A Glossary Of Common Accounting Terms

Every industry has its language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific sector, and the accounting industry is no exception.

To help you understand the terms, acronyms, and phrases regularly used when dealing with bookkeeping and accounting solutions, A Little Faith Accounting & Tax Services, LLC has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your accounting, tax, and bookkeeping needs effectively.

Income statement
An income statement is a financial statement that shows you an enterprise’s income and expenditures. It also indicates whether a company is making a profit or loss for a given period. Annual statements use revenues and expenses over twelve months, while quarterly statements focus on revenues and expenses incurred during a three-month period.

Balance sheet
A balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholder equity. The balance sheet is one of the three core financial statements used to evaluate a business. It provides a snapshot of a company’s finances and shows what it owns and owes as of the date of publication.

Statement of cash flows
A cash flow statement, also known as a statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. In short, it is a detailed summary of all the cash inflows and outflows or the sources and uses of cash during the period.

Assets
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. In other words, assets can be land, buildings, machinery, etc., with probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Liabilities
A liability is something a person or company owes, usually a sum of money. Liabilities are recorded on the right side of the balance sheet and include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.

Equity
In finance, equity is the ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets or the residual interest in the assets of an entity that remain after deducting its liabilities.

Revenue
Revenue is the total amount of income generated by the sale of goods or services related to the company’s primary operations. Revenue, also known as gross sales, is often referred to as the “top line” because it sits at the top of the income statement.

Expenses
An expense is the cost of operations that a company incurs to generate revenue. Expenditure is an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other categories of costs. For example, for a tenant, rent is an expense. For students or parents, tuition is an expense.

Gains
A gain is the increase in net profit resulting from something other than the day-to-day earnings from recurrent operations and is not associated with investments or withdrawals. In other words, gains are increases in equity (net assets) from peripheral or incidental transactions of an entity except those resulting from owners’ revenues or investments.

Losses
A loss is a decrease in net income outside the business’s everyday operations. Losses can result from several activities such as the sale of an asset for less than its carrying amount, the write-down of assets, or a loss from lawsuits.

Depreciation
The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset’s value has been used. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use.

Depletion
Depletion refers to an accrual accounting method used to determine the expense of extracting natural resources from the earth, such as wood, minerals, and oil. Just like depreciation, depletion is a non-cash expense. It incrementally lowers an asset’s cost value through scheduled income charges.

Amortization
Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. Concerning a loan, amortization focuses on spreading out loan payments over time, whereas when applied to an asset, amortization is similar to depreciation. Examples of amortization include the expiration of intangible assets, such as patents or goodwill.

Accounting
Accounting is the measurement, processing, and communication of financial and non-financial information about economic entities such as businesses and corporations. It can also be defined as the identification, measurement, and communication of financial information about economic entities to interested persons.

Auditing
Auditing typically refers to financial statement audits or an objective examination and evaluation of a company’s financial statements, usually performed by an external third party. Auditing can also be defined as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and the communication of the results to interested users.

If you’re looking for accounting, bookkeeping, and tax solutions, reach out to the experts at A Little Faith Accounting & Tax Services, LLC. We are leading tax preparation, accounting, and financial advisors in Baltimore, MD. Our firm has a track record of providing outstanding service to our clients because of our dedication to the three underlying principles of professionalism, responsiveness, and quality.

Please view our complete list of services here, or get in touch with us here.