20 Basic Accounting Terms For Business Owners

If you are running your own business, chances are, you’ve encountered some accounting terms that you don’t quite understand (unless, of course, you’re running an accounting firm).

At EDR, we’re not your usual accountants. Our goal is to make accounting simple for every business owner. Here are some of the most common accounting terms you may have encountered before, with definitions that won’t be a pain to understand.

So roll up those sleeves and start building your accounting vocabulary!

Accounting term Layman's term
Accounts Payable
Amounts due to vendors or suppliers for goods or services received that have not yet been paid for.
Accounts Receivables
Money owed by a customer for buying on credit.
Asset
A general term for the tangible and intangible things owned by the company. Bought or created to increase the company’s value or benefit its operations.
A summary report that shows the asset of the company (what it owns), liabilities (what it owes) and equity (contribution of the owners).
Bonds Payable
A long-term agreement between a borrower and a lender.
Cash
From the point of view of a layman, “cash” simply means money.
Cash equivalents
3 months of investments with no restrictions.
Depreciation
Value allocated due to the wear and tear or deterioration as the long-term asset of the company is used.
Equity
Represents the value of ownership that an owner of a business has left over after liabilities are deducted.
Expenses
The money spent by the business in its effort to generate revenues.
Financial Statements
A summary report that shows the activities of the business and its financial performance. It includes the Balance Sheet and Income Statements.
Gains
Selling an asset of the company aside from its inventory that the amount received is higher than the cost of the asset.
Income
Refers to money that a business receives in return for working, providing a product, or service.
Income Statement
A report that shows the income and expense of the company to determine if they have a profit or loss.
Inventories
Merchandise that a business holds for sale to customers or to be used in the business in the near future.
Liabilities
Debt owed by the company to another company or individual. This will require payment to settle it.
Losses
Selling an asset of the company aside from its inventory that the amount received is lower than the cost of the asset.
Ordinary Shares
Also known as common shares, it’s the shares of a company that gives the shareholders the right to vote in the company's meeting and also share in the income of the company.
Preference Shares
Also known as preferred stock, it’s the shares of a company owned by people who have the right to receive part of the company's profit first before the ordinary shareholders.
Property, Plant & Equipment
Company's physical or tangible long-term assets (can be used for more than 1 year). Examples are buildings, motor vehicles, machinery and equipment.
ROI (Return of Investment)
This pertains to how fast you can recover your initial investment and earn on top of it.

Say you invested your money amounting to $1,000,000 on a rental property. You earn rentals off of this property amounting to $500,000 annually. Divide the investment of $1,000,000 by $500,000, this equals to 2, referring to the number of years you can recover your full investment amount. This means that in 2 years’ time, you would have made back your $1M investment and in the third year, you will be earning $500,000 from that rental property.

Learning the language of your business accounts will give you the kind of edge that will push you and your business to greater heights. Knowing these accounting terms and understanding them will help you evaluate your business finances well, and having an experienced Chartered Accountant do it for you is even better – that’s what we’re here for.

Have a chat with us. Let EDR Accounting help you build better business. Book a discovery session with our expert accountant today!