Finance and Accounting Glossary

Navigating the world of finance and accounting requires understanding specialized terminology. This glossary provides definitions for common terms, helping to demystify complex concepts.

Key Terms

Assets

Resources owned by a company that have future economic value. These can be tangible (e.g., buildings, equipment) or intangible (e.g., patents, trademarks).

Liabilities

Obligations of a company to transfer assets or provide services to others in the future. Examples include accounts payable, loans, and deferred revenue.

Equity

The residual interest in the assets of an entity after deducting its liabilities. Represents the owners’ stake in the company.

Revenue

Income generated from the normal business operations, such as the sale of goods or services.

Expenses

Costs incurred by a company in the process of generating revenue. Examples include salaries, rent, and utilities.

Balance Sheet

A financial statement that reports a company’s assets, liabilities, and equity at a specific point in time. Follows the accounting equation: Assets = Liabilities + Equity.

Income Statement

A financial statement that reports a company’s financial performance over a period of time, typically a month, quarter, or year. Also known as the Profit and Loss (P&L) statement.

Cash Flow Statement

A financial statement that summarizes the movement of cash both into and out of a company over a period of time. Categorized into operating, investing, and financing activities.

Accrual Accounting

An accounting method where revenue and expenses are recognized when they are earned or incurred, regardless of when cash changes hands. Contrasts with cash accounting.

Depreciation

The allocation of the cost of a tangible asset over its useful life. Represents the decline in value of an asset due to wear and tear or obsolescence.

Amortization

Similar to depreciation, but applied to intangible assets, such as patents or trademarks.

Cost of Goods Sold (COGS)

Direct costs attributable to the production of goods sold by a company. Includes the cost of materials, labor, and manufacturing overhead.

Gross Profit

Revenue less the cost of goods sold. Represents the profit a company makes before deducting operating expenses.

Net Income

The bottom line of the income statement. Calculated as total revenues less total expenses, including taxes and interest. Also known as net profit or earnings.

Generally Accepted Accounting Principles (GAAP)

A common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Used in the United States.

International Financial Reporting Standards (IFRS)

A set of accounting standards developed by the International Accounting Standards Board (IASB). Used in many countries around the world.

Audit

An independent examination of a company’s financial statements to ensure they are fairly presented in accordance with GAAP or IFRS.

Budget

A financial plan that outlines expected revenues and expenses for a specific period. Used for planning and controlling financial performance.

Variance Analysis

The process of comparing actual results to budgeted or planned results and investigating the reasons for any significant differences.

Return on Investment (ROI)

A profitability ratio that measures the return generated from an investment relative to its cost.

Debt-to-Equity Ratio

A financial ratio that measures the proportion of a company’s financing that comes from debt versus equity. Indicates the company’s financial leverage.

This glossary is not exhaustive, but it provides a foundation for understanding common finance and accounting terminology. Continuous learning is essential in this dynamic field.