Do you do all your own accounting personally? Or do you hire professional accounting help? Whichever way you do your accounting, it helps to know basic accounting terms.
In this article, we’ve compiled basic accounting terms all business owners should know. After all, knowing the correct accounting terms – and what they mean – make a world of difference when determining profits/ losses and deciphering financial reports.
Accounting Terms Glossary
These terms are relevant to the owners of all business entities – whether you own a sole proprietorship or run a large corporation.
Accounts Receivable
Generally, accounts receivable refers to the amount of money owed by clients or customers to a business after services or goods have been used and/or delivered.
Accounts Payable
Accounts payable refers to the amount of money a company owes to vendors, suppliers, and creditors. Essentially, it refers to any bills the company still has to pay for.
Depreciation
Depreciation is the term used to describe the loss of value in an asset over time.
Accruals
Accruals refer to a list of expenses that you have incurred but have not yet paid. It may also refer to a list of sales that have been completed, but not yet billed.
Equity
Equity refers to all capital currently invested in the company. This includes any profits that have been re-invested as retained earnings.
Liabilities (Current vs. Long-Term)
Liabilities refer to a company’s financial obligations or debts incurred during business operations. Current liabilities refer to debts that are payable within a year. Long-term liabilities refer to debts that are typically payable over a period of time longer than one year (i.e. multi-year mortgage for office space).
Assets
Assets refer to everything that a company owns. This may include tangible and intangible assets. Examples of tangible assets include land, property, equipment, and cash. Examples of intangible assets include copyrights, stock, trademarks, and patents.
Cost of Goods Sold
Cost of Goods Sold refers to the direct expenses related to producing the goods sold by a business. Calculating the Cost of Goods sold will depend on what is being produced. An example would be the direct labor to provide a service or the cost of materials.
Income Statement
Also known as a ‘profit and loss statement’, the income statement is a summary of a company’s profits and losses during a certain period of time. Income statements show all operating expenses, as well as all revenues earned during that specific period.
Gross Margin
Gross margin refers to the profitability of a company after deducting the Cost of Goods Sold. It is a percentage calculated by taking Gross Profit and dividing by Revenue for the same period.
Gross Profit
Gross profit refers to the profitability of a company. This particular value doesn’t take overhead expenses into consideration. To calculate your gross profit, subtract the Cost of Goods Sold from Revenue for the same period.
Conclusion
Taking the time to understand basic accounting terms is well worth your while. It can set you up for future success. It will allow you to:
- communicate more efficiently with your financial team;
- help you avoid any mistakes and misunderstandings;
- and, help you appear more credible.
If you need professional accounting help, don’t hesitate to reach out!