Glossary of Accounting Terms

If accounting is a new thing for you, the only text that can save you (or make you less prone to jumping off a building!) is a glossary of accounting terms to make life and learning a new lingo a lot easier.

It’s important to have a firm grasp of the most basic accounting concepts and terms, or else you may find yourself in over your head, fast.

The good news is that accounting terms really aren’t difficult to grasp. They actually make a lot of sense, if you’ve ever balanced a checkbook (or tried to!).

No, it’s not as hard as you think it is (really.)

The first concept to understand is the idea of debits and credits. Every time a bank or a company or a store handles any kind of a transaction, it falls into either the debit or credit side of the ledger.

Think of it as “money in” and “money out.”

With a debit, some unit of value is added to a customer account. With a credit, it’s the opposite.

This might be easier to apply if you imagine you are the customer, and you have a charge account with a local store. If you buy something, the store “debits” your account with the amount of the purchase. If you pay your bill, the store “credits” your account with the payment.

The “value” in this case is the cost of merchandise added to your account when you purchase something (i.e., the debit.) And if you pay your bill, the “value” is credited (or removed) from the balance you owe the store.

Or try the same concept again with the much-maligned checking account. When you made a deposit, the bank adds (debits) to your checking account. When you write a check, the bank subtracts (credits) your checking account.

The concept of credits and debits are the most basic units for understanding any glossary of accounting terms. You’ll always find these words prominently figured in that accounting list.

Glossary of Accounting Terms

Another basic unit of understanding in accounting is the concept of an “account.” That’s simply a list of transactions tied to one business or individual. It’s a way of keeping records in order so one can figure out what’s going on financially (much like an individual or business checking account).

The thing about accounts is that they are all listed in a general ledger, a book long since replaced by accounting software that performs the same function.

When anything happens in an individual account - say, a debit or a credit as described above - a notation, also called a journal entry, is made (or “posted” in accounting lingo) as a transaction in the general ledger, and the running balance that’s kept of the total debit/credit summary.

Assets and LiabilitiesAccounting uses a variety of different accounts to manage financial worth. Again, using yourself as an example, anything that is categorized as an “asset” is something that brings financial worth to your account.

If you own a car, that has a financial value. If you have a retirement plan, like a 401k, that adds value to your bottom line (by the way, the bottom line is you, or a business, is worth after all the assets, liabilities, debits and credits are all taken into account.)

Similarly, a liability is anything you owe as a financial obligation. The car that is an asset is offset by the liability (the balance) of what you owe on your auto loan. The same type of example can be used with a house and a homeowner’s mortgage.

In the same homeowner example, the equity you have in your house is what you have invested in it. That could include improvements you’ve done to it, and the amount of money you’ve paid into your mortgage.

These terms are just more examples of how a glossary of accounting terms can help you understand the word of finance.