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Accounting Terms & Facts

Understanding accounting terms and facts is crucial to decision making. Knowledge of what accounting terms mean will help you understand financial reports you may encounter.

  1. Profit

    • Gross profit is sales minus the cost of the goods sold. Net profit is gross profit minus all other business expenses.

    Accounts

    • Each business transaction is recorded in an account. Each account is either an asset account, a liability account or an equity account.

    Debit and Credit

    • Each account receives debits and credits. Depending on the specific account, a debit may increase or decrease the account balance. The same is true for credits.

    Equity

    • Equity is what would be left if all the assets of a business were sold and all the debt was paid off.

    Depreciation

    • Assets depreciate over time. Accountants depreciate assets to reflect the decline in value over time. A brand new machine is worth more when it is first purchased than 5 years later.

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