Accounting Glossary – 100 Important Terms (Easy Definitions with Examples)

1.Accounting

Definition: Accounting is the process of recording, classifying, and summarizing financial information.

Example: Recording income and expenses to know business profit.

2. Bookkeeping

Definition: Bookkeeping is the daily recording of financial transactions.

Example: Recording sales and expenses in accounting software.

3. Assets

Definition: Assets are things a business owns that have value

Example: Cash, equipment, or buildings.

4. Liabilities

Definition: Liabilities are amounts a business owes to others.

Example: Loans or unpaid bills.

5. Equity

Definition: Equity is the owner’s share in the business

Example:  Owner investment plus retained profits.

6. Revenue

Definition: Revenue is money earned from business activities.

Example:  Sales income from customers.

7. Expenses

Definition:  Expenses are costs incurred to run a business.
Example: Rent, utilities, salaries.

8. Profit

Definition: Profit is what remains after expenses are deducted from revenue.

Example:  Earning $10,000 and spending $7,000 leaves $3,000 profit.

9. Loss

Definition: Loss occurs when expenses exceed revenue.

Example: Spending more than sales earned.

10. Accounts Payable

Definition: Accounts payable are bills a business must pay.

Example: Supplier invoices waiting for payment.

11. Accounts Receivable

Definition: Accounts receivable are amounts customers owe
Example: Unpaid customer invoices.

12. Balance Sheet

Definition: A financial statement showing assets, liabilities, and equity.
Example: Snapshot of company finances on a date.

13. Income Statement

Definition: Shows income, expenses, and profit over time
Example: Monthly profit and loss report.

14. Cash Flow Statement

Definition: Shows how cash moves in and out of a business
Example: Cash received from sales and paid for expenses.

15. Debit

Definition: Debit increases assets or expenses.
Example:  Recording cash received.

16. Credit

Definition: Credit decreases assets or increases liabilities.
Example: Recording a loan payable.

17. Journal Entry

Definition: A record of a financial transaction.
Example: Recording rent payment.

18. Ledger

Definition: A record containing all accounts.
Example:  Sales ledger or expense ledger.

19. Trial Balance

Definition: A report that checks if debits equal credits.
Example:  Ensuring accounting accuracy.

20. Accrual Accounting

Definition: Records income and expenses when earned or incurred.
Example: Recording revenue before receiving cash.

21. Cash Accounting

Definition: Records income and expenses when cash changes hands.
Example: Recording sales when cash is received.

22. Depreciation

Definition: Allocation of asset cost over its useful life.
Example: Spreading vehicle cost over 5 years.

23. Amortization

Definition: Spreading cost of intangible assets over time.
Example: Patent cost spread over years.

24. Inventory

Definition: Goods available for sale.
Example: Products stored in a warehouse.

25. Cost of Goods Sold (COGS)

Definition:  Direct cost of producing goods sold.
Example: Cost of raw materials used.

26. Gross Profit

Definition: Revenue minus cost of goods sold.
Example: $10,000 sales minus $4,000 cost.

27. Net Profit

Definition:  Final profit after all expenses.
Example: Profit after taxes and costs.

28. Operating Expenses

Definition: Costs needed to run daily operations.
Example: Office rent and salaries.

29. Current Assets

Definition: Assets expected to be used within one year.
Example: Cash and inventory.

30. Current Liabilities

Definition: Debts due within one year.
Example: Short-term loans.

31. Working Capital

Definition: Difference between current assets and liabilities.
Example: Example: $20,000 assets – $10,000 liabilities.

32. Financial Statement

Definition: Reports showing financial performance.
Example:  Balance sheet and income statement.

33. Audit

Definition: Examination of financial records.
Example: External audit by accountants.

34. Reconciliation

Definition: Matching records to ensure accuracy.
Example: Bank reconciliation.

35. Accrued Expense

Definition: Expense incurred but not yet paid.
Example: Unpaid utility bill.

36. Prepaid Expense

Definition: Expense paid in advance.
Example: Prepaid insurance.

37. Revenue Recognition

Definition: Recording revenue when earned.
Example: Recognizing service income after work completion.

38. Bad Debt

Definition: Money that cannot be collected.
Example: Customer unable to pay invoice

39. Allowance for Doubtful Accounts

Definition: Estimated uncollectible receivables.
Example: Setting aside 5% of receivables.

40. Capital Expenditure

Definition: Spending on long-term assets.
Example: Buying machinery

41. Operating Income

Definition: Income from normal business operations.
Example: Profit before interest and tax.

42. Fixed Costs

Definition: Costs that stay constant.
Example: Office rent.

43. Variable Costs

Definition: Costs that change with activity.
Example: Raw materials.

44. Break-even Point

Definition: Point where revenue equals costs.
Example: No profit and no loss.

45. Financial Ratio

Definition: Tool to analyze financial performance.
Example: Current ratio.

46. Liquidity Ratio

Definition: Measures ability to pay short-term debts.
Example: Current ratio calculation.

47. Retained Earnings

Definition: Profits kept in the business.
Example: Reinvested profits.

48. Chart of Accounts

Definition: List of all accounts used.
Example: Asset, liability, and expense accounts.

49. Contingent Liability

Definition: A possible obligation that depends on a future event.
Example: A lawsuit that may require payment if the case is lost.

50. Provision

Definition: An amount set aside for a known future expense or loss.
Example: Provision for warranty claims.

51. Capital

Definition: Money invested by owners into the business.
Example: Owner invests $50,000 to start operations.

52. Drawings

Definition: Money or assets withdrawn by the owner for personal use.
Example: Owner takes cash for personal expenses.

53. Outstanding Expense

Definition: Expense due but not yet paid.
Example: Salary payable at month-end.

54. Unearned Revenue

Definition: Money received before providing goods or services.
Example: Advance received from a customer.

55. Closing Entries

Definition: Entries made to close temporary accounts.
Example: Transferring profit to capital account.

56. Opening Balance

Definition: Balance carried forward from the previous period.
Example: Cash balance at the start of the year.

57. Long-term Liabilities

Definition: Debts payable after one year.
Example: Long-term bank loan.

58. Fixed Assets

Definition: Assets used for long-term business operations.
Example: Machinery and furniture.

59. Intangible Assets

Definition: Non-physical assets with value.
Example: Trademark or goodwill.

60. Goodwill

Definition: Excess value paid over net assets during acquisition.
Example: Buying a business for more than its asset value.

61. Going Concern

Definition: Assumption that a business will continue operating.
Example: Preparing accounts assuming future operations.

62. Matching Principle

Definition: Expenses should match related revenues.
Example: Recording commission expense with sales revenue.

63. Prudence Concept

Definition: Recording expenses early but income only when certain.
Example: Creating provision for doubtful debts.

64. Materiality

Definition: Importance of information affecting decisions.
Example: Small expenses recorded immediately.

65. Consistency

Definition: Using the same accounting methods over time.
Example: Applying the same depreciation method yearly.

66. Realization Concept

Definition: Revenue recorded when earned, not when received.
Example: Recording credit sales immediately.

67. Cost Principle

Definition: Assets recorded at purchase cost.
Example: Land recorded at original price paid.

68. Contra Account

Definition: Account that reduces another account’s balance.
Example: Accumulated depreciation.

69. Accumulated Depreciation

Definition: Total depreciation charged to date.
Example: Total depreciation on machinery.

70. Payroll

Definition: Total compensation paid to employees.
Example: Monthly salary payments.

71. Manufacturing Overheads

Definition: Indirect production costs.
Example: Factory electricity and maintenance.

72. Markup

Definition: Amount added to cost to determine selling price.
Example: Adding 20% to product cost.

73. Margin

Definition: Difference between selling price and cost.
Example: Profit margin on sales.

74. Cash Discount

Definition: Discount for early payment.
Example: 2% discount for payment within 10 days.

75. Trade Discount

Definition: Discount given at the time of sale.
Example: Bulk purchase discount.

76. Petty Cash

Definition: Small cash fund for minor expenses.
Example: Office stationery purchases.

77. Bank Overdraft

Definition: Withdrawal exceeding bank balance.
Example: Negative balance in bank account.

78. Bank Charges

Definition: Fees charged by banks.
Example: Service charges deducted by bank.

79. Suspense Account

Definition: Temporary account for unidentified items.
Example: Difference in trial balance.

80. Adjusting Entries

Definition: Entries made at period-end to update accounts.
Example: Recording accrued expenses.

81. Fiscal Year

Definition: Accounting period of 12 months.
Example: April to March financial year.

82. Segment Reporting

Definition: Reporting financial results by business segment.
Example: Sales by product line.

83. Cash Equivalent

Definition: Short-term highly liquid investments.
Example: Treasury bills.

84. Budget

Definition: Financial plan for future activities.
Example: Annual expense budget.

85. Budgetary Control

Definition: Comparing actual results with budget.
Example: Monitoring expense variances.

86. Variance

Definition: Difference between actual and budgeted figures.
Example: Higher-than-expected expenses.

87. Break-even Analysis

Definition: Study of cost, volume, and profit relationship.
Example: Calculating minimum sales needed.

88. Contribution

Definition: Sales minus variable costs.
Example: Amount contributing to fixed costs.

89. Standard Cost

Definition: Predetermined cost for a product.
Example: Expected material cost per unit.

90. Cost Accounting

Definition: Tracking and controlling costs.
Example: Calculating production costs.

91. Management Accounting

Definition: Accounting for internal decision-making.
Example: Profit analysis for managers.

92. Financial Accounting

Definition: Reporting financial data to external users.
Example: Published annual accounts.

93. Cost Center

Definition: Department where costs are accumulated.
Example: Production department.

94. Profit Center

Definition: Unit responsible for revenue and costs.
Example: Retail branch.

95. Activity-Based Costing

Definition: Allocating costs based on activities.
Example: Assigning overheads by machine hours.

96. Lease

Definition: Agreement to use an asset for payment.
Example: Office space rented under lease.

97. Finance Lease

Definition: Lease transferring risks and rewards.
Example: Leasing machinery long-term.

98. Operating Lease

Definition: Short-term lease without ownership transfer.
Example: Renting office equipment.