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Basic Accounting Terms All Business Owners Should Know – General Terms

1. Accounting Period: The period communicates the span of time that is reported in the statements.

2. Allocation: The term Allocation describes the procedure of assigning funds to various accounts or periods. For example, a cost can be Allocated over multiple months (like in the case of insurance) or Allocated over multiple departments (as is often done with administrative costs for companies with multiple divisions).

3. Business Entity: This is the legal structure, or type, of a business. Common company formations include Sole Proprietor, Partnership, Limited Liability Corp (LLC), S-Corp and C-Corp.

4. Cash Flow: Cash Flow is the term that describes the inflow and outflow of cash in a business. The Net Cash Flow for a period of time is found by taking the Beginning Cash Balance and subtracting the Ending Cash Balance. A positive number indicates that more cash flowed into the business than out, where a negative number indicates the opposite.

5. Certified Public Accountant (CPA): CPA is a professional designation that an accountant can earn by passing the CPA exam and fulfilling requirements for both education and work experience.

6. Credit: A credit is an increase in a liability or equity account, or a decrease in an asset or expense account.

7. Debit: A debit is an increase in an asset or expense account, or a decrease in a liability or equity account.

8. Fixed Cost: A Fixed Cost is one that does not change with the volume of sales. For example, rent and salaries won’t change if a company sells more.

9. General Ledger: A General Ledger is the complete record of a company’s financial transactions. The GL is used in order to prepare all of the Financial Statements.

10. Journal Entry: Journal Entries are how updates and changes are made to a company’s books. Every Journal Entry must consist of a unique identifier (to record the entry), a date, a debit/credit, an amount, and an account code (that determines which account is altered).

11. Overhead: Overhead are those Expenses that relate to running the business. They do not include Expenses that make the product or deliver the service. For example, Overhead often includes Rent, and Executive Salaries.

12. Variable Cost: Variable costs increase with more sales because they are an expense that is incurred in order to deliver the sale. For example, if a company produces a product and sells more of that product, they will require more raw materials in order to meet the increase in demand.


Work Cited:

Pronovost, Gareth. “42 Basic Accounting Terms & Acronyms All Business Owners Should Know.” PaySimple Blog, 9 Aug. 2019, paysimple.com/blog/42-basic-accounting-terms-all-business-owners-should-know/.


Basic Accounting Terms

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