11 Of the Most Used Accounting Terms Defined and Explained...

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Effective accountants ensure that their organizations understand their legal obligations and financial performance and that they can develop budgets and plan for the future. Managers use accounting information to make decisions related to buying or selling, investing, and pricing. Even when a company is hiring outsourced booking you should be familiar with the accounting term definition to effectively communicate with your accounting service provider. The following guide includes basic accounting terms, definitions, and industry acronyms.


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. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. Assets are the wealth that has been accumulated by the business and is owned outright without lean or loan.

Balance Sheet

Balance sheets are financial statements providing snapshots of organizations’ liabilities, assets, and shareholders’ equity at specific moments in time. Balance sheets represent one type of financial statement used to evaluate companies’ financial health and worth. Accountants use the accounting equation, also known as the balance sheet equation, to create balance sheets: “Assets = Liabilities + Equity.”

General Ledger

The general ledger is the side of the bookkeeping ledger that contains the balance sheet and the income statement accounts. Here all business transactions are recorded, including sales, credit purchases, office expenses, and income losses.

Gross Margin

The gross margin ratio is a percentage resulting from dividing the amount of a company's gross profit by the number of its net sales. (The gross margin ratio is also known as the gross profit margin or the gross profit percentage or simply the gross margin.)


When a service or product sells for less than what it cost to supply or manufacture it, or when expenses have exceeded revenues of a particular asset, it is called a loss.

On Credit/On Account

On credit, also called on account, is an agreement for an individual or company to pay for a good or service at a later date. Using credit cards is one way of buying on credit. Payment has not immediately been provided from these items.


A payment receipt, also referred to as a receipt for payment, is an accounting document that a business provides its customer as proof of full or partial payment toward a product or service. Receipts are the total amount of cash collected in business transactions over the course of the day.


Revenue, also called sales, is the gross income a business makes through normal business operations. To calculate sales revenue, multiply sales price by the number of units sold. Accrual accounting and cash accounting methods calculate revenue differently. When using the accrual accounting method to calculate revenue, accountants include sales made on credit. Those who use the cash accounting method only count sales as revenue once the business receives payment.

Trial Balance

A periodical bookkeeping worksheet, a trial balance compiles the balance of ledgers into credit and debit columns that equal each other. Companies create trial balances to ensure the mathematical accuracy of their bookkeeping systems entries


Overhead refers to the ongoing costs of doing business, other than those related to directly creating a good or service. Companies must understand the cost of overhead to figure out how much they need to charge for their goods or services and make a profit. Income statements include information about overhead expenses.


Inventory refers to a company’s goods and raw materials used for making the goods it sells. It appears on a balance sheet as an asset. Inventory includes finished goods, raw materials, and works-in-progress. Generally, companies should avoid holding large amounts of inventory for long periods of time, due to the risk of obsolescence and storage costs.

As a small or medium-sized business owner, your time is valuable, and you need to be choosing carefully where to focus your energies. With a good outsouced accouting firm handling your books, you can focus on the core tasks of your business.

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James E. Wilson, CPA is a team of professionals provide innovative financial solutions designed for today’s business owner. Our advisors treat each client relationship with the loyalty and care required to properly advise you now and well into the future.

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