Basics of Accounting - Terminologies and Concepts for Business Owners

Learn Basic Accounting Terms

Accounting involves monitoring and documenting financial activity. Accounting principles are used by both individuals and organisations to evaluate their financial performance and health. Accounting is a helpful tool for individuals and businesses to fulfil their tax obligations.

Accounting has a long history that extends back to antiquity. It is most closely related to financial reporting for firms in the current era. However, having a basic understanding of accounting is advantageous for everyone.

Balance Sheet Related Terms

One of the two financial statements that accountants prepare most frequently is the balance sheet. This section discusses basic accounting terms that could be difficult to understand and are related to the balance sheet.

1. Accounts Payable (AP)

All of the costs that a company has incurred but has not yet paid are included in accounts payable. Because the corporation owes this debt, it is listed as a liability on the balance sheet.

2. Accounts Receivable (AR)

All of the revenue (sales) that a business has generated but has not yet been paid for are included in accounts receivable. On the balance sheet, this account is listed as an asset that will probably be converted to cash soon.

3. Accrued Expense

Accrued expense is a term used to indicate an item that has been incurred but not paid for.

4. Asset

Anything with financial value that the corporation owns. These are categorized from cash(the most liquid) to land in order of decreasing liquidity (least liquid).

5. Balance Sheet (BS)

A financial statement that includes a corporation's whole inventory of assets, liabilities and equity. As its name suggests, a balance sheet uses the equation "Assets = Liabilities + Equity."

6. Book Value (BV)

When an asset depreciates, its value decreases. The Asset's initial value less any accumulated Depreciation is shown in the Book Worth.

7. Equity

Equity is the amount that is still present after obligations have been paid. Do not forget that assets are equal to liabilities plus equity. When liabilities are subtracted from assets, what's left is equity, or the portion of the company owned by investors and owners.

8. Inventory

The term "inventory" is used to group any unsold assets that a business has bought to sell to its clients. The inventory account will decrease as these things are purchased by customers.

9. Liability

Liabilities refer to all outstanding debts owed by a business. Payroll, loans, and accounts payable are examples of common liabilities.

Income Statement Related Terms

The second of the two common financial statements is the income statement, sometimes known as the profit and loss statement. These are the basic accounting words that are most frequently used in conjunction with this reporting tool.

10. Cost of Goods Sold (COGS)

The costs that are directly related to the production of a good or service are known as the cost of goods sold. The expenses required to operate the business are not included in this category. The price of materials or the direct labour required to offer a service are two examples of COGS.

11.Depreciation (Dep)

Depreciation is the term used to describe how an asset loses value over time. An asset often needs to have a high value in order to be depreciated. Automobiles and equipment are common assets that must be depreciated. Depreciation is a cost item that appears on the income statement and is frequently referred to as a "Non-Cash Expense" because it doesn't directly affect a company's cash situation.

12. Expense(Cost)

Any expenditure that the company incurs is considered an expense.

13. Gross Margin (GM)

Gross Margin is determined as a percentage by taking the same-period revenue and dividing by the gross profit. It indicates a company's profitability after subtracting cost of goods sold.

14. Gross Profit (GP)

Without accounting for overhead costs, a company's gross profit shows its profitability in dollars. It is computed by deducting the same-period revenue from the cost of goods sold.

15. Income Statement (Profit and Loss) (IS or P&L)

The financial statement that displays the revenues, costs, and profits for a specific time period is known as the income statement (sometimes known as a profit and loss, or P&L). The top of the report displays the revenue collected, and as various expenditures (expenses) are deducted from it until all costs are taken into account, Net Income is produced..

16. Net Income (NI)

The amount made in profits is known as net income. It is computed by taking the revenue and taking off all of the expenses for a specific time period, such as taxes, COGS, overhead, and depreciation.

17. Net Margin

The percentage known as "Net Margin" shows how profitable a business is in comparison to its revenue. It is determined by taking Net Income for a specific period and dividing it by Revenue.

18. Revenue (Sales) (Rev)

Revenue is any money that the company makes.

General Terms

There are, of course, some fundamental accounting terminology that don't apply to a specific financial statement. We've set aside the "generic" category for those.

19. Accounting Period

All Financial Statements contain a designation for an Accounting Period (Income Statement, Balance Sheet, and Statement of Cash Flows). The timeframe conveys the time period covered by the statements.

20. Allocation

The process of allocating money to different accounts or time periods is referred to as allocation. For instance, a cost may be spread out across a number of months(as in the case of insurance) or among several departments (as is often done with administrative costs for companies with multiple divisions).

21. Business (or Legal) Entity

This is the kind of business it is legally speaking. Sole proprietorship, partnerships, limited liability corporations (LLC), S-Corps, and C-Corps are examples of common business structures. Each entity is subject to different rules, regulations, and tax ramifications.

22. Cash Flow Statement (CFS)

The word "cash flow" refers to the inflow and outflow of cash in a firm. By taking the Beginning Cash Balance and subtraction the Ending Cash Balance, one can calculate the Net Cash Flow for a certain period of time. A positive figure shows that there was more money flowing into the company than leaving it, whilst a negative number shows the opposite.

23. Certified Public Accountant (CPA)

An accountant can obtain the professional designation of CPA by passing the CPA exam and meeting the state-specific requirements for education and work experience.

24. Credit

A credit is an increase or decrease in an obligation, equity, asset, or cost account.

25. Debit

An rise in an expense or asset account, or a decrease in a debt or equity account, is referred to as a debit.

26.Diversification

Increasing diversification can help to lower risk. The objective is to distribute capital among numerous assets so that the performance of any one asset won't determine the performance of everything else.

27. Enrolled Agent (EA)

A professional accounting certification known as "Enrolled Agent" is given to individuals who have excelled on exams demonstrating their knowledge of both personal and commercial taxes. To maintain compliance with the IRS, business tax filings are often completed by enrolled agents.

28. Fixed Cost (FC)

A fixed cost is one that stays the same regardless of the amount of sales. For instance, if a company sells more, rent and salaries won't alter. A variable cost is the opposite of a fixed cost.

29. General Ledger (GL)

The whole record of a business's financial transactions is kept in the general ledger. All of the Financial Statements are created using the GL.

30. Generally Accepted Accounting Principles (GAAP)

All accountants must follow these guidelines when executing the act of accounting. When examining a company's financial reports, it is now simpler to compare" apples to apples" according to these common guidelines.

31. Interest

The amount paid on a loan or credit line over and above the principal repayment is called interest.

32. Journal Entry (JE)

Updates and modifications to a company's books are made through journal entries. Every journal entry needs to have an account code, a date, a debit or credit, an amount, and a unique identifier to be recorded (that determines which account is altered).

33. Liquidity

A phrase used to describe how rapidly something can be turned into money. For instance, stocks are more liquid than real estate because they may be sold for cash more quickly than real estate.

34. Material

Information that has the potential to affect decisions is referred to as material. For instance, if a business generates millions of dollars in revenue, $0.50 is hardly significant. All Material factors must be stated in accordance with GAAP.

35. On Credit/On Account

A purchase made on credit or on account is one that will be paid for at a later date, but the buyer gets to use the product right away.

36. Overhead

Expenses related to operating the firm are referred to as overhead. They exclude costs associated with producing the good or providing the service. For instance, rent and executive salaries are frequently included in overhead.

37. Payroll

The account used to track payments for employee salaries, wages, bonuses, and deductions is known as payroll. If there is accrued vacation pay or other outstanding salaries ,this will frequently display on the Balance Sheet as a Liability that the company owes.

38. Present Value (PV)

The word "present value" refers to an asset's value right now rather than at a later date. It is predicated on the idea that because of inflation, money now is worth more than money tomorrow.

39. Receipts

A receipt tis a record that attests to the payment's existence. When a firm offers its product or service, it generates receipts, and when it pays for goods and services from other businesses, it receives receipts. In order for a business to demonstrate the accuracy of its incurred expenses, received receipts should be preserved in accordance with IRS receipt criteria and catalogued.

40. Return on Investment (ROI)

This phrase originally referred to a company's profit (Return), divided by the investment needed. The phrase is now used more broadly to refer to returns on various efforts and goals.

41. Trial Balance(TB)

The General Ledger's accounts are listed in the trial balance along with their current balances (either debit or credit). The balance results from the need that all debits and credits be equal.

42. Variable Cost (VC)

The opposite of Fixed Costs, these costs fluctuate based on sales volume. Because they represent an expense incurred to deliver the sale, variable expenses rise as sales increase. For instance, if a business manufactures a product and sells more of it, they will need to purchase more raw materials to satisfy the rise in demand.

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