--- title: "Accounting glossary: the terms behind your books" description: "A clear accounting glossary: debit, credit, trial balance, closing entry, intercompany elimination, IFRS, fiscal year, FIFO and more, each in two sentences." canonical: https://ledgeriano.com/glossary language: en publisher: "Ledgeriano" updated: 2026-11-05 --- # Accounting glossary: the terms behind your books > A clear accounting glossary: debit, credit, trial balance, closing entry, intercompany elimination, IFRS, fiscal year, FIFO and more, each in two sentences. Short, precise definitions of the accounting terms used across Ledgeriano and its guides, from debit and credit to intercompany elimination, FIFO, equivalent units, break-even point and idempotency keys. Each entry answers one question and links to a guide when you want the full picture. ## Double-entry bookkeeping Double-entry bookkeeping records every transaction in at least two accounts, with total debits equal to total credits. Because both sides always balance, errors show up in the trial balance instead of hiding in the books. Guide: https://ledgeriano.com/guides/double-entry-journal-entries ## Debit A debit is an entry on the left side of an account. It increases assets and expenses and decreases liabilities, equity and revenue. Guide: https://ledgeriano.com/guides/double-entry-journal-entries ## Credit A credit is an entry on the right side of an account. It increases liabilities, equity and revenue and decreases assets and expenses. Guide: https://ledgeriano.com/guides/double-entry-journal-entries ## Normal balance The normal balance is the side on which an account usually carries its balance: debit for assets and expenses, credit for liabilities, equity and revenue. A balance on the other side is a signal to check the account. ## Journal entry (voucher) A journal entry, also called a voucher, is the record of one transaction: a date, a description and two or more lines that debit and credit accounts by equal totals. In Ledgeriano every entry has a sequential number within its fiscal year. Guide: https://ledgeriano.com/guides/double-entry-journal-entries ## Voucher type A voucher type classifies journal entries by purpose, such as sales, purchases, payments or payroll, usually with a short code like SAL or PUR. It makes filtering, reporting and automation rules easier. ## Draft and posted entries A draft entry can still be edited or deleted and does not affect reports. Posting finalizes it: a posted entry counts in the ledger and is corrected only by a reversal entry. Guide: https://ledgeriano.com/guides/double-entry-journal-entries ## Reversal entry A reversal entry cancels a posted entry by recording the same lines with debits and credits swapped. Both entries stay in the books and are linked, which keeps the audit trail complete. Guide: https://ledgeriano.com/guides/double-entry-journal-entries ## Adjusting entry An adjusting entry is recorded at the end of a period to bring balances up to date, for example accrued expenses, prepaid amounts or depreciation. It makes the statements follow the accrual basis. ## General ledger The general ledger is the complete set of accounts with every posted movement and its running balance. Financial statements are built from general ledger balances. ## Subsidiary ledger A subsidiary ledger shows the detail behind a control account, such as each customer inside trade receivables. Its total must equal the control account balance in the general ledger. ## Journal book The journal book lists all posted entries in date order with their lines. It is the chronological record, while the ledger groups the same lines by account. ## Trial balance A trial balance lists every account with its debit or credit balance to prove that total debits equal total credits. The 6-column version shows opening balance, period movement and closing balance for each account. Guide: https://ledgeriano.com/guides/double-entry-journal-entries ## Balance sheet (statement of financial position) The balance sheet shows what a business owns (assets), owes (liabilities) and the owners' residual interest (equity) on a specific date. Assets always equal liabilities plus equity. Guide: https://ledgeriano.com/guides/financial-statements ## Income statement (profit and loss) The income statement reports revenue, expenses and the resulting profit or loss for a period. Presented by function, it shows revenue, cost of sales, gross profit, operating expenses and net profit. Guide: https://ledgeriano.com/guides/financial-statements ## Cash flow statement (indirect method) The cash flow statement explains the change in cash during a period, split into operating, investing and financing activities. The indirect method starts from net profit and adjusts for non-cash items and changes in working capital. Guide: https://ledgeriano.com/guides/financial-statements ## Statement of changes in equity The statement of changes in equity shows how share capital, reserves and retained earnings moved during the period, including profit, dividends and capital contributions. Guide: https://ledgeriano.com/guides/financial-statements ## Chart of accounts A chart of accounts is the coded list of all accounts a business uses, organized as a hierarchy of assets, liabilities, equity, revenue and expenses. Ledgeriano ships six templates, from about 97 to about 248 accounts. Guide: https://ledgeriano.com/guides/chart-of-accounts ## Account group In a coded chart of accounts, the group is the top level, such as 1 Current assets or 3 Current liabilities. Groups only summarize; entries are posted to lower levels. Guide: https://ledgeriano.com/guides/chart-of-accounts ## Ledger account The ledger (control) account is the second level of a coded chart, such as 11 Cash and bank balances. Statements are usually presented at this level. Guide: https://ledgeriano.com/guides/chart-of-accounts ## Subsidiary account The subsidiary account is the third level of a coded chart, such as 1101 Cash on hand, and is where entries are usually posted. Guide: https://ledgeriano.com/guides/chart-of-accounts ## Detail account A detail account breaks a subsidiary balance down by person, project or unit. In Ledgeriano, parties, cost centers and projects on each line play this role, so one subsidiary account can be analyzed many ways. Guide: https://ledgeriano.com/guides/chart-of-accounts ## Fiscal year A fiscal year is the accounting period, usually twelve months, for which a business prepares its annual statements. It does not have to match the calendar year: many companies run from 1 April to 31 March or from 1 July to 30 June. Guide: https://ledgeriano.com/guides/year-end-closing ## Lock date A lock date blocks new entries, edits and postings on or before a chosen day. It protects periods that have been reported, filed or audited. Guide: https://ledgeriano.com/guides/year-end-closing ## Closing entry A closing entry brings revenue and expense accounts to zero at year end and moves the net result to equity. In Ledgeriano it runs through the income summary into retained earnings. Guide: https://ledgeriano.com/guides/year-end-closing ## Income summary The income summary is a temporary account used during closing. Revenue and expense balances are closed into it, and its balance, the year's profit or loss, is then transferred to retained earnings. Guide: https://ledgeriano.com/guides/year-end-closing ## Opening entry The opening entry starts a new fiscal year with the closing balances of assets, liabilities and equity from the previous year. Ledgeriano writes it automatically when a year is closed. Guide: https://ledgeriano.com/guides/year-end-closing ## Retained earnings Retained earnings are the accumulated profits a business has kept rather than distributed to owners. Each year's profit or loss is added to them at closing. Guide: https://ledgeriano.com/guides/year-end-closing ## Accrual basis Under the accrual basis, revenue is recorded when it is earned and expenses when they are incurred, whatever the date of payment. IFRS and US GAAP statements are prepared on this basis. ## Contra account A contra account carries a balance opposite to the account it belongs with, reducing it on the statements. Accumulated depreciation, for example, is a credit balance that reduces fixed assets. ## Accumulated depreciation Accumulated depreciation is the total depreciation charged on an asset since it was acquired. Cost minus accumulated depreciation gives the asset's carrying amount. ## Accounts receivable Accounts receivable are amounts customers owe the business for goods or services already delivered. They are current assets and are tracked per customer. ## Accounts payable Accounts payable are amounts the business owes suppliers for goods or services received. They are current liabilities and are tracked per supplier. ## Party (counterparty) A party is a customer, supplier or other person the business deals with. Tagging entry lines with a party lets you see receivable and payable balances per counterparty. ## Cost center A cost center is a department, branch or unit that expenses are assigned to, so management can see what each part of the business costs. It is tagged on entry lines rather than built into account codes. ## Project accounting Project accounting tracks revenue and costs per project or contract to measure its profitability. Tagging lines with a project gives a per-project result without separate accounts. ## Multi-entity accounting Multi-entity accounting is keeping separate books for several related businesses, each with its own chart, currency and fiscal years, while managing them from one place. It is the base for intercompany automation and consolidation. Guide: https://ledgeriano.com/guides/multi-entity-accounting ## Intercompany transaction An intercompany transaction is a sale, loan, recharge or fee between two companies in the same group. It is recorded in both sets of books, for example as a sale by one company and a purchase by the other. Guide: https://ledgeriano.com/guides/intercompany-automation ## Intercompany elimination Intercompany elimination removes transactions and balances between group companies when preparing consolidated statements, so the group does not report sales or receivables to itself. Guide: https://ledgeriano.com/guides/intercompany-automation ## Consolidation Consolidation combines the financial statements of a parent and its subsidiaries into one set, as if they were a single entity, after eliminating intercompany items. Guide: https://ledgeriano.com/guides/multi-entity-accounting ## Base currency The base currency is the currency a business keeps its books and reports in. Entries in other currencies are converted to it with an exchange rate. Guide: https://ledgeriano.com/guides/multi-currency-accounting ## Exchange rate An exchange rate is the price of one currency in another, used to convert a foreign-currency amount into the base currency on a given date. Guide: https://ledgeriano.com/guides/multi-currency-accounting ## Foreign exchange gain or loss A foreign exchange gain or loss arises when the rate changes between recording a foreign-currency item and settling or revaluing it. It is reported in profit or loss. Guide: https://ledgeriano.com/guides/multi-currency-accounting ## VAT (value added tax) VAT is a consumption tax charged at each stage of supply. Businesses collect output VAT on sales, recover input VAT on purchases and pay the difference to the tax authority. ## Zakat Zakat is an Islamic levy on wealth that companies in Saudi Arabia and some other GCC countries account for and pay annually, usually based on a zakat base derived from the balance sheet. ## IFRS IFRS (International Financial Reporting Standards) are accounting standards issued by the IASB and required or permitted in more than 140 jurisdictions. IAS 1 sets the structure of the primary financial statements. Guide: https://ledgeriano.com/guides/financial-statements ## IFRS for SMEs IFRS for SMEs is a simplified, self-contained version of IFRS for private companies without public accountability, with fewer options and lighter disclosures. ## US GAAP US GAAP (Generally Accepted Accounting Principles) is the accounting framework used in the United States, set mainly by the FASB through its Accounting Standards Codification. ## PCG (Plan comptable général) The PCG is the French general chart of accounts, organized in classes 1 to 7 from equity and long-term liabilities to revenue, with class 8 for special accounts. Several European countries use charts built on the same class structure. Guide: https://ledgeriano.com/guides/chart-of-accounts ## Audit trail An audit trail is a chronological log of who created, changed, posted or reversed what and when. It lets auditors trace every number back to its origin. ## API key An API key is a secret token that identifies a program calling an API. In Ledgeriano each key belongs to one business, has read or write abilities and can be rotated or revoked by the owner. Guide: https://ledgeriano.com/guides/accounting-api ## Idempotency key An idempotency key is a unique value sent with a request so that repeating the request has no extra effect. Retrying an entry creation with the same key returns the original entry instead of booking it twice. Guide: https://ledgeriano.com/guides/accounting-api ## Webhook A webhook is an HTTP request a system sends to your URL when an event happens, such as entry.posted. Ledgeriano signs each delivery with HMAC SHA-256 so the receiver can verify it. Guide: https://ledgeriano.com/guides/accounting-api ## FIFO (first in, first out) FIFO is an inventory cost formula that assumes the oldest units are issued first, so cost of sales uses older prices and closing stock is valued at the most recent ones. IAS 2 permits it for interchangeable items. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Weighted average cost Weighted average cost values each issue at the average cost of the units on hand. In a perpetual system the average is recalculated after every receipt, which is called the moving weighted average. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Standard cost A standard cost is a predetermined cost per unit for materials, labour and overhead. Inventory moves at the standard, and the differences from actual cost are recorded as variances, which IAS 2 accepts when the result approximates actual cost. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Net realisable value Net realisable value is the estimated selling price of inventory minus the costs to complete and sell it. Inventory is carried at the lower of cost and net realisable value, so damaged or obsolete stock is written down. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Work in progress (WIP) Work in progress is the cost of products that have entered production but are not finished: materials issued plus labour and overhead absorbed so far. It is an inventory account on the balance sheet. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Equivalent units Equivalent units express partly finished units in process costing as a number of fully finished ones. For example, 4,000 units that are 50% converted equal 2,000 equivalent units of conversion cost. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Overhead absorption Overhead absorption charges production overhead to products with a predetermined rate, such as cost per labour hour. The gap between absorbed and actual overhead at period end is under- or over-absorbed overhead. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Joint products Joint products are two or more main products that come out of one process together, such as cream and skimmed milk. Their shared cost up to the split-off point is allocated by physical units, sales value or net realisable value. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Cost of goods manufactured Cost of goods manufactured is the cost of products finished in a period: direct materials, direct labour and overhead used, adjusted for the change in work in progress. The statement of cost of goods manufactured carries it on to cost of goods sold. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Working capital Working capital is current assets minus current liabilities. Changes in it, such as higher receivables or lower payables, are the main adjustments in an indirect cash flow statement. Guide: https://ledgeriano.com/guides/financial-statements ## Lot traceability Lot traceability is the ability to follow a batch of goods backward to the material lots and suppliers it came from and forward to the orders, finished lots and customers that received it. It makes recalls precise and is usually combined with FEFO picking by expiry date. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Contribution margin Contribution margin is sales minus variable costs, in total or per unit. It is the amount each sale contributes first to covering fixed costs and then to profit, and dividing it by sales gives the contribution margin ratio. Guide: https://ledgeriano.com/guides/management-accounting ## Break-even point The break-even point is the level of sales at which total revenue equals total costs and profit is zero. In units it is fixed costs divided by the contribution margin per unit; in revenue it is fixed costs divided by the contribution margin ratio. Guide: https://ledgeriano.com/guides/management-accounting ## Margin of safety The margin of safety is the amount by which actual or budgeted sales exceed break-even sales, often shown as a percentage of sales. It tells you how far sales can fall before the business makes a loss. Guide: https://ledgeriano.com/guides/management-accounting ## Flexible budget A flexible budget restates the budget for the level of activity actually achieved: variable costs and revenue are scaled to actual volume and fixed costs stay as planned. Comparing actual results with it separates spending variances from the effect of selling more or less than planned. Guide: https://ledgeriano.com/guides/management-accounting ## Master budget A master budget is the complete set of linked budgets for a period: sales, production, materials, labour, overhead, selling and administrative costs, the cash budget and a budgeted income statement. Each schedule feeds the next, starting from the sales budget. Guide: https://ledgeriano.com/guides/management-accounting ## Residual income Residual income is the profit of an investment center minus a required rate of return on the operating assets it uses. Unlike return on investment, it rewards any project that earns more than the required rate, even if it lowers the center's percentage return. Guide: https://ledgeriano.com/guides/management-accounting ## Activity-based costing (ABC) Activity-based costing assigns overhead to products through the activities that consume it, such as setups or inspections, each with its own cost driver and rate. It gives more accurate product costs than a single plant-wide rate when products use support activities differently. Guide: https://ledgeriano.com/guides/management-accounting ## Assets Assets are resources a business controls as a result of past events and from which it expects future economic benefits, such as cash, receivables, inventory and equipment. They have a debit normal balance and appear first on the balance sheet. Guide: https://ledgeriano.com/guides/financial-statements ## Liabilities Liabilities are present obligations of a business to transfer cash or other resources because of past events, such as supplier invoices, loans, taxes payable and customer advances. They have a credit normal balance. Guide: https://ledgeriano.com/guides/financial-statements ## Equity Equity is the owners' residual interest in the assets of a business after deducting all its liabilities. It includes share capital, reserves and retained earnings and has a credit normal balance. Guide: https://ledgeriano.com/guides/financial-statements ## Revenue Revenue is the income a business earns from its ordinary activities, such as selling goods or providing services, measured at the amount it expects to be entitled to. Under the accrual basis it is recognised when control passes to the customer, not when cash arrives. Guide: https://ledgeriano.com/guides/financial-statements ## Expenses Expenses are decreases in economic benefits during a period, through outflows or used-up assets, that reduce equity other than distributions to owners. Examples are salaries, rent, depreciation and the cost of goods sold. Guide: https://ledgeriano.com/guides/financial-statements ## Cost of goods sold (COGS) Cost of goods sold is the cost of the inventory a business sold during a period: purchase or production cost plus the costs of bringing goods to their saleable condition. It equals opening inventory plus purchases minus closing inventory. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Gross profit Gross profit is revenue minus the cost of goods sold. Divided by revenue it gives the gross margin, which shows how much of each sale is left to pay operating expenses and earn a profit. Guide: https://ledgeriano.com/guides/financial-statements ## Net income (net profit) Net income is what remains of revenue after every expense for the period, including cost of sales, operating expenses, finance costs and income tax. It is the bottom line of the income statement and flows into retained earnings at year end. Guide: https://ledgeriano.com/guides/financial-statements ## Depreciation Depreciation is the systematic allocation of the cost of a tangible fixed asset, less its residual value, over its useful life. Each period's charge is an expense credited to accumulated depreciation, so the asset's carrying amount falls over time. ## Amortization Amortization is the systematic allocation of the cost of an intangible asset with a finite useful life, such as software licences or patents, over that life. The term is also used for paying down a loan through scheduled instalments of principal and interest. ## EBITDA EBITDA is earnings before interest, taxes, depreciation and amortization: operating profit with depreciation and amortization added back. It is widely used to compare operating performance, but it is not a cash flow figure and is not defined by IFRS or US GAAP. Guide: https://ledgeriano.com/guides/management-accounting ## Current ratio The current ratio is current assets divided by current liabilities. It measures whether a business can cover obligations due within a year from assets that turn into cash within a year; a ratio below 1 is a warning sign. Guide: https://ledgeriano.com/guides/management-accounting ## Quick ratio (acid-test ratio) The quick ratio divides cash, short-term investments and receivables by current liabilities, leaving out inventory and prepayments. It is a stricter liquidity test than the current ratio because inventory may take months to turn into cash. Guide: https://ledgeriano.com/guides/management-accounting ## Accrued expense An accrued expense is a cost incurred in the period but not yet invoiced or paid, such as wages earned by staff at month end or interest on a loan. It is recorded as an expense and a liability so the period carries its full cost. Guide: https://ledgeriano.com/guides/year-end-closing ## Prepaid expense A prepaid expense is a payment made in advance for goods or services the business will receive in future periods, such as annual insurance or rent paid up front. It starts as an asset and is expensed as the period it covers passes. Guide: https://ledgeriano.com/guides/year-end-closing ## Deferred revenue (unearned revenue) Deferred revenue is cash received from customers before the business has delivered the goods or services. It is a liability until the obligation is fulfilled, then it is recognised as revenue, for example month by month over an annual subscription. ## Bank reconciliation A bank reconciliation compares the cash balance in the books with the balance on the bank statement and explains every difference, such as outstanding payments, deposits in transit, bank fees or errors. It is a core month-end control against mistakes and fraud. ## Petty cash (imprest fund) Petty cash is a small fund of cash kept on hand for minor expenses such as postage or taxis. Under the imprest system the fund is replenished by the amount spent, supported by receipts, so it always returns to its fixed amount. ## Goodwill Goodwill is the amount paid in a business combination above the fair value of the identifiable net assets acquired, reflecting things like customer relationships and an assembled workforce. Under IFRS it is not amortized but tested for impairment at least once a year. Guide: https://ledgeriano.com/guides/multi-entity-accounting ## Inventory turnover Inventory turnover is cost of goods sold divided by average inventory, showing how many times stock is sold and replaced in a period. Dividing 365 by it gives days inventory outstanding, the average number of days goods sit in stock. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Economic order quantity (EOQ) The economic order quantity is the order size that minimises the total of ordering costs and holding costs for an item with steady demand. It equals the square root of 2 times annual demand times cost per order, divided by the annual holding cost per unit. Guide: https://ledgeriano.com/guides/inventory-cost-accounting ## Cash conversion cycle The cash conversion cycle is the number of days between paying suppliers and collecting cash from customers: days inventory outstanding plus days sales outstanding minus days payables outstanding. A shorter cycle means less cash tied up in operations. Guide: https://ledgeriano.com/guides/financial-statements ## Bad debt A bad debt is a receivable that will not be collected because the customer cannot or will not pay. Under the allowance method an expected loss is provided in advance, and the specific balance is written off against the allowance once it is confirmed uncollectible. ## Credit note A credit note is a document a seller issues to reduce or cancel an invoice already sent, for example after returned goods, a pricing error or a discount. It reverses the revenue, the receivable and the related VAT for the credited amount. ## Input VAT and output VAT Output VAT is the tax a registered business charges on its sales; input VAT is the tax it pays on its purchases. For each return period the business pays the authority output VAT minus deductible input VAT, or claims back the difference.