Accounting Terms A–Z: Dictionary + Abbreviations

Accounting Terms A–Z: Dictionary + Abbreviations – The Complete Guide

Introduction: Why I Created This Accounting Dictionary

I still remember my first day as an articled assistant back in the late 1990s – I was handed a set of consolidated financial statements and asked to "review the receivables turnover ratio and comment on the working capital cycle." I nodded confidently, then spent the next hour frantically searching through textbooks trying to decode what felt like a foreign language.

🛍️ Product

Best CPA US Course. Self paced learning with Surgent

Best CPA course in India with Surgent’s AI powered CPA USA Course The CPA USA course is the gold standard for finance professionals seeking to become ...

by Surgent CPA ✓ Available

🛒 View Product

Twenty-five years later, as a Chartered Accountant with extensive experience across audit, financial advisory, IFRS implementation, and corporate finance, I've mentored hundreds of students and professionals through this same learning curve. I've seen brilliant commerce graduates stumble during job interviews because they couldn't explain the difference between capital and revenue expenditure. I've watched capable business owners make poor decisions because they didn't understand the terms their accountants were using.

That's why I created this comprehensive accounting dictionary.

Whether you're:

• A student preparing for CA, ACCA, CMA, or CPA exams
• A business owner trying to understand your financial statements
• A career switcher entering the accounting profession
• A professional brushing up on terminology

Common Mistakes I've Seen (And How to Avoid Them)

In my 25+ years of practice, I've identified three areas where accounting terminology causes the most confusion:

1. Confusing Debit and Credit

The Mistake: Many people assume "debit" means "add money" and "credit" means "subtract money."

The Reality: Whether a debit or credit increases or decreases an account depends on the account type.

Real Example from My Practice: A small retail business owner once called me in panic, saying their accountant had "debited their bank account" and they thought money was being taken out. In reality, the debit increased their bank balance (an asset account). Here's how it actually works:

My Tip: Remember the acronym DEALER – Debit: Expenses, Assets, Losses, Equity Reductions / Credit: Revenue, Liabilities, Equity Increases.

2. Mixing Cash Basis vs. Accrual Basis Accounting

The Mistake: Many small business owners track only cash in and cash out, not realizing this doesn't give an accurate picture of profitability.

Real Example from My Practice: I once reviewed books for a consulting firm that showed a "profitable" year based on cash received. However, they had delivered ₹40 lakhs worth of services in the last quarter that wouldn't be paid until the following year. Under accrual accounting, their actual profit was 60% higher than they thought! This affected their tax planning, bonus decisions, and expansion plans.

The Key Difference:

• Cash Basis: Record income when cash is received, expenses when cash is paid
• Accrual Basis: Record income when earned (service delivered/goods sold), expenses when incurred

As per IND AS and IFRS requirements, most companies must use an accrual basis for statutory reporting.

3. Misclassifying Assets and Expenses (CapEx vs. OpEx)

The Mistake: Treating capital expenditure as revenue expenditure, or vice versa.

Real Example from My Practice: A manufacturing client once tried to expense the entire cost of a new machinery line (₹2.5 crores) in one year. This would have shown a massive loss that year and distorted future profitability. The correct treatment was to capitalize the asset and depreciate it over its 10-year useful life (approximately ₹25 lakhs per year).

The Rule of Thumb:

• Capital Expenditure (CapEx): Spending that creates or enhances long-term assets (buildings, machinery, software). Capitalized on the balance sheet, then depreciated/amortized.
• Revenue Expenditure (OpEx): Day-to-day operating costs (salaries, rent, utilities). Fully expensed in profit & loss.

How to Use This Accounting Dictionary

This comprehensive guide is structured for maximum learning efficiency:

Quick Navigation

• Browse alphabetically using the A–Z sections below
• Press Ctrl+F (Windows) or Cmd+F (Mac) to search for specific terms
• Jump to audience-specific sections tailored for students, business owners, or professionals
• Check the abbreviations table for quick reference on acronyms like EBITDA, COGS, or ROI

Learning Features

• Real-world examples based on my 25 years of practical experience
• Comparison tables showing differences between similar concepts
• Calculation examples with actual numbers
• Exam tips for students preparing for professional certifications
• Business context for practical application

🔠 A–Z Accounting Terms and Definitions

Below is your complete accounting glossary, covering over 250 key terms from A to Z. Each term includes a precise definition, and many include practical examples from real-world scenarios.

A – Accounting Terms Starting with A

1. Account

A record that tracks the financial activities for a specific item (like "Bank Account," "Sales Account," or "Rent Expense Account").

2. Accounting Equation

Assets = Liabilities + Equity

The fundamental equation of double-entry bookkeeping. This equation must always balance.

Example from my practice: If a company has total assets of ₹50 lakhs and liabilities of ₹30 lakhs, then equity must be ₹20 lakhs. If these don't balance, there's an error in the books.

3. Accounts Payable (A/P)

Amounts a business owes to suppliers for goods or services purchased on credit. This is a current liability on the balance sheet.

Real scenario: A retail store receives inventory worth ₹5 lakhs in December, with a 30-day payment term. This ₹5 lakhs appears as Accounts Payable until paid in January.

4. Accounts Receivable (A/R)

Money owed to a business by customers for goods or services delivered on credit. This is a current asset.

Red flag I've seen: High accounts receivable that are aging beyond 90 days often indicate collection problems. I always recommend monitoring the DSO (Days Sales Outstanding) ratio.

5. Accrual

Recognition of revenue or expenses before cash is exchanged. This matches income and expenses to the period when the economic activity occurred, not when cash moved.

6. Accrual Basis Accounting

Records income and expenses when they're incurred, not when cash is received or paid. Required under IND AS, IFRS, and GAAP for most companies.

Why it matters: During an IFRS implementation project I led, we discovered a company had understated its revenue by ₹2 crores because it only recognized sales when payment was received, not when goods were delivered.

7. Accumulated Depreciation

The total depreciation charged on a fixed asset from the date of purchase to the present. This is a contra-asset account that reduces the asset's book value.

Example: Machinery purchased for ₹10 lakhs with annual depreciation of ₹1 lakh. After 5 years, accumulateddepreciation = ₹5 lakhs, and book value = ₹5 lakhs.

8. Adjusting Entry

A journal entry made at period-end to update account balances before preparing financial statements. Common examples include accruing expenses, deferring revenue, or recording depreciation.

9. Allowance for Doubtful Accounts

An estimated portion of accounts receivable that may not be collected. This creates a more realistic valuation of receivables.

From my audit experience: Companies that don't maintain adequate allowances often face sudden write-offs that shock stakeholders. I recommend reviewing aging analysis quarterly.

10. Amortization

Gradual reduction of an intangible asset's value over time (similar to depreciation for tangible assets). Applied to patents, copyrights, goodwill, software licenses, etc.

11. Annual Report

A yearly comprehensive report of a company's financial performance, including audited financial statements, management discussion & analysis, and director's report.

12. Asset

Anything a company owns that has economic value and can provide future benefits. Categories include current assets (cash, inventory, receivables) and non-current assets (property, equipment, investments).

13. Audit

An independent examination of financial records by a qualified professional (like a CA or CPA) to verify accuracy and compliance with accounting standards.

Note from my audit practice: A clean audit report significantly improves credibility with banks, investors, and regulatory authorities.

B – Accounting Terms Starting with B

1. Balance Sheet

A financial statement showing a company's assets, liabilities, and equity at a specific point in time. It's called a "balance" sheet because Assets must equal Liabilities + Equity.

How I explain it to business owners: Think of it as a financial snapshot. If your business were a person, the balance sheet shows what you own (assets), what you owe (liabilities), and your net worth (equity).

2. Bad Debt

Amounts owed to a business that are deemed uncollectible and must be written off as an expense.

Real case: A consulting firm I advised had ₹12 lakhs in receivables from a client who went bankrupt. We had to write this off as bad debt expense, which reduced their profit significantly that year.

3. Bank Reconciliation

Comparing bank statements with internal cash records to identify and reconcile any differences (like outstanding checks, deposits in transit, or bank charges).

Why it's critical: I've caught embezzlement cases, duplicate payments, and unauthorized transactions through thorough monthly bank reconciliations.

4. Book Value

The value of an asset after deducting accumulated depreciation. Formula: Original Cost – Accumulated Depreciation = Book Value.

5. Break-Even Point (BEP)

The sales level at which total revenue equals total costs (no profit, no loss).

Formula: BEP (units) = Fixed Costs ÷ (Selling Price per Unit – Variable Cost per Unit)

Example: A cafe has fixed costs of ₹2 lakhs/month. Each coffee sells for ₹100 with variable costs of ₹40. BEP = 2,00,000 ÷ (100-40) = 3,333 cups per month.

6. Budget

A financial plan outlining projected income and expenses for a future period. Essential for planning, control, and performance evaluation.

7. Bookkeeping

The process of recording daily financial transactions systematically. This forms the foundation for accounting and financial reporting.

8. Bond

A debt instrument issued by companies or governments to raise capital. Bondholders receive periodic interest payments and principal repayment at maturity.

9. Business Entity Concept

An accounting principle that treats the business as separate from its owner(s) for accounting purposes. Personal and business transactions must be recorded separately.

Common violation I've seen: Small business owners using company funds for personal expenses without proper documentation, creating tax and audit issues.

10. Bank Charges

Fees deducted by banks for services like account maintenance, transaction processing, overdraft facilities, or loan processing.

11. Benchmarking

Comparing your business's financial performance metrics against industry standards or competitors to identify areas for improvement.

12. Bill of Exchange

A written order requiring one party to pay a fixed amount to another party at a predetermined date. Commonly used in trade finance.

C – Accounting Terms Starting with C

1. Capital

The owner's investment in the business. Also called "owner's equity" or "shareholders' equity" in companies.

2. Cash Flow

The movement of cash in and out of a business. Positive cash flow means more cash coming in than going out.

Critical insight: I've seen profitable companies fail because of cash flow problems. Profit ≠ Cash. You can be profitable on paper while running out of cash to pay bills.

3. Cash Flow Statement

A financial statement showing cash inflows and outflows categorized into operating activities, investing activities, and financing activities.

Why it matters: During due diligence for an acquisition, I always scrutinize the cash flow statement. It's harder to manipulate than profit & loss and reveals the true financial health.

4. Capital Expenditure (CapEx)

Spending on long-term assets like property, plant, equipment, or technology that will benefit the business for multiple years. Capitalized on the balance sheet and depreciated over time.

Decision framework from my advisory work: If the expenditure provides benefits for more than one year and exceeds a materiality threshold (often ₹50,000), treat it as CapEx.

5. Chart of Accounts

A complete listing of all accounts used in a company's general ledger, organized by category (assets, liabilities, equity, income, expenses).

6. Closing Entry

Journal entries made at the end of an accounting period to transfer balances from temporary accounts (income and expenses) to permanent accounts (retained earnings).

7. COGS (Cost of Goods Sold)

Direct costs of producing goods that were sold during a period. Formula: Opening Stock + Purchases - Closing Stock = COGS.

Example: A garment retailer starts with ₹5 lakhs inventory, purchases ₹20 lakhs more, and ends with ₹8 lakhs. COGS = 5 + 20 - 8 = ₹17 lakhs.

8. Contingent Liability

A potential obligation that depends on a future event (like pending litigation or guarantees given). Must be disclosed in financial statement notes.

From my audit experience: Many companies underestimate contingent liabilities. I once found undisclosed litigation worth ₹50 lakhs that could have materialized, requiring immediate note disclosure.

9. Contra Account

An account that offsets a related account. Examples: Accumulated Depreciation (offsets Fixed Assets), Allowance for Doubtful Debts (offsets Accounts Receivable).

10. Credit

In double-entry bookkeeping, an entry on the right side of a T-account. Increases liabilities, equity, and income; decreases assets and expenses.

11. Current Assets

Assets expected to be converted to cash or used within one year or the operating cycle, whichever is longer. Includes cash, receivables, inventory, and prepaid expenses.

12. Current Liabilities

Debts or obligations due within one year. Includes accounts payable, short-term loans, accrued expenses, and currentportion of long-term debt.

D – Accounting Terms Starting with D

1. Debit

In double-entry bookkeeping, an entry on the left side of a T-account. Increases assets and expenses; decreases liabilities, equity, and income.

2. Depreciation

The systematic allocation of a tangible asset's cost over its useful life. Reflects wear and tear, obsolescence, or passage of time.

Common methods I've applied:

• Straight-Line: Equal amount each year (most common)
• Written Down Value (WDV): Percentage of book value (used for tax purposes in India)
• Units of Production: Based on actual usage

Example: Vehicle costing ₹10 lakhs with 5-year useful life and ₹1 lakh salvage value.

Annual depreciation (straight-line) = (10,00,000 - 1,00,000) ÷ 5 = ₹1,80,000 per year.

3. Dividends

Distribution of profits to shareholders. Reduces retained earnings and must be declared by the board of directors.

4. Double-Entry System

Every transaction affects at least two accounts – for every debit, there's an equal credit. This ensures the accounting equation stays balanced.

Why it's brilliant: In 25 years, I've never seen a better system for ensuring accuracy. It's self-balancing and creates an audit trail.

5. Drawings

Withdrawals made by the owner from the business for personal use. Reduces owner's equity.

Common mistake: Treating drawings as business expenses. They're not deductible and should reduce capital, not profit.

6. Deferred Revenue (Unearned Revenue)

Money received for goods or services not yet delivered. It's a liability because you owe the customer the service or a refund.

Example: A software company receives ₹12 lakhs annual subscription in advance. Each month, ₹1 lakh moves from Deferred Revenue (liability) to Revenue (income).

7. Debtor

A party who owes money to the business (same as Accounts Receivable or Sundry Debtors).

8. Days Sales Outstanding (DSO)

Average number of days to collect payment after a sale. Formula: (Accounts Receivable ÷ Total Credit Sales) × Number of Days.

Benchmark: Most industries target 30-45 days. Higher DSO indicates collection problems or loose credit policies.

9. Direct Costs

Costs directly attributable to producing specific goods or services. Examples: raw materials, direct labor, manufacturing supplies.

10. Discount Allowed

A price reduction given to customers to encourage prompt payment or bulk purchases. It's an expense for the seller.

11. Discount Received

A price reduction received from suppliers. It's income for the buyer.

12. Deferred Tax

Tax liability or asset arising from temporary differences between book income and taxable income. Required under IND AS 12 and IAS 12.

E – Accounting Terms Starting with E

1. Equity

The owner's residual interest in business assets after deducting liabilities. Formula: Assets - Liabilities = Equity.

2. Expense

Costs incurred to generate revenue during a period. Reduces profit and equity.

3. EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)

A measure of operating profitability that excludes non-operating and non-cash items.

When I use it: EBITDA is excellent for comparing operational efficiency across companies with different capital structures, tax situations, or depreciation policies. However, it ignores capital expenditure needs, which can be misleading for capital-intensive businesses.

4. Earnings Per Share (EPS)

Net profit available to equity shareholders divided by number of shares. Key metric for investors.

Formula: EPS = (Net Profit - Preference Dividends) ÷ Number of Equity Shares

5. Earnings Before Tax (EBT)

Profit before income tax expense is deducted. Also called Profit Before Tax (PBT).

6. Encumbrance

A claim or liability attached to an asset (like a mortgage on property or lien on equipment).

7. Ending Inventory

The value of goods remaining unsold at the end of an accounting period. Becomes opening inventory for the next period.

8. Entry

A single record in a journal documenting a financial transaction with date, accounts affected, amounts, and description.

9. Errors of Omission

Transactions completely left out of the accounting records. These are harder to detect than errors of commission.

Detection method: Regular reconciliations and analytical reviews help catch these errors.

10. Exchange Rate

The value of one currency expressed in terms of another. Critical for businesses with foreign transactions.

Real impact: I advised a company importing from China. A 10% rupee depreciation increased their costs by ₹80 lakhs annually, requiring pricing strategy adjustments.

11. Escrow

A financial arrangement where a third party holds funds until specified conditions are met (common in real estate transactions or M&A deals).

12. Estimated Liability

An obligation with uncertain amount or timing, but probable to occur. Examples: warranty provisions, litigation settlements.

F – Accounting Terms Starting with F

1. Fixed Assets (Non-Current Assets)

Long-term tangible assets used in business operations, not for resale. Include land, buildings, machinery, vehicles, furniture, and equipment.

2. Fiscal Year (Financial Year)

A 12-month period used for financial reporting and budgeting. In India, it runs from April 1 to March 31.

3. Financial Statements

Formal records of business financial activities. The main statements are:

• Balance Sheet (financial position)
• Profit & Loss Statement (performance)
• Cash Flow Statement (cash movements)
• Statement of Changes in Equity

Quality check: I always verify that these statements are internally consistent and reconcile with each other.

4. FIFO (First-In, First-Out)

Inventory valuation method assuming first items purchased are first items sold. Results in lower COGS and higher profits during inflation.

Example: A store buys 100 units at ₹100, then 100 units at ₹120. If they sell 150 units, COGS under FIFO = (100 × ₹100) + (50 × ₹120) = ₹16,000.

5. Forensic Accounting

8. Impairment

Case from my practice: I assisted in a forensic investigation where an employee had created fictitious vendors and siphoned off ₹35 lakhs over three years.

6. Full Disclosure Principle

An accounting principle requiring all material and relevant financial information to be disclosed in financial statements or notes.

7. Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

8. Fixed Costs

Costs that remain constant regardless of production volume (rent, salaries, insurance, depreciation).

Management insight: Understanding fixed vs. variable costs is crucial for break-even analysis and pricing decisions.

9. FOB (Free On Board)

A shipping term indicating when ownership transfers from seller to buyer.

• FOB Shipping Point: Buyer owns goods during transit
• FOB Destination: Seller owns goods until delivered

10. Freight In

Transportation costs to bring inventory to your location. Added to inventory cost.

11. Freight Out

Shipping costs to deliver goods to customers. Operating expense.

12. Funds Flow Statement

Statement showing changes in working capital and how funds were generated and utilized. Less common now, replaced largely by cash flow statement.

G – Accounting Terms Starting with G

1. GAAP (Generally Accepted Accounting Principles)

Standard framework of accounting principles, standards, and procedures. US GAAP is used in the United States; most other countries use IFRS.

2. General Ledger (GL)

Master record containing all accounts and transactions. The central repository from which financial statements are prepared.

3. Going Concern

Accounting assumption that a business will continue operating for the foreseeable future. If this assumption is invalid, assets may need to be valued at liquidation value.

Auditor's responsibility: During audits, I must assess going concern viability. COVID-19 made this assessment particularly challenging for many businesses.

4. Goodwill

Intangible asset representing excess purchase price over fair value of identifiable net assets in an acquisition. Reflects brand value, customer relationships, reputation, etc.

Example: Company A acquires Company B for ₹100 crores. Fair value of B's net assets is ₹70 crores. Goodwill = ₹30 crores.

5. Gross Profit

Revenue minus cost of goods sold. Formula: Sales - COGS = Gross Profit.

Key metric: Gross profit margin indicates pricing power and production efficiency. I track this monthly for management clients.

6. Gross Margin

Gross profit expressed as a percentage of sales. Formula: (Gross Profit ÷ Sales) × 100.

7. Gain

Excess of selling price over book value of an asset (usually non-operating income).

8. Government Grant

Financial assistance from government, often for specific projects or capital expenditure. Treatment follows IND AS 20 / IAS 20.

9. Gross Receipts

Total revenue before any deductions or adjustments.

10. Guarantee

A promise to fulfill another party's obligation if they default. Creates contingent liability.

H – Accounting Terms Starting with H

1. Historical Cost

Recording assets at their original purchase price. This is the primary valuation basis under most accounting standards, though fair value is increasingly used.

2. Holding Company

A company that owns controlling interest (usually >50% shares) in one or more subsidiary companies.

3. Horizontal Analysis

Comparing financial data across multiple periods to identify trends. Also called trend analysis.

Example: Analyzing revenue growth: Year 1: ₹50L, Year 2: ₹60L, Year 3: ₹75L shows 20% and 25% year-over-year growth.

4. Hire Purchase

Purchasing an asset through installment payments, with ownership transferring after final payment.

5. Hedge / Hedging

Financial strategy to reduce risk exposure (like using forward contracts to lock in exchange rates).

Real application: I advised an exporting company to hedge 70% of their US dollar receivables, which saved them ₹15 lakhs when the rupee strengthened unexpectedly.

6. High-Low Method

A cost estimation technique separating fixed and variable components by analyzing highest and lowest activity levels.

7. Human Capital

The economic value of employee skills, knowledge, and experience. Though not recorded as an asset, it's increasingly recognized as crucial for business valuation.

8. Hypothecation

Pledging an asset as collateral for a loan while retaining possession (common for inventory or receivables financing).

9. Head Office Account

Used in branch accounting to record transactions between head office and branches.

10. Hire Charges

Rental fees paid for using equipment or assets.

I – Accounting Terms Starting with I

1. Income

Money earned from business operations or investments. Includes revenue from sales, interest income, rental income, etc.

2. Income Statement (Profit & Loss Statement)

Financial statement showing revenues, expenses, and resulting profit or loss for a specific period.

How I read it: I start with gross profit margin, then examine operating expenses as a % of revenue, and finally analyze one-time or unusual items.

3. Interest

Cost of borrowing money, or return earned on investments/loans given.

4. Inventory (Stock)

Goods held for sale or raw materials/work-in-progress used in production. Current asset on the balance sheet.

5. Intangible Assets

Non-physical assets with value: patents, trademarks, copyrights, brand names, software, licenses, goodwill.

6. Invoice

A commercial document issued by seller to buyer, detailing goods/services provided and amount due.

7. Imprest System

A petty cash system where a fixed amount is maintained. After expenses, it's reimbursed back to the fixed amount.

Example: Petty cash imprest of ₹10,000. After spending ₹3,500, reimbursement of ₹3,500 restores the balance to ₹10,000.

8. Impairment

Permanent decrease in an asset's value below its book value. Requires write-down as per IND AS 36 / IAS 36.

Trigger: During the pandemic, I saw many companies impair their leasehold improvements and retail fit-outs due to store closures.

9. Income Tax

Tax levied on business profits or individual income by government.

10. Internal Audit

Ongoing review of internal controls, risk management, and compliance conducted by the company's own audit team.

11. IFRS (International Financial Reporting Standards)

Global accounting standards used in 140+ countries. India uses IND AS (converged with IFRS).

12. Internal Control

Policies and procedures designed to ensure accuracy of financial information, prevent fraud, and ensure compliance.

J – Accounting Terms Starting with J

1. Journal

Book of original entry where transactions are first recorded chronologically before posting to ledger.

2. Journal Entry

Recording of a business transaction showing date, accounts debited and credited, amounts, and narration.

Format example:

Date: 01-Jan-2026
Rent Expense Dr. ₹25,000
  To Bank Account Cr. ₹25,000
(Being rent paid for January 2026)

3. Joint Venture

A temporary partnership between two or more parties for a specific project or business activity. Each party shares profits, losses, and control.

Example from my consulting: Two construction companies formed a joint venture to bid on a large infrastructure project, sharing resources and risk.

4. Job Costing

Cost accounting method tracking costs for specific jobs or projects (common in construction, consulting, custommanufacturing).

5. Just-in-Time (JIT)

Inventory management strategy where materials arrive just when needed for production, minimizing storage costs and waste.

6. Judgment

Professional estimates and decisions required in accounting (like useful life of assets, collectability of receivables, or revenue recognition timing).

7. Journal Voucher

Documentary evidence supporting a journal entry (invoices, receipts, contracts, etc.).

8. Joint Cost

Cost incurred in producing multiple products simultaneously (like oil refining producing gasoline, diesel, and other products).

9. Journal Proper (General Journal)

Journal for recording non-routine transactions that don't fit specialized journals (sales, purchase, cash journals).

10. Judicial Accounting

Accounting services for legal proceedings, estates, trusts, or bankruptcy cases.

K – Accounting Terms Starting with K

1. Key Performance Indicators (KPIs)

Quantifiable metrics measuring business performance against strategic objectives.

My recommended financial KPIs:

• Gross Profit Margin
• Operating Profit Margin
• Current Ratio
• Quick Ratio
• Return on Equity (ROE)
• Days Sales Outstanding (DSO)
• Debt-to-Equity Ratio

2. Kiting

Fraudulent practice manipulating bank balances by exploiting float time between banks.

3. Knowledge Capital

The value of intellectual assets, expertise, and proprietary knowledge possessed by a business.

4. Kickback

Illegal commission or bribe paid to secure business or favorable treatment.

5. Key Ratio

Critical financial ratio for assessing business health (varies by industry).

6. KPI Dashboard

Visual representation of key performance metrics, often updated in real-time.

7. Keeping Accounts

The act of maintaining systematic financial records.

8. Knock-Off Account

Temporary account used to clear or reconcile transactions before final allocation.

9. Known Liability

Obligation with a definite amount and due date (like accounts payable or loans).

10. K-factor

A multiplier or coefficient used in various financial calculations (context-specific).

L – Accounting Terms Starting with L

1. Ledger

Book containing all accounts where transactions are posted from journals. The general ledger is the master record.

2. Liabilities

Obligations owed to external parties. Classified as current (due within one year) or non-current (due after one year).

3. Liquidity

A company's ability to meet short-term obligations using current assets. Measured by Current Ratio and Quick Ratio.

Red flag from audits: Liquidity below 1.0 indicates potential solvency issues. I always investigate negative working capital.

4. Loan

Borrowed funds that must be repaid with interest. Can be secured (backed by collateral) or unsecured.

5. Lease

Contractual agreement to use an asset for a specified period in exchange for payment. Under IND AS 116 / IFRS 16, most leases now appear on balance sheet.

6. Long-Term Assets (Non-Current Assets)

Assets expected to provide benefits beyond one year (property, equipment, investments, intangibles).

7. Loss

When total expenses exceed total revenues. Also refers to selling an asset below book value.

8. LIFO (Last-In, First-Out)

Inventory valuation assuming most recently purchased items are sold first. Not permitted under IFRS/IND AS, but allowed under US GAAP.

9. Line of Credit

Flexible borrowing arrangement allowing a business to draw funds up to a maximum limit as needed.

10. Lien

Legal claim on an asset to secure debt repayment.

11. Leasehold Improvements

Modifications or enhancements made to rented property. Capitalized and amortized over the shorter of lease term or improvement's useful life.

12. Liquidation

Process of winding up a business, selling assets, paying liabilities, and distributing remaining funds to owners.

M – Accounting Terms Starting with M

1. Margin

Profit expressed as a percentage of sales. Various types include gross margin, operating margin, and net margin.

2. Market Value

Current price an asset would fetch in an open market transaction.

3. Materiality

Accounting principle that items significant enough to influence decisions must be disclosed. What's "material" depends on size and context.

My rule of thumb: Items exceeding 5% of net profit or 1% of total assets typically warrant separate disclosure.

4. Matching Principle

Expenses should be recorded in the same period as the revenues they helped generate.

Example: Sales commissions paid in January for December sales should be expensed in December, not January.

5. Maturity

The date when a loan, bond, or other financial instrument becomes due for repayment.

6. Merger

Combination of two companies into one entity. Different from acquisition where one company buys another.

7. Markup

Amount added to cost price to determine selling price. Formula: Markup = Selling Price - Cost Price.

8. Manufacturing Overhead

Indirect production costs not directly traceable to specific units (factory rent, utilities, indirect labor, depreciation).

9. Miscellaneous Expenses

Small, varied expenses that don't fit other categories (often immaterial items).

10. Mortgage

Loan secured by real estate property. If borrower defaults, lender can seize the property.

11. Management Accounting

Internal accounting focused on providing information to managers for decision-making, planning, and control (not bound by GAAP/IFRS).

12. Moving Average

Inventory valuation method calculating a new average cost after each purchase.

N – Accounting Terms Starting with N

1. Net Income (Net Profit)

Final profit after all revenues, expenses, interest, and taxes. The "bottom line" of the income statement.

2. Net Assets

Total assets minus total liabilities. Equals owner's equity.

3. Net Worth

The equity or ownership value in a business or individual's assets after deducting liabilities.

4. Nominal Account

Accounts relating to revenues, expenses, gains, and losses. Closed to retained earnings at year-end (temporary accounts).

5. Notes Payable

Written promises to pay specific amounts on specific dates. More formal than accounts payable.

6. Non-Current Assets

Assets held for more than one year (fixed assets, long-term investments, intangibles).

7. Net Sales

Gross sales minus returns, allowances, and discounts.

8. NPA (Non-Performing Asset)

Loan or advance where principal or interest payment is overdue by 90+ days (banking term).

9. Negotiable Instrument

Transferable financial document guaranteeing payment (checks, promissory notes, bills of exchange).

10. Net Realizable Value (NRV)

Estimated selling price minus estimated costs to complete and sell. Used for inventory valuation under lower of cost or NRV rule.

11. Net Working Capital

Current assets minus current liabilities. Indicates short-term financial health.

12. Negative Working Capital

When current liabilities exceed current assets. Can indicate financial stress or (in some business models like Amazon) efficient cash management.

O – Accounting Terms Starting with O

1. Outstanding Expenses (Accrued Expenses)

Expenses incurred but not yet paid. Recorded as current liabilities.

Example: December electricity bill received in January is an outstanding expense at December 31.

2. Overdraft

Bank facility allowing account balance to go negative up to a sanctioned limit. Interest charged on overdrawn amount.

3. Operating Income (Operating Profit)

Profit from core business operations before interest and tax. Also called EBIT (Earnings Before Interest and Tax).

4. Operating Expenses (OpEx)

Day-to-day costs of running business (salaries, rent, utilities, marketing, administration).

5. Obsolescence

Decline in asset value due to technological advancement, market changes, or becoming outdated.

Real example: A printing company I advised had to write off ₹40 lakhs of traditional offset printing equipment when clients shifted to digital printing.

6. Owner's Equity

Owner's claim on business assets after liabilities. In sole proprietorships: Capital + Profit - Drawings.

7. Opening Balance

Account balance at the beginning of an accounting period (equals previous period's closing balance).

8. Opportunity Cost

The benefit foregone by choosing one alternative over another. Not recorded in accounts but crucial for decision-making.

Business example: If you use your building for operations instead of renting it out for ₹5 lakhs/month, the opportunity cost is ₹5 lakhs monthly.

9. Order Book

Record of pending customer orders yet to be fulfilled.

10. Output Tax

GST/VAT collected on sales (liability to be paid to government after deducting input tax credit).

11. Overhead Allocation

Process of assigning indirect costs to products, departments, or cost centers.

12. Over-Capitalization

When a business has excessive capital relative to its earning capacity, leading to low returns.

P – Accounting Terms Starting with P

1. Profit

Excess of revenues over expenses. Various types: Gross Profit, Operating Profit, Net Profit.

2. Prepaid Expenses

Expenses paid in advance for future benefits (recorded as current assets until expense period arrives).

Common examples: Insurance premiums, annual software licenses, advance rent.

3. Provision

Amount set aside for known liability with uncertain amount or timing (warranty provision, tax provision, restructuring provision).

4. Payables

Amounts owed to suppliers, creditors, or other parties (accounts payable, notes payable, accrued expenses).

5. Payroll

System for compensating employees, including salary calculation, deductions, tax withholding, and disbursement.

6. Petty Cash

Small cash fund maintained for minor expenses (office supplies, refreshments, courier charges).

7. Posting

Transferring journal entries to respective ledger accounts.

8. Prime Cost

Direct materials + Direct labor. The most direct production costs.

9. Purchase Returns

Goods returned to suppliers due to defects, wrong specifications, or other issues.

10. Partnership

Business owned by two or more persons sharing profits and losses per partnership agreement.

11. P&L Statement (Profit and Loss Statement)

See Income Statement.

12. Present Value (PV)

Current value of future cash flows discounted at appropriate rate. Foundation of time value of money calculations.

Q – Accounting Terms Starting with Q

1. Quick Ratio (Acid-Test Ratio)

Stringent liquidity measure excluding inventory. Formula: (Current Assets - Inventory) ÷ Current Liabilities.

Why it matters: During the 2008 crisis, I saw companies with healthy current ratios struggle because inventory couldn't be quickly converted to cash. Quick ratio revealed the real problem.

2. Quarterly Report

Financial report covering three-month period. Required for listed companies.

3. Quotation

Formal document stating price, terms, and conditions for supplying goods or services.

4. Qualified Audit Report

Auditor's opinion expressing reservations about specific aspects of financial statements (less clean than unqualified/unmodified report).

5. Quantitative Analysis

Financial analysis using numerical and statistical methods.

6. Quasi Contract

Legal obligation arising from circumstances rather than formal agreement.

7. Quasi Equity

Hybrid financial instruments with characteristics of both debt and equity (convertible bonds, preference shares).

8. Quick Assets

Highly liquid assets readily convertible to cash (cash, marketable securities, receivables) – excludes inventory and prepaid expenses.

9. Query

Question raised during audit or review requiring clarification or supporting evidence.

10. Qualified Opinion

See Qualified Audit Report.

R – Accounting Terms Starting with R

1. Revenue

Income generated from core business operations (sales of goods or services).

2. Reserves

Retained profits appropriated for specific purposes (general reserve, capital reserve, revaluation reserve).

3. Receipts

Cash or payments received from customers, debtors, or other sources.

4. Reconciliation

Process of comparing two sets of records to ensure consistency and identify discrepancies.

Most critical reconciliations I perform monthly:

• Bank reconciliation
• Receivables/Payables ledger to control account
• Inventory records to physical count
• Intercompany accounts

5. Retained Earnings

Accumulated profits not distributed as dividends, kept in business for growth or reserves.

6. Return on Investment (ROI)

Profitability ratio measuring return relative to investment. Formula: (Gain from Investment - Cost) ÷ Cost × 100.

Example: Invested ₹10 lakhs in marketing, generated ₹15 lakhs additional profit. ROI = (15-10)÷10 × 100 = 50%.

7. Realization Account

Temporary account used when a partnership or business is dissolved, recording sale of assets and payment of liabilities.

8. Revenue Expenditure

Day-to-day operating expenses providing benefit for current period only (contrast with capital expenditure).

9. Ratio Analysis

Evaluating financial performance by calculating and interpreting financial ratios (liquidity, profitability, efficiency, leverage ratios).

10. Receivable Turnover

Efficiency ratio measuring how quickly receivables are collected. Formula: Net Credit Sales ÷ Average Accounts Receivable.

11. Return on Equity (ROE)

Profitability measure from shareholders' perspective. Formula: Net Income ÷ Shareholders' Equity × 100.

12. Residual Value (Salvage Value)

Estimated value of an asset at the end of its useful life.

S – Accounting Terms Starting with S

1. Sales (Revenue)

Income from selling goods or services – the topline of income statement.

2. Stock (Inventory)

Goods held for sale or materials used in production.

3. Sundry Debtors (Accounts Receivable)

Customers who owe money for goods/services sold on credit.

4. Sundry Creditors (Accounts Payable)

Suppliers to whom money is owed for goods/services purchased on credit.

5. Suspense Account

Temporary account holding entries when correct account is uncertain. Must be cleared once resolved.

From my audit experience: Large or old suspense account balances are red flags indicating poor record-keeping or potential irregularities.

6. Straight-Line Depreciation

Method charging equal depreciation each year. Formula: (Cost - Salvage Value) ÷ Useful Life.

7. Share Capital

Funds raised by issuing shares to shareholders.

8. Solvency

Ability to meet long-term debts and obligations. Measured by Debt-to-Equity and Interest Coverage ratios.

9. Subsidiary

Company controlled by another company (parent) through majority shareholding.

10. Service Revenue

Income from providing services rather than selling goods.

11. Stakeholders

Parties with interest in business (shareholders, creditors, employees, customers, government, community).

12. Statement of Cash Flows

See Cash Flow Statement.

T – Accounting Terms Starting with T

1. Trial Balance

List of all ledger account balances to verify that total debits equal total credits.

What it proves: Arithmetical accuracy of bookkeeping.

What it doesn't prove: Correctness of transactions, omissions, or compens

2. Turnover

Total sales revenue. In British terminology, synonymous with revenue.

3. Tax Payable

Amount of tax owed to government authorities (current liability).

4. Trade Discount

Price reduction given to business customers or for bulk purchases (different from cash discount for prompt payment).

5. Treasury Stock

Company's own shares that were issued, then repurchased. Reduces shareholders' equity.

6. T-Account

Visual representation of a ledger account showing debits on left, credits on right, resembling the letter "T."

7. Transaction

Any business event with monetary impact that must be recorded in accounting books.

8. Time Value of Money

Principle that money available today is worth more than the same amount in future due to earning potential.

Application: Used in NPV analysis, loan amortization, lease accounting, and pension calculations.

9. Transfer Pricing

Pricing of transactions between related entities (like parent and subsidiary). Must be at arm's length to prevent profit shifting.

10. Total Assets

Sum of all assets owned by business (current + non-current).

11. Tangible Assets

Physical assets you can touch (land, buildings, machinery, inventory).

12. Tax Shield

Reduction in taxable income through allowable deductions like depreciation, interest, or business expenses.

U – Accounting Terms Starting with U

1. Unearned Revenue (Deferred Revenue)

Payment received before service delivery or product shipment. Current liability until earned.

2. Unadjusted Trial Balance

Trial balance before year-end adjusting entries for accruals, deferrals, depreciation, etc.

3. Underwriting

Agreement to purchase unsold shares in a public offering, guaranteeing capital raise.

4. Useful Life

Estimated period an asset will be productive and provide economic benefits.

Judgment required: I've seen companies overestimate useful life to reduce depreciation expense. This manipulates profits and overstates asset values.

5. Unit Cost

Total cost divided by number of units produced or sold.

6. Uncollectible Accounts (Bad Debts)

Receivables deemed impossible to collect.

7. Utilization Rate

Percentage of available capacity actually used (in manufacturing) or billable hours (in services).

8. Unrealized Gain/Loss

Paper profit or loss on assets still held (not yet sold), like marketable securities valued at fair value.

9. Uniform Costing

Standardized costing system used across similar businesses for comparison purposes.

10. Upside Potential

Expected maximum gain from an investment or business decision.

V – Accounting Terms Starting with V

1. Voucher

Documentary evidence supporting a transaction (invoice, receipt, bill, contract).

2. Variable Cost

Costs that change proportionally with production volume (raw materials, direct labor, packaging).

3. Value Added Tax (VAT) / Goods and Services Tax (GST)

Consumption tax collected at each stage of supply chain, with credit for tax paid on inputs.

4. Vertical Analysis

Expressing each financial statement item as percentage of a base figure (total assets or total sales).

Example: If COGS is ₹60 lakhs and sales are ₹100 lakhs, COGS is 60% of sales.

5. Variance

Difference between actual and budgeted/standard amounts. Used in management accounting for control.

6. Vendor

Supplier of goods or services.

7. Volume Discount

Price reduction for purchasing in large quantities.

8. Valuation

Process of determining the fair value or worth of an asset, business, or security.

9. Venture Capital

Investment funds provided to startups and early-stage companies with high growth potential.

10. Void Cheque

Cancelled cheque marked "VOID" to prevent use. Often provided for setting up automatic payments.

W – Accounting Terms Starting with W

1. Working Capital

Current Assets minus Current Liabilities. Indicates short-term financial health and operational efficiency.

My benchmark: Healthy working capital equals 1.5-2.0 times current liabilities for most businesses.

2. Wages

Payment to workers, typically hourly or daily (contrast with salaried employees).

3. Write-Off

Removing an uncollectible amount from books (bad debt write-off) or reducing asset value to zero.

4. Withholding Tax (TDS - Tax Deducted at Source)

Tax deducted when making certain payments (salary, contractor fees, rent, professional fees). Remitted to governmenton behalf of recipient.

5. Warranty Provision

Estimated liability for future warranty claims on products sold. Required under matching principle.

Real calculation: Electronics company with ₹100 crores sales estimates 2% warranty claims = ₹2 crore provision.

6. Work-in-Progress (WIP)

Partially completed goods or projects. Valued at cost incurred to date.

7. Wholesale Price

Price charged to retailers or bulk buyers (lower than retail price).

8. Weighted Average Cost

Inventory valuation method calculating average cost of all units available for sale.

Formula: Total Cost of Goods Available ÷ Total Units Available = Weighted Average Cost per Unit

9. Window Dressing

Manipulating financial statements to present a better picture than reality. Often involves timing of transactions around reporting dates.

Red flags I look for: Sudden spike in sales in last month of year, unusually low receivables at year-end, or aggressive revenue recognition.

10. Wire Transfer

Electronic transfer of funds between banks.

X – Accounting Terms Starting with X

1. XBRL (eXtensible Business Reporting Language)

Standardized electronic format for business reporting, facilitating automated data exchange.

2. X-Account

Cross-reference or contra account offsetting a related account.

3. X-Rate (Exchange Rate)

See Exchange Rate.

4. X-Chart

Control chart or graph showing financial trends over time.

5. X-Transaction Code

System-generated classification code for categorizing transactions in accounting software.

Y – Accounting Terms Starting with Y

1. Year-End Adjustments

Final accounting entries made before closing books (accruals, provisions, depreciation, stock adjustments).

2. Yield

Return earned on an investment, expressed as percentage of investment cost.

3. Year-to-Date (YTD)

Cumulative total from the beginning of fiscal/calendar year to current date.

4. Yield Ratio

Measure of profitability or return relative to investment or assets employed.

5. Yardstick Competition

Benchmarking performance against industry standards or best practices.

6. Yield on Bonds

Interest return on bond investment, considering coupon rate and market price.

7. Yearly Budget

Annual financial plan projecting revenues and expenses for the coming year.

8. YTD Profit

Cumulative profit from beginning of year to present date.

Z – Accounting Terms Starting with Z

1. Zero-Based Budgeting (ZBB)

Budgeting method starting from zero each period, requiring justification for every expense (contrast with incremental budgeting).

When I recommend it: During cost rationalization or when historical spending patterns aren't relevant.

2. Z-Score (Altman Z-Score)

Bankruptcy prediction model using financial ratios to assess credit risk and financial distress likelihood.

Key insight: Scores below 1.8 indicate high bankruptcy risk; above 3.0 suggests financial stability.

3. Zero Coupon Bond

Bond issued at discount with no periodic interest payments. Returns face value at maturity.

4. Zonal Accounting

Accounting system organized by geographic zones or regions.

5. Z-Report

End-of-day summary report from point-of-sale (POS) systems showing sales, returns, and cash collected.

6. Zombie Company

Business earning just enough to service debt but unable to grow or invest. Survives on borrowed funds

List of Common Accounting Abbreviations and Acronyms

Accounting uses abbreviations extensively to save space in reports, ledgers, and communications. Here's your comprehensive reference from A/R (Accounts Receivable) to YTD (Year-to-Date).

FAQs on Accounting Terms and Abbreviations

What are the 5 most important accounting terms to know?

Based on my 25 years of experience, these five form the foundation of all accounting:

1. Assets - Resources owned by the business with economic value
2. Liabilities - Obligations owed to external parties
3. Equity - Owner's residual interest (Assets - Liabilities)
4. Revenue - Income earned from business operations
5. Expenses - Costs incurred to generate revenue

Understanding these five and how they relate through the accounting equation (Assets = Liabilities + Equity) is fundamental. Every transaction affects at least two of these categories, and the equation must always balance.

What's the difference between debit and credit?

This is the question I'm asked most often! Here's the practical explanation:

Debit and credit are positions, not additions or subtractions. Their effect depends on the account type:

Debits increase:

• Assets (Bank, Inventory, Receivables)
• Expenses (Rent, Salaries, Utilities)

Credits increase:

• Liabilities (Loans, Payables)
• Equity (Capital, Retained Earnings)
• Revenue (Sales, Service Income)

Memory aid I teach: Use the acronym DEALER

• Debit: Expenses, Assets, Losses, Equity Reductions
• Credit: Everything else (Revenue, Liabilities, Equity increases)

What's the difference between accrual and cash accounting?

Cash Basis Accounting:

• Records transactions when cash changes hands
• Simple but doesn't match revenues with related expenses
• Suitable only for very small businesses
• Not permitted under IFRS/IND AS/GAAP for financial reporting

Accrual Basis Accounting:

• Records revenue when earned (regardless of cash receipt timing)
• Records expenses when incurred (regardless of payment timing)
• Matches revenues with expenses in correct period
• Required for most companies under accounting standards

Real example from my practice:

A consulting firm delivers a ₹10 lakh project in December 2025 but receives payment in January 2026.

• Cash basis: Revenue recorded in January 2026
• Accrual basis: Revenue recorded in December 2025 (when earned)

The accrual method gives a more accurate picture of profitability because it shows that the work was done in December, even though cash arrived later.

What's the difference between balance sheet and income statement?

Balance Sheet (Statement of Financial Position):

• Shows what you own and owe at a specific point in time (snapshot)
• Format: Assets = Liabilities + Equity
• Accumulates from business start – it's cumulative
• Example: "As of December 31, 2025"

Income Statement (Profit & Loss Statement):

• Shows financial performance over a period of time (video)
• Format: Revenue - Expenses = Profit/Loss
• Resets to zero each year – not cumulative
• Example: "For the year ended December 31, 2025"

How they connect: Net profit from Income Statement flows into Retained Earnings on the Balance Sheet. This is how profitability builds equity over time.

What does EBITDA mean and why is it important?

EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization

It's essentially operating profit before non-cash expenses (depreciation/amortization) and financing decisions (interest/taxes).

Why I use it:

1. Compares operational performance across companies with different:
   • Capital structures (debt vs. equity)
   • Tax jurisdictions
   • Asset bases (different depreciation)
2. Proxy for cash flow from operations (though not perfect – it ignores working capital changes)
3. Common in valuations - Companies are often valued as multiples of EBITDA

Important caveat: EBITDA can be misleading for capital-intensive businesses because it ignores the very real cost of replacing assets. As Warren Buffett says, "Does management think the tooth fairy pays for capital expenditures?"

How do I calculate working capital?

Working Capital = Current Assets - Current Liabilities

Current Assets include:

• Cash and bank balances
• Accounts receivable (money customers owe you)
• Inventory
• Prepaid expenses

Current Liabilities include:

• Accounts payable (money you owe suppliers)
• Short-term loans
• Accrued expenses
• Current portion of long-term debt

What it means:

• Positive working capital: You have more current assets than current liabilities – generally healthy
• Negative working capital: Current liabilities exceed current assets – potential liquidity concerns (though some business models like Amazon operate successfully with negative working capital by collecting from customers faster than paying suppliers)

My benchmark: Working capital should ideally cover 1.5-2.5 months of operating expenses for most businesses.

What's the difference between provision and reserve?

This confuses many people, including some experienced accountants!

Provision:

• Set aside for a known liability with uncertain amount or timing
• Must be created when liability is probable and estimable
• Reduces profit when created
• Examples: Provision for warranties, provision for doubtful debts, provision for tax
• Required under accounting standards (IND AS 37 / IAS 37)

Reserve:

• Appropriation of profit already earned
• Created at management's discretion (except statutory reserves)
• Does not reduce profit – just reallocates retained earnings
• Examples: General reserve, dividend equalization reserve, capital reserve
• Provides financial strength and flexibility

Example: If you expect ₹5 lakhs in warranty claims, you create a provision (expense), which reduces profit. If you later set aside ₹10 lakhs of retained profit as "general reserve" for future growth, that's a reserve (doesn't affect profit).

What accounting terms should I know before starting a business?

As a CA who has advised 50+ startups, these are the essential terms every new business owner should understand:

Before you start:

• Business Entity Concept - Keep personal and business finances separate
• Capital - Your initial investment
• Fixed vs. Variable Costs - Understand your cost structure

Day-to-day operations:

• Invoice - Bill you issue to customers
• Accounts Receivable - Money customers owe you
• Accounts Payable - Money you owe suppliers
• Cash Flow - Money moving in and out

Financial health monitoring:

• Break-Even Point - Sales needed to cover all costs
• Gross Margin - Profitability on each sale
• Working Capital - Short-term financial health
• Burn Rate - How fast you're spending cash (for startups)

Growth and funding:

• EBITDA - Operating profitability measure
• ROI - Return on investment decisions
• Debt-to-Equity - Leverage and financial risk

My advice: Focus on understanding your numbers monthly. Don't wait for year-end to learn you have problems!

Final Thoughts

Keywords: accounting glossary online, accounting dictionary summary

Understanding accounting terms and abbreviations is the first step toward mastering finance, bookkeeping, and business decision-making. Whether you're prepping for exams or reviewing financial reports, this guide equips you with the language of accounting.

Bookmark this page for future reference — your accounting dictionary is always here when you need it.

About the Author

This comprehensive accounting dictionary has been compiled by Vicky Sarin, CA, a Chartered Accountant with over 25 years of post-qualification experience. Having worked across audit, financial reporting, and corporate finance advisory, Vicky has trained thousands of accounting students and professionals throughout his career. His practical insights come from real-world application of these terms in complex financial scenarios across multiple industries.