Accounting Definitions and Terms

An extensive libary of accounting and finance definitions.

Professions are notorious for the use of jargon and accounting and finance are no different. With this website we hope to clear away at least some of this confusion. Set out below are explanation of basic accounting and finance definitions that we hope will help you along this learning path.

If there are other accounting or finance definitions you like to see included please get in touch through our Contact Us page.

Arbitrage
Is the process of taking advantage of a price difference of an identical or similar asset between two or more separate markets. Often used in financial instruments and currencies markets, including cryptocurrencies, an asset is purchased in one market and then sold at a higher price in another market.
Assets
Something that is owned or at least controlled by the firm that has already taken place and from which it expects to receive cash or some other economic benefit. Assets are disclosed on the statement of financial position.
Breakeven Analysis
In its simplest form break even analysis enables us to work out at what level of sales does the business start to make a profit. This is of course based on assumptions of sales price, variable costs per unit and fixed costs actually remaining fixed.
Cost of Goods Sold
This figure represents the direct costs to the business for the goods and/or services that have been sold during the year.
Cost of Sales
Another terms used for cost of goods sold (see above).
Cryptocurrency
A token that is generated digitally forming a virtual currency. Generated through cryptography these tokens are maintained through an “accounting” ledger system known as a blockchain, which is a running decentralised record of transactions maintained across many computers rather than one single ledger owner. These currencies have the distinct feature of being both a method of payment, for example paypal, while also being a currency, such as the US dollar.
Current Assets
A classification of assets used in financial reporting to denote those assets the business does not intend to still be controlling after 12 months.
Debtor Aging Report
An internal document that ranks debtors (accounts receivable) by how long they are taking to pay their account. Generally starting with the quickest through to the slowest. These reports will often group debtors into 0 – 30 days, 31 – 60 days, 61 – 90 days, 91 – 120 days and the 120 days plus. This enables a business to determine which debtors to focus on and assist in calculation of bad debt expenses and doubtful debt provisions.
Diversification
An often used finance term that refers to a risk strategy that attempts to control or reduce the level of risk of a portfolio through holding different asset classes, different liquidities, different time frames, and even different geo-policital exposures.
Drawings
The reduction in owners contributions or capital as a result of making a specific withdrawal of funds from the business. Drawings are reflected in the statement of financial position.
Economic Benefits
An accounting terms that refers to the gains, or avoidance of losses, a reporting entity can reliability identity and measure as a result of specific events. For example, in the normal sale of goods and services, the economic benefit is the money received from a sale. Or when a debt might be forgiven by a creditor, the economic benefit is no longer having to pay the debt off. The gain or avoidance of loss may not even be for the entity’s direct benefit, if could be for another party, but it needs to have control over who receives those benefits.
Effective Interest Method
A technique that allows us to more accurately reflect the borrowing costs of a firm by factoring in premiums or discounts costs – which reflect prevailing interest costs rather than purely coupon payments. This method is also useful in the accounting of costs associated with issuance of debt and stock. We have a whole article looking into this very topic.
Expenses
The outflow of money or some other form of economic benefit to a third party, excluding distributions of owners capital, that has already happened and results in the reduction in assets and/or increase in liabilities. Expenses are disclosed in the statement of financial performance.
Form 1099
A form used in the US tax code titled “1099-Misc, Miscellaneous Income, that is used to report payments that otherwise are not separately reported, eg salary and wages. The types of payments include rents, prizes and awards, payment to someone who isn’t an employee for services, medical and health care payments, payments to attorneys and “any fishing boat proceeds”.
Generally Accepted Accounting Principles (GAAP)
A mix of pronounced accounting standards by the issuing authority within that reporting jurisdiction, which for many jurisdictions will include International Financial Reporting Standards, and those commonly accepted methods of recognition, measurement and disclosure.
Income
Money or some other economic benefit that a firm receives control over as a result of an event that has already happened and increases its balance of assets or reduces its balance of liabilities. Income is disclosed in the statement of financial performance.
Income Statement
A name previously used for the now named Statement of Financial Performance (see below).
Individual Retirement Account (IRA)
A US based tax-advantaged account that individual tax payers can use to accumulate funds for retirement. At the moment there are four different types of IRA accounts, being: Roth, SEP, Simple and Traditional.
International Accounting Standards
Issued by the IFRS Foundation and the International Accounting Standards Board (IASB) these standards are slowing being replaced by IFRS (International Financial Reporting Standards). If a country follows standards issued by the IASB then IAS’s form part of the GAAP of that jurisdiction and must be followed in external financial reporting. International standards assist in the better comparison of financial reporting across different jurisdictions through harmonising the recognition, measurement and disclosure of financial information.
Liabilities
Debts or loans or other forms of financial arrangements that create an obligation on the firm to repay another party. For the debt to be recognized on the firm’s statement of financial position it must have already taken place and its repayment will be in the form cash or some other outflow of economic benefits leaving the firm.
Non-Current Asset
A classification of assets used in financial reporting to denote those assets the business intends to still be controlling after 12 months.
Present Value
The value today from a stream of future money and / or a lump sum discounted at a given rate applied over that period of time. It provides us an easy means to reflect in mathematical terms that $1 now is worth more than the same $1 in the future; due to the rate of return that could be earned on it. Therefore, that future dollar is “discounted” back to give us what its value would be today (assuming that rate of return was earned).
Recognition
An accounting term defined in the IFRS Conceptual Framework para. 5.1 as a process that brings into the accounting records and therefore to be disclosed in the financial statements a transaction that meets one of the five elements of those statements, being either part of revenue, expenses, assets, liabilities or equity.
Recoverable Amount
The higher value of an asset’s fair value less cost to sell or an asset’s value in use. The fair value less cost to sale is an amount that could be obtained in the open market from the sale of that asset (or similar asset) less the costs of bringing it to market. While the value in use is the present value of future cash flows generated from the use and, if any, sale at the end of its useful life.
Statement of Cash Flows
A summary of the cash flows generated within the specified period by the entity in three areas, being operations, financing and investing. The statement brings together the flow in cash within the statement of financial performance and the statement of financial position and so provides the user with a clearer picture of where cash is coming from and what it is being applied too.
Statement of Financial Performance
A summary of the income, expenses and resulting profit of the business over a set period of time.
Statement of Financial Position
A snap-shot of the assets, liabilities and equity of a business at a particular point in time.
Trading Account
In accounting and finance this term has different definitions. In accounting it is a financial statement, often forming the initial part of a statement of financial performance, that determines the gross profit for a business, or business unit, over a period of time. Starting with sales, less the cost of goods sold, provides a gross operating profit.
In finance it refers to an account held by a client with a firm for the purpose of acting trades in financial instruments, such as shares, currencies or derivatives.
Trial Balance
A list of all the general ledger accounts maintained in a businesses double-entry ledger system. The purpose of bringing all of the accounts together is to test that accounting equation is in balance, ie all debit nominated accounts are equal to all credit nominated accounts.
Working Capital
In accounting definitions this refers to net current assets, ie current assets less current liabilities. This is the amount liquid assets that can be applied to the normal operations of the business. In particular during start-up and the early years of a new business this is one metric that will often spell the ruin of otherwise quite profitable businesses.

If there are any further definitions from the world of accounting, finance or economics you would like help with please get in touch or drop a question in the ask a question page (included in the top menu).