Accounting Glossary
14 essential accounting terms with definitions, examples, and journal entries.
Accounts Payable: Definition, Recording, and Management
Accounts Payable (AP) is a current liability representing the amount a company owes to its suppliers and vendors for goods or services purchased on credit. It is an informal obligation (no signed promissory note) typically due within 30 to 90 days.
Retained Earnings: Definition, Formula, and Statement
Retained Earnings is the cumulative total of net income a company has earned since inception, minus all dividends declared to shareholders. It represents the portion of profits reinvested in the business rather than distributed to owners.
Cost of Goods Sold (COGS): Formula, Calculation, and Examples
Cost of Goods Sold (COGS) represents the direct costs of producing or purchasing the goods that a company sold during a specific period. It includes raw materials, direct labor, and manufacturing overhead directly tied to production.
Working Capital: Formula, Interpretation, and Examples
Working Capital is the difference between a company's current assets and current liabilities. It measures a company's short-term liquidity and ability to meet its day-to-day operational obligations.
General Ledger: Definition, T-Accounts, and How It Works
The General Ledger (GL) is the master accounting record that contains all financial accounts used by a company. It serves as the central repository for all transactions recorded through journal entries, organized by individual account.
Chart of Accounts: Structure, Examples, and Best Practices
A Chart of Accounts (COA) is the organized listing of all accounts used by a company in its general ledger. It assigns a unique number and name to each account and groups them into categories: assets, liabilities, equity, revenue, and expenses.
Double-Entry Bookkeeping: The Foundation of Modern Accounting
Double-entry bookkeeping is the accounting system in which every transaction is recorded in at least two accounts — a debit to one account and a credit to another. This ensures the accounting equation (Assets = Liabilities + Equity) always remains in balance.
Contra Accounts: Types, Examples, and How They Work
A contra account is an account paired with a related account that offsets its balance. Contra accounts have a normal balance opposite to the account they are paired with — for example, Accumulated Depreciation (credit balance) is a contra-asset paired with Equipment (debit balance).
Deferred Revenue: Definition, Recognition, and Journal Entries
Deferred revenue (also called unearned revenue) is a liability created when a company receives cash before delivering goods or services. The company recognizes revenue only as it satisfies its performance obligations.
Materiality Principle: Meaning, Thresholds, and Practical Use
The materiality principle says financial information should be accurate enough to influence the decisions of users, but minor items can be handled using simpler methods when they are unlikely to affect decisions.
Accrual Basis Accounting: Definition and Why It Matters
Accrual basis accounting records revenue when earned and expenses when incurred, regardless of when cash is received or paid.
Allowance for Doubtful Accounts: Definition, Estimation, and Reporting
Allowance for Doubtful Accounts is a contra-asset account that estimates the portion of accounts receivable a company does not expect to collect.
Prepaid Expenses: Definition, Adjustments, and Common Examples
Prepaid expenses are payments made before the related goods or services are consumed, initially recorded as assets and recognized as expenses over time.
Accounts Receivable Turnover: Formula, Interpretation, and Limits
Accounts receivable turnover measures how efficiently a company collects credit sales by comparing net credit sales to average accounts receivable.