Basic Accounting Terms

Accounting is fun and easy once you understand some basic accounting terms. Anything without knowledge is difficult, but once you have it, the sky is the limit. Here are several questions raised about the basic terms of accounting.

What is the difference between costs and expenses?

Costs: Money spent to make a product or provide a service. Reported on the Income Statement.

Expenses: Money spent to develop, sell, account and manage a product or service. Reported on the Income Statement.

For example, XYZ Company produces personal calendars for customers. Costs for XYZ Company are the labor, paper, ink, and glue that are required to make the calendar. Expenses for XYZ Company are advertising services for commercials, bookkeeping services, accounting services, merchant account fees, and wages for administrative personnel.

Do sales and revenue mean the same thing?

Yes. The terms mean money received from providing a product or service to a customer. The exchange is reported at the top of the Income Statement.

Is there a difference between profits, earnings and income?

No. They are similar. The terms show the difference between sales and the sum of cost and expenses. It is the money left over after subtracting costs and expenses from sales. Profits are reported as Net Income on the Income Statement.

What are expenditures?

Expenditures are costs and expenses that have been paid. Or when the money is sent to the supplier to pay for them.

Are orders the same as shipments?

No.

Orders: A request from a customer for the delivery of a product or service. Orders are not reported on any financial statement.

Shipments: An order that is delivered to a customer with an invoice. Once product is shipped it can be recorded as a sale on the accrual accounting method.

For example when XYZ Company receives an order for two calendars, this does not mean it has a sale. For a sale to occur a product must be shipped or delivered with an invoice to the customer.

An order becomes a shipment once the product is shipped. It becomes a sale when the shipment has an invoice attached.

Can a business be profitable and insolvent at the same time?

Yes. A business is making money but does not have enough cash in the bank to pay the bills. This is a sign of too much debt.

Solvency: Having enough money in the bank to pay the bills.

Profitable: Sales are greater than costs and expenses.

To learn more than the basic accounting terms and increase your understanding view our accounting dictionary.

Return from basic accounting terms to importance of accounting