Accounting Vocabulary in English

Assets are what a business owns that has value — cash, stock, equipment, property, and money owed to it. Liabilities are what a business owes to others — loans, unpaid supplier bills, and tax due. The simplest way to remember the difference is that assets put money into the business, while liabilities take money out. The two sit on opposite sides of the balance sheet, and the difference between them is the owners' equity. A healthy business generally has assets comfortably exceeding its liabilities.

Equity is the value that belongs to the owners of a business after all its liabilities have been paid. It is calculated by the fundamental accounting equation: assets minus liabilities equals equity. If a company owns £500,000 of assets and owes £300,000, its equity is £200,000. Equity includes the money the owners originally invested plus any profits the business has kept rather than paid out. It is sometimes called net worth, shareholders' funds, or capital, depending on the type of business.

A balance sheet is a snapshot: it shows what a business owns, owes, and is worth at a single moment in time, such as the last day of the financial year. An income statement (also called the profit and loss account) covers a period of time — typically a year — and shows revenue, costs, and the resulting profit or loss. In short, the balance sheet answers "what is the business worth right now?" while the income statement answers "how well did the business perform over the year?" Both are needed for a full picture.

Depreciation is the way accountants spread the cost of a long-lasting asset across the years in which it is used, rather than recording the whole cost in the year of purchase. A delivery van bought for £20,000 and expected to last five years might be depreciated by £4,000 each year. This matches the cost of the asset to the income it helps generate over time, and it gradually reduces the asset's recorded value on the balance sheet. Depreciation is a non-cash expense — no money leaves the business when it is recorded.

Accruals mean recording income and expenses when they are earned or incurred, not when the cash actually moves. Under the accruals concept, if your business uses electricity in December but does not pay the bill until January, the cost still belongs to December's accounts. This gives a truer picture of performance for each period than simply tracking cash in and out. Accruals accounting is required for most companies and contrasts with cash accounting, which records transactions only when money changes hands.

Gross profit is sales revenue minus only the direct cost of the goods or services sold — for a shop, that is sales minus the cost of buying the stock. Net profit goes further: it is what remains after all other expenses are also deducted, including rent, wages, interest, and tax. Gross profit shows how profitable the core product is; net profit shows whether the whole business is actually making money. A company can have a strong gross profit but a poor net profit if its overheads are too high.

These are two sides of credit trading. Receivables (accounts receivable) are amounts owed to your business by customers who have bought from you but not yet paid — they are an asset, because the money is due to come in. Payables (accounts payable) are amounts your business owes to suppliers for goods or services it has received but not yet paid for — they are a liability. Managing both well is central to healthy cash flow: you want to collect receivables promptly while paying payables on reasonable terms.

Reconciliation is the process of comparing two sets of records to confirm they agree, and investigating any differences. The most common example is a bank reconciliation, where you check that the cash balance in your own ledger matches the balance on your bank statement. Differences often arise from timing — a cheque written but not yet cashed, for instance — or from errors such as a payment entered twice. Regular reconciliation catches mistakes and fraud early and is a basic discipline of good bookkeeping.

To write off something in accounting is to remove it from the accounts because it no longer has any value. The most common example is a bad debt: if a customer goes bankrupt and will never pay an invoice, the business writes off that receivable, recording it as a loss. Assets can also be written off when they are scrapped or become worthless. A write-off reduces profit in the period it is recorded, but it gives a more honest picture of the business's true financial position.

The most effective approach is to connect each term to a simple real-world example — picture an actual invoice, a bank reconciliation, or a balance sheet rather than memorising abstract definitions. Group the words by where they appear: balance sheet terms (assets, liabilities, equity, solvency), income statement terms (gross profit, net profit, overheads), and process terms (audit, reconciliation, write-off). Use Flash Cards on LexFizz to drill the 20 words on this page, then read a real set of company accounts and spot the terms in context. Because these words recur constantly in business English, they soon become second nature.