Understanding Key Accounting Terms: The Ultimate Glossary for Interviews & Professionals

Understanding key accounting terms is foundational for anyone in the finance profession—whether you’re a student preparing for interviews or a working professional handling real-world transactions. This blog breaks down over 100 essential terms across 12 categories to strengthen your accounting vocabulary and conceptual clarity.

🔹 A. Accounting Basics (Conceptual)

1. Accounting

The process of recording, classifying, summarizing, and interpreting financial transactions to provide information for decision-making.
📌 Example: Preparing financial statements at year-end.

2. Bookkeeping

Systematic recording of day-to-day financial transactions.
📌 Example: Entering cash receipts and payments into ledgers.

3. System of Accounting

• Cash-based Accounting: Records income/expenses when cash is received or paid.
• Accrual-based Accounting: Records income/expenses when they are incurred, regardless of cash flow.
  

4. Double Entry System

Every transaction has two sides—debit and credit—to keep the accounting equation balanced.
📌 Example: Purchase of goods on credit increases inventory (debit) and accounts payable (credit).

5. Single Entry System

Records only one aspect of a transaction; less accurate and incomplete.
📌 Used by: Small businesses for simplicity.

6. Accounting Cycle

The full process from identifying transactions to preparing financial statements:
Transaction → Journal → Ledger → Trial Balance → Final Accounts

7. Accounting Equation

Assets = Liabilities + Owner’s Equity
This is the foundation of the balance sheet.

8. Business Entity Concept

A business is treated as separate from its owner.

9. Going Concern Concept

Assumes the business will operate indefinitely.

10. Money Measurement Concept

Only transactions that can be expressed in money are recorded.

🔹 B. Accounting Principles & Assumptions

1. GAAP

Generally Accepted Accounting Principles – Framework followed in India/USA for consistency.

2. IFRS

International Financial Reporting Standards – Global standards used for cross-border reporting.

3. Consistency Principle

Accounting methods should remain consistent across periods.

4. Conservatism Principle

Anticipate potential losses, not gains.

5. Matching Principle

Match revenue earned with expenses incurred in the same period.

6. Revenue Recognition Principle

Recognize revenue when it is earned—not when cash is received.

7. Historical Cost Principle

Assets are recorded at their purchase price.

8. Accrual Concept

Revenue and expenses are recorded when they are incurred, not when money changes hands.

9. Materiality

Disclose items that could influence decisions.

10. Full Disclosure

All necessary information must be disclosed in the financial statements.

🔹 C. Source Documents & Vouchers

1. Invoice

A bill sent by the seller to the buyer showing details of sale.

2. Debit Note

Issued when goods are returned to the supplier.

3. Credit Note

Issued when goods are returned by the customer.

4. Receipt

Acknowledgment of payment received.

5. Payment Voucher

Proof of payment to a supplier or employee.

6. Journal Voucher

Used for adjustments like depreciation or provisions.

7. Supporting Document

Includes bills, delivery notes, memos, etc.

8. Purchase Order (PO)

Buyer’s document requesting goods or services from a seller.

🔹 D. Journal & Ledger

1. Journal

Book of original entries. First record of a transaction.

2. Journal Entry

Detailed record of a transaction with debit and credit amounts.

3. Narration

Brief explanation accompanying each journal entry.

4. Posting

Transferring data from journal to respective ledger accounts.

5. Ledger

Book of accounts summarizing all transactions.

6. Ledger Folio (LF)

Page reference used to cross-reference journal and ledger.

7. Subsidiary Books

Includes Purchase Book, Sales Book, etc.

8. Cash Book

Record of all cash and bank transactions.

9. Petty Cash Book

Tracks small, day-to-day expenses.

10. Contra Entry

Transaction affecting both cash and bank (e.g., cash deposit into bank).

🔹 E. Trial Balance & Adjustments

1. Trial Balance

List of closing balances of ledger accounts to check arithmetic accuracy.

2. Opening Entry

Records opening balances of assets, liabilities, and capital.

3. Adjusting Entry

Entries made to account for accruals, deferrals, etc., at period-end.

4. Closing Entry

Used to transfer temporary account balances to capital.

5. Rectification Entry

Correction of errors in books.

6. Provision

Estimate for a known liability (e.g., tax, doubtful debts).

7. Prepaid Expense

Expense paid in advance for future periods.

8. Outstanding Expense

Expense due but not yet paid.

9. Accrued Income

Earned but not yet received.

10. Unearned Income

Received in advance but not yet earned.

🔹 F. Income & Expense

1. Revenue

Income from business activities like sales or services.

2. Expense

Cost incurred in generating revenue.

3. Direct Expense

Directly related to production (e.g., raw materials, wages).

4. Indirect Expense

General business costs (e.g., rent, electricity).

5. Operating Expense

Regular business expenses (e.g., salaries, depreciation).

6. Non-Operating Expense

Unrelated to main business activity (e.g., interest, penalties).

7. Capital Expenditure

Spent on acquiring or improving long-term assets.

8. Revenue Expenditure

Incurred in daily operations.

9. Deferred Revenue Expenditure

Big cost that benefits several future periods (e.g., heavy advertising).

🔹 G. Assets, Liabilities & Capital

1. Asset

Resource controlled by the business (e.g., land, receivables).

2. Fixed Asset

Used over long term (e.g., machinery, building).

3. Current Asset

Expected to be converted into cash within a year (e.g., stock).

4. Tangible Asset

Physical in nature (e.g., vehicles).

5. Intangible Asset

Non-physical (e.g., goodwill, patents).

6. Liability

Obligation or debt owed by the business.

7. Current Liability

Due within a year (e.g., creditors).

8. Long-Term Liability

Payable after a year (e.g., loans).

9. Contingent Liability

Possible liability, dependent on future events.

10. Capital

Owner’s investment in the business.

11. Drawings

Owner’s withdrawals for personal use.

12. Reserves

Profits retained for future use or contingencies.

13. Provision for Doubtful Debts

Expected bad debts deducted from receivables.

🔹 H. Inventory & Costing

1. Inventory

Stock of raw materials, WIP, and finished goods.

2. Opening Stock

Inventory at the beginning of the accounting period.

3. Closing Stock

Inventory left at the end of the period.

4. COGS (Cost of Goods Sold)

Opening Stock + Purchases – Closing Stock.

5. FIFO

First In First Out – oldest inventory is sold first.

6. LIFO

Last In First Out – newest inventory is sold first.

7. Weighted Average Method

Average cost method for inventory valuation.

8. Overhead

Indirect costs like rent, utilities, salaries.

9. Marginal Costing

Focuses on variable cost for decision-making.

10. Standard Costing

Predefined costs used to compare with actuals.

🔹 I. Financial Statements

1. Balance Sheet

Snapshot of assets, liabilities, and equity on a specific date.

2. Profit & Loss Account (P&L)

Summary of income and expenses over a period.

3. Cash Flow Statement

Shows inflow and outflow of cash under Operating, Investing, and Financing.

4. Fund Flow Statement

Analyzes movement of working capital.

5. Notes to Accounts

Detailed explanation of financial statement items.

6. Schedules

Annexures providing itemized details.

🔹 J. Depreciation & Amortization

1. Depreciation

Allocation of cost of tangible assets over their useful life.

2. Amortization

Same as depreciation but for intangible assets.

3. Straight Line Method

Equal amount charged every year.

4. Written Down Value (WDV)

Depreciation on reducing balance.

5. Salvage Value

Estimated residual value at asset’s end of life.

6. Useful Life

Expected period of use for an asset.

🔹 K. Taxation & Compliance

1. TDS

Tax Deducted at Source – deducted before making payments.

2. GST

Goods & Services Tax – a unified indirect tax in India.

3. Income Tax

Tax on income or profits of individuals and businesses.

4. Advance Tax

Tax paid in advance during the financial year.

5. Assessment Year

Year in which income is assessed.

6. Financial Year

Year in which income is earned (April 1 to March 31 in India).

🔹 L. Others

1. Audit

Independent examination of books and records.

2. Reconciliation

Comparing two sets of records (e.g., bank & books) for consistency.

Your Complete Guide to Accounting Vocabulary: From Basics to Balance Sheets

📌 Why Knowing These 100+ Accounting Terms Is Essential

Accounting isn’t just about numbers. It’s about understanding, communicating, and interpreting financial information. Whether you’re a CA, CPA, MBA student, intern, or finance manager, these terms form the core language of the profession. Here’s why mastering them matters:

🔹 1. Foundation for All Accounting Work

These terms form the building blocks of accounting systems. Without a clear grasp of what terms like journal, trial balance, or depreciation mean, it’s impossible to prepare accurate accounts or analyze financial data.

📍Example: You can’t post an entry unless you understand journal vs. ledger vs. trial balance.

🔹 2. Helps in Understanding Financial Statements

Terms like assets, liabilities, income, and expenses are not just words—they’re the elements of Balance Sheets and Profit & Loss accounts.

📍If you don’t understand how capital expenditure differs from revenue expenditure, you might misclassify a transaction and misstate the accounts.

🔹 3. Crucial for Compliance & Audit

In today’s environment, compliance with tax laws, standards (GAAP/IFRS), and audits is mandatory.

Understanding terms like:

• TDS, GST, Deferred Revenue
  
• Provision vs. Contingent Liability
  …helps ensure the organization is legally compliant and audit-ready.
  

🔹 4. Improves Communication with Clients, Auditors & Stakeholders

As an accountant, you’re not just recording data—you’re explaining it to:

• Business owners
  
• Investors
  
• Auditors
  
• Tax consultants
  

Knowing terms like full disclosure, materiality, or marginal costing enables you to speak their language confidently.

🔹 5. Essential for Interview & Certification Exams

If you’re preparing for:

• CA/CPA/ACCA/CS exams
• Interviews in accounting or finance firms
  …then these terms will form the core of technical questions.
  

📍Common interview question: “Explain the difference between accrual and cash accounting.”

🔹 6. Helps Avoid Costly Mistakes

Misunderstanding terms like:

• Prepaid Expense vs. Outstanding Expense
• Direct vs. Indirect Expense
• Accrued Income vs. Unearned Income
  

…can result in wrong financial reporting, impacting tax liabilities, profits, and decision-making.

🔹 7. Strengthens Analytical Thinking

Understanding concepts like:

• Standard costing
• Financial ratios
• COGS vs. Overhead
  …helps you analyze business performance, not just report it.
  

📍You move from being a data entry person → to a decision-making partner.

🔹 8. Aligns You with Modern Tools & Automation

Modern ERPs like SAP, QuickBooks, Tally, and Dynamics 365 still use these basic accounting principles.
Terms like:

• Journal Voucher
• Ledger
• Contra Entry
  …are the backbone of accounting software workflows.
  

Knowing the terms helps you work efficiently with software automation.

🔹 9. Supports Tax Planning & Strategy

Understanding the nature of expenses (capital vs. revenue) or provisions affects:

• Tax planning
• Deduction eligibility
• Profit calculation
  

📍Example: Deferred revenue expenditure is amortized—not fully expensed—helping with profit smoothing and tax management.

🔹 10. Builds Long-Term Career Confidence

Whether you’re:

• Starting a freelance accounting practice
• Auditing MNCs
• Handling payroll and taxation
• Planning to become a CFO…
  

…these terms are non-negotiable essentials.

Why Mastering These Terms Matters

Let’s begin with 10 practical reasons why knowing these terms is essential, not optional:

🏁 Conclusion: Start Here, Grow Smarter

If accounting is the language of business, then these 100+ terms are its alphabet and grammar.

Knowing them fluently means:

• You reduce errors
• You communicate clearly
• You grow faster professionally

📥 Download the Full PDF Guide: Get a beautifully formatted version of these 100+ essential accounting terms for easy reference, interview prep, and daily practice.