Accounting Glossary: Key Terms

At Profits Plus, we have prepared the ultimate accounting glossary to help you understand all the key financial terms and definitions.

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Glossary Table in Alphabetical Order

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Profits Plus Accounting Glossary

A

Account

A record used to classify and summarize financial transactions in a systematic manner.

Amortisation

The gradual reduction of an intangible asset’s value over its useful life, similar to depreciation for tangible assets.

Accruals

Income or expenses that are recognized before cash changes hands, based on incurred obligations or earned revenues

Allowances for Doubtful Accounts

A contra-asset account that represents the estimated portion of accounts receivable that may not be collected.

B

Bookkeeping

The process of recording and classifying financial transactions in the accounting system

Balance Sheet

A financial statement that provides a snapshot of a company’s financial position, showing assets, liabilities, and equity at a specific date.

Book Value

The value of an asset as recorded on the balance sheet, often different from its market value.

C

Cash Flow Statement

A financial statement that shows the inflows and outflows of cash and cash equivalents during a specific period.

Consolidation

The process of combining financial statements of parent and subsidiary companies into a single set of financial statements.

Cost of Goods Sold (COGS)

The direct costs associated with producing goods, including materials, labour, and overhead.

D

Double Entry Accounting

A system where every transaction is recorded with equal debits and credits to ensure that the accounting equation (Assets = Liabilities + Equity) remains balanced.

Deffered Tax Liability

An account that reflects taxes that will be payable in the future due to temporary differences between book and tax accounting methods.

Depreciation

The systematic allocation of the cost of tangible assets over their useful lives.

E

Earnings Before Interest and Taxes (EBIT)

A measure of a company’s operating performance, calculated as revenue minus operating expenses, excluding interest and taxes.

Equity Method

An accounting technique used to account for investments in associates, where the investor’s share of the associate’s net income is recognized as income.

F

Financial Statements

Reports that summarize a company’s financial activities, including the income statement, balance sheet, and cash flow statement

Financial Ratios

Calculations that provide insights into a company’s financial performance and position, such as the current ratio, debt-to-equity ratio, and return on equity.

G

Goodwill

The excess of the purchase price of an acquired company over the fair value of its net assets, representing intangible value like reputation and customer relationships.

H

I

Income Statement

Also known as the profit and loss statement, it shows a company’s revenues, expenses, and net income over a specific period.

Intangible Assets

Non-physical assets that lack a physical presence but have value, such as patents, trademarks, and copyrights.

J

K

L

Liabilities

Debts or obligations owed by a company to external parties

LIFO (Last-in, First out)

An inventory valuation method where the most recently acquired items are assumed to be sold first

Lease Capitalization

Treating a lease as a purchase and recording the lease payments as an asset and corresponding liability

M

Merger

The combination of two or more companies into a single entity, often resulting in a new corporate identity.

Making Tax Digital

The UK government has launched an initiative called Making Tax Digital (MTD), which mandates businesses and individuals to maintain digital records, use software that is compatible with MTD, and submit updates every quarter

N

O

P

Pension Obligation

The present value of future pension payments owed to employees based on their service and expected benefits

Profit Margin

A financial ratio that measures a company’s ability to generate profit from its revenue.

Payables

Amounts owed to suppliers or creditors for goods and services purchased on credit.

Prepaid Expenses

Payments made in advance for goods or services that will be received in the future.

Q

R

Return on Investment (ROI)

A measure of the profitability of an investment, calculated as the net profit from the investment divided by its initial cost.

Receivables

Amounts owed to a company by its customers or debtors for goods or services provided on credit.

Retained Earnings

Accumulated profits that a company has not distributed as dividends.

S

Segment Reporting

The practice of reporting financial information for different operating segments of a company, often reflecting its diverse business activities.

Stock Options

Contracts that give employees the right to buy company stock at a predetermined price, often used as a form of employee compensation.

Statement of Cash Flows

See ‘Cash Flow Statement’

T

Tax Shield

The reduction in taxable income resulting from deductible expenses like interest payments and depreciation.

Trial Balance

A list of all general ledger accounts with their debit and credit balances to ensure that debits equal credits.

U

Unrealized Gain/Loss

A change in the value of an investment that has not been sold, resulting in paper profits or losses

Unearned Revenue

Payments received in advance for goods or services that will be provided in the future.

V

Valuation

The process of determining the economic value of an asset, liability, or entire company, often involving various methods like market, income, and cost approaches.

W

Working Capital

Working capital assesses a company’s capacity to fulfill its immediate financial responsibilities, including payroll, inventory, and accounts payable, and is determined by deducting current liabilities from current assets.

X

Y

Z