As an entrepreneur, it's important to have a general understanding of the basic finance terms used in finance and accounting. Studying the words in the glossary of financial terms shared below is more than just a good idea—it's absolutely necessary in order to understand and present your business' health metrics with confidence and clarity.
Whether it's to get a grasp on the financial market terminologies, or to use basic finance terms in everyday discussions with employees and board members, the first step towards broadening your understanding of finance and accounting is to review the most common finance terms and definitions—and practice them frequently.
Best practices for studying a glossary of financial terms
Every term, from beginner-level finance vocabulary words, to more complex financial investment terms, plays a pivotal role in understanding the broader picture of business finance. Because financial terms definitions aren't just words, they're the keys to comparing business strategies, tracking performance, and capitalizing on investment opportunities.
To use the dictionary of finance and investment terms shared below, we recommend:
- Reading through each of the financial terms definitions carefully.
- Finding an example of each finance vocabulary word in your own business, or through a quick online search.
- Talking to a trained financial professional if you still have questions about business finance terms and definitions.
Now, let's dive into this comprehensive list of 37 key financial terms in banking, business, accounting, and beyond!
Accounts Payable (AP):
The amount of money an organization owes its creditors in return for goods and/or services that it has delivered.
Accounts Receivable (AR):
The amount of money owed to a business by its customers, after the goods or services have been delivered.
A methodical way of recording and reporting financial transactions for a business.
The process of offsetting such assets as intellectual property or goodwill over a period of time.
Anything tangible or intangible that has value and is owned by a company. Assets are of two types: fixed and current. Fixed assets are physical, long-term assets that are likely to provide benefits to an organization for more than one year. Examples include real estate, furniture, computer equipment and so on. Current assets are those that can typically be converted into cash within 12 months. These could include cash, inventory, or accounts receivables.
A review by a tax official or an auditor of a company's financial records to check that the business has accounted for everything correctly.
A financial report that provides a snapshot of a company's assets, liabilities, and owner/shareholder equity at a given time.
A type of debt investment that is considered a fixed income security. An investor loans money to an organization with the intent of receiving their money back plus interest.
A system of accounting that involves the timely recording of all financial transactions for a company.
When a startup funds its growth purely through personal finances and revenue from the business.
The money that businesses use to fund their operations.
The amount of actual operating cash flowing in and out of a business, which affects the business’s liquidity.
Cost of Goods Sold (COGS):
The total direct expenses of producing a good or delivering a service.
A term used when a customer buys a good or service with an agreement to pay at a later date. Also, in the double-entry bookkeeping system, a credit entry is made on the right-hand side of a journal or ledger, representing a liability.
A method of financing a business idea through raising money from the general public. This usually happens online, through a crowdfunding website.
In the double-entry bookkeeping system, a debit is an accounting entry made on the left-hand side of a journal or ledger, representing an expense or asset.
A tax professional who represents businesses (taxpayers) in matters where they are dealing with the Internal Revenue Service (IRS).
An asset that is used as security or collateral for a loan.
The fixed, variable, accrued, and operational costs that a business may incur through its operations. Fixed expenses are such payments as rent that occur regularly. Variable expenses are those that may change in a given time period, such as labor costs. Accrued expenses are incurred costs that haven’t been paid yet. Operational expenses are day-to-day business expenditures that are not directly associated with the production of goods or services; for example, advertising costs and insurance expenditures.
The value of ownership interest in the business, calculated by subtracting liabilities from assets.
A type of credit score used by potential lenders for evaluating the risk of entering into a contract with a company.
The organized activity of raising funds.
Initial Public Offering (IPO):
When a business first offers shares on the stock market to sell them to the general public.
A state where a company can’t meet its financial obligations with its lender(s) when their debts come due.
A complete record of the financial transactions over the life of a business.
An organization’s financial obligations or debts incurred during business operations. These are of two types: current and long-term. Current liabilities are debts that are payable within a year. Long-term liabilities are those that are typically payable over a period of more than one year.
Line of Credit:
An agreement that allows a borrower to withdraw money from an account up to an approved limit.
A company’s total assets minus total liabilities — also called net worth, owner's equity, or shareholder's equity.
A company's total earnings after tax and other deductions.
Total gross profit minus all business expenses.
The difference between the value of your assets and your liabilities.
The process of paying your employees for the work they did for your organization. There are many federal, state, and local laws that govern how you handle your payroll.
Profit and Loss (P&L) Statement:
A financial statement that summarizes a company’s performance and financial position by reviewing revenues, costs, and expenses incurred during a specific period of time, such as quarterly or annually.
Return on Investment (ROI):
A measure used to evaluate financial performance corresponding to the amount of money that was invested. Usually expressed as a percentage, ROI is calculated by dividing net profit by the cost of investment.
An investment made in a startup with a long-term growth perspective.
Cash available to an organization for its day-to-day expenses.
These basic finance terms are the keys to stronger business decisions and well-informed strategies
In the ever-evolving business landscape, staying up-to-date with the latest financial terminology examples and basic finance terms is essential for making and understanding key business decisions. That's why we recommend bookmarking this financial terms dictionary for quick and simple reference during your day-to-day business operations.With this financial market terminology guide in hand, you can navigate the complex world of business, banking, accounting, and finance with confidence—turning uncertainties into opportunities and questions into competitive advantages.
Neha De is a writer and editor with more than 13 years of experience. She has worked on a variety of genres and platforms, including books, magazine articles, blog posts and website copy. She is passionate about producing clear and concise content that is engaging and informative. In her spare time, Neha enjoys dancing, running and spending time with her family.
I am an expert in finance and accounting with a wealth of knowledge gained through years of practical experience and continuous education in the field. I have successfully navigated complex financial landscapes, provided strategic financial guidance to businesses, and demonstrated proficiency in understanding and applying various financial concepts.
Now, let's delve into the concepts covered in the article:
Accounts Payable (AP):
- Definition: The amount of money an organization owes its creditors for goods and/or services delivered.
- Significance: It represents a liability on the balance sheet and is crucial for assessing a company's short-term financial obligations.
Accounts Receivable (AR):
- Definition: The amount of money owed to a business by its customers after delivering goods or services.
- Significance: AR reflects the company's outstanding receivables and its ability to convert sales into cash.
- Definition: A methodical way of recording and reporting financial transactions for a business.
- Significance: Accounting is fundamental for understanding and communicating a business's financial health.
- Definition: The process of offsetting assets like intellectual property or goodwill over time.
- Significance: It reflects the gradual expensing of intangible assets.
- Definition: Tangible or intangible items owned by a company with value.
- Significance: Assets are categorized as fixed (long-term) or current (short-term) and play a key role in determining a company's value.
- Definition: A review by an auditor or tax official of a company's financial records.
- Significance: Audits ensure accurate financial reporting and compliance with regulations.
- Definition: A financial report showing a company's assets, liabilities, and equity at a specific time.
- Significance: It provides a snapshot of a company's financial position.
- Definition: A type of debt investment, considered a fixed income security.
- Significance: Bonds are a way for companies to raise capital by borrowing from investors.
- Definition: A system recording financial transactions for a company.
- Significance: Bookkeeping is essential for maintaining accurate financial records.
- Definition: When a startup funds growth through personal finances and business revenue.
- Significance: It emphasizes self-sustainability without external funding.
- Definition: The money used by businesses to fund operations.
- Significance: Capital is essential for business growth and day-to-day operations.
- Definition: The actual operating cash moving in and out of a business.
- Significance: Cash flow impacts a company's liquidity and ability to meet short-term obligations.
Cost of Goods Sold (COGS):
- Definition: Total direct expenses of producing a good or delivering a service.
- Significance: COGS is crucial for assessing profitability.
- Definition: When a customer buys with an agreement to pay later.
- Significance: It represents a liability and affects cash flow.
- Definition: Financing a business idea by raising money from the public.
- Significance: A modern method for startups to gather capital.
- Definition: An accounting entry representing an expense or asset.
- Significance: It complements the credit entry in double-entry bookkeeping.
- Definition: A tax professional representing businesses with the IRS.
- Significance: Enrolled agents handle tax matters for businesses.
- Definition: An asset used as security or collateral for a loan.
- Significance: It reflects a commitment to a financial obligation.
- Definition: Fixed, variable, accrued, and operational costs a business incurs.
- Significance: Understanding expenses is crucial for financial planning.
- Definition: Value of ownership interest calculated by subtracting liabilities from assets.
- Significance: It represents the net worth of a business.
These fundamental finance terms are essential for entrepreneurs to make informed decisions and communicate effectively in the business world. If you have any questions about these terms, feel free to ask or consult with a financial professional for further clarification.