21 basic accounting terms you need to master

If you have a business or if you are thinking of opening one, surely accounting is not among those tasks to which you plan to dedicate hours and hours. And it is good that this is the case, because it is best to hire an accountant with the necessary knowledge and experience. But be careful: it is very important that, as an entrepreneur , you understand the basic terms that will allow you to have a good dialogue with your accountant, analyze how money moves within your organization and thus make better financial decisions.

That’s why we prepared this list of 21 basic accounting terms that you need to understand to run a smooth operation; for example, when uploading the data into an electronic accounting system . For ease of reference, we present them in alphabetical order.

In case of any doubt and, above all, if you are about to make an important decision: always talk to your trusted accountant. Shall we start?

  1. CREDITOR . Person to whom money is owed.
  2. ACTIVE . They are the rights and assets that the company owns, such as a fleet of motorcycles for the distribution of merchandise; but also intangible assets, such as a registered trademark or a patent.
  3. CURRENT ASSETS . Assets with cash value available in the short term (usually less than one year).
  4. FIXED ASSETS . Assets and investments that generate income in the long term and that are not held with the intention of selling them.
  5. BALANCE SHEET . Also known as a statement of financial position, balance sheet or statement of equity, it reflects the economic and financial information of a company at a given time based on three data: assets, liabilities and equity or net capital.
  6. WORKING CAPITAL . It is made up of the resources that a company has to be able to operate on a day-to-day basis, serve customers and meet its commitments (such as payroll).
  7. CONTINGENCIES . The costs that a company might have to absorb in the future (for example, for the resolution of a legal action).
  8. COST OF SALES . It includes all expenses associated with the production, distribution, promotion and sale of a product or service.
  9. FIXED COST . These are the expenses that do not change according to the level of activity or sales of the company, such as the rent of a commercial premises.
  10. MARGINAL COST . It is the cost that must be assumed when starting the production of an additional product or unit.
  11. VARIABLE COST . Costs that are tied to the volume of activity of the company; for example, the raw materials to manufacture products, the electricity consumption of the factory and the commissions of the sellers.
  12. DEPRECIATION . The loss of the book value of an asset, as a consequence of its wear and tear due to its use and the passage of time; for example, a car, a machine or a computer.
  13. EARNED . It refers to the registration of an economic transaction at the time it is carried out; like the sale of a product, but with a future payment.
  14. INCOME STATEMENT . Also known as a profit and loss statement, it is a report that shows in detail whether a business was profitable or not during an accounting cycle. There are three important elements that make up this report: income, costs and expenses.
  15. CASH FLOW . It is the variation of money inflows and outflows from the business during a given period of time. It is one of the clearest indicators of the financial health of a company.
  16. PASSIVE . It is the sum of the debts and obligations with which the company finances its activity and can pay its assets.
  17. STOCKHOLDERS’ EQUITY . It is the set of assets and rights that a company possesses at a given time. It is made up of capital, reserves and the results of the current year.
  18. BALANCE POINT . Sales level at which revenue is equal to the sum of fixed and variable costs.
  19. INVENTORY TURNOVER . Number of times a total inventory is used over the course of a year, and needs to be replenished.
  20. GROSS PROFIT . Profit that results from deducting the direct costs of production and acquisition, but without subtracting general or indirect expenses.
  21. NET PROFIT . Profit that results after subtracting all costs, including general and indirect costs, such as payment for services and taxes.