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Glossary: 25 basic accounting terms for small businesses

Posted by Kanika Sinha

August 24, 2023    |     5-minute read (823 words)

Accounting period

It is an established range of time during which accounting functions are performed, recorded and analyzed. It can be a calendar year, fiscal year, quarter, month, or even a week.  

Accounts payable (AP)

It comprises the expenses incurred but not yet paid off by the business. It belongs to a larger class of accounting entries known as liabilities and appears as current liabilities on the balance sheet.

Accounts receivable (AR)

It is the revenue made by the business but not yet collected from its customers. It is classified as an asset and recorded on the balance sheet in the current asset section.

Accrual basis accounting

It is an accounting method in which payments and expenses are recorded in the company’s journal when earned or incurred, and not when money exchanges hands. It uses double-entry bookkeeping and provides a more accurate picture of a business’s finances.


A resource with economic value that a business owns.

Balance sheet

It is a financial statement that depicts the company’s assets, liabilities and shareholder equity; and provides a snapshot of a company’s financial position at a given point in time.

Break-even point

It refers to the sales level at which a business generates exactly zero profits, that is break-even point is when the total cost is equal to the total revenue of the business.


It most commonly refers to the money available to a business to pay for its day-to-day operations and to fund its future growth. Typically, capital includes financial assets as well as physical factors of production such as machinery and equipment. It can be found on the balance sheet under the equity category.

Cash basis accounting

Simpler and more straightforward than accrual accounting, this accounting method records transactions only when cash is actually received or paid.

Cash flow

It is the net balance of cash moving in and out of a business at a specific point in time.

Cost of goods sold (COGS)

It refers to the direct cost of producing goods and services. COGS is recorded as an expense and appears on the income statement.


This accounting entry indicates money leaving an account and tends to increase liabilities or decrease the assets of a business. It is recorded on the right side of accounting documents.


The exact opposite of credit, this accounting entry functions to increase assets or decrease the liabilities of a business. It is positioned to the left side in accounting documents.


It refers to the accounting method used to spread out the cost of a tangible or physical asset over its useful life. It entails deducting the cost of the business asset over a long period of time, rather than over the course of one year.

Fixed cost

These are a type of cost that remains unchanged with an increase or decrease in the volume of goods or services sold. Examples of fixed costs include rent, salaries, utility bills, insurance etc.

General ledger

It is a record of all past financial transactions of a firm, organized by accounts. These accounts contain all debit and credit transactions affecting them along with detailed information about each transaction, such as the date, description and amount.

Gross margin

Also known as gross profit margin, this term refers to a profitability measure that illustrates the relationship between a company’s gross profit to its revenue as a percentage.

Gross profit

Often confused with gross margin, the two accounting terms are not the same. While gross margin is expressed as a percentage, gross profit is represented as a whole dollar amount and aims to describe a company’s top line earnings.

Income statement

One of the three major financial statements, the income statement reports a company’s financial performance over a specific accounting period.


It refers to the raw materials that a business holds to produce goods as well as the goods that are available for the ultimate goal of sale.


It is a  document used by businesses to notify a customer that payment — for goods or services you’ve provided — is due. Also known as a bill, this document carries detailed information about the transaction.


It is anything that a business owes.


These are the costs that are related to the day-to-day running of the business. While, unlike operating expenses (such as raw material and labor), overhead costs cannot be attributed to a specific cost unit or business activity, they support the overall revenue-generating activities of the business. Examples of overhead costs include rent, utilities, insurance, advertising etc.


It is the sales amount a business earns from providing services or selling products.

Variable cost

These costs vary depending on the volume of activity, that is they increase as the volume of goods or services that a business produces increases, and they decrease with the fall in the volume of goods or services produced by the business. Examples of variable costs include direct materials, direct labor, commissions etc.


Kanika Sinha
Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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