Terminology of Financial Accounting

by Diane Perez

The two main types of accounting are managerial and financial. Managerial accounting revolves around corporate management. Financial information about the company is prepared for internal distribution to management. However, financial accounting involves preparing documents relating to the health of the corporation for external use, such as potential bond investors or current stockholders. If you plan to issue bonds or prepare an initial stock offering, you need to understand the terminology of financial accounting so you can discuss your company's financial situation with the public.

Weighted Average of Common Shares

Stock is constantly changing ownership. Your company may issue new stock at the same time it is retiring old issues, such as two shares of new stock for one share of an older issue. The weighted average of common shares is the overall number of shares outstanding during a specified reporting period. You need this number before you can calculate earnings per share.

Earnings Per Share

Earning per share is the amount of money that each share of stock has earned during a specified time, such as quarterly. Calculate earnings per share (EPS) by dividing the earnings of the corporation by the number of outstanding shares of stock.

Basic Earnings Per Share

Subtract the dividend payment to preferred stockholders from the company's net income. Next, divide that amount by the weighted average of common shares to arrive at the basic earnings per share.

Income Statement

The income statement reports expenses as well as income. The statement may be monthly, quarterly, annually or a specified fiscal period. Potential investors examine the income statement to learn the various sources of revenue. For example, they want to know if revenue is high from increased sales or from a one-time sale of assets.

Notes Receivable

Notes receivable are debts owed by the business to its investors, such as bondholders. The notes may or may not pay interest, and are payable on the maturity date. If the note is a callable bond, then your company can redeem it on or after the first call date.


Inventory includes materials shipped but not delivered, in addition to current warehouse stock. Investors look at the level of inventory as part of their criteria when judging the financial health of a company.