into Ledgeroo’s bite-sized practice exercises to see these terms in action. You’ll learn faster by doing rather than just reading.

Is gross margin the same as markup?
No. Gross margin = (Revenue – COGS) ÷ Revenue. Markup = (Price – COGS) ÷ COGS. Ledgeroo’s interactive exercises walk you through examples step-by-step so you never mix them up again.

Do service businesses have COGS?
Yes — often called “cost of sales.” It includes direct labor and delivery costs for the products or services delivered. Ledgeroo explains how service-based companies record these costs in income statements and balance sheets.

How does ROI differ from IRR or NPV?
ROI is a quick ratio. NPV converts all future cash flows to present value using a discount rate. IRR is the rate that makes NPV zero. Ledgeroo helps you practice each with real scenarios so you can make smarter investment and budgeting decisions.

What does a Certified Public Accountant (CPA) do?
A CPA performs audits, reviews, and advisory work while ensuring compliance with the Internal Revenue Service (IRS) and other regulations. Ledgeroo helps future CPAs sharpen the foundational skills they’ll use every day.

Final word

Mastering accounting terms and definitions is just the first step. To turn knowledge into skill, you need to apply it — and Ledgeroo was built precisely for that. With interactive lessons, daily warm-ups, and gamified practice, Ledgeroo transforms learning from memorization into mastery.

Keep this glossary close, but make Ledgeroo your daily training ground. In just 15 minutes a day, you’ll develop the accounting fluency to read financial statements, make data-driven decisions, and confidently navigate the language of business.

👉 Start learning with Ledgeroo today — master accounting step-by-step, from basics to brilliance.