Every business owner and even laymen should have at least a basic understanding of common accounting terms. You never know when you’ll face an accounting emergency!
So, without further ado, let’s look at some essential accounting terms that you need to know about:
Essential Accounting Terms
Balance Sheet
A financial statement that captures the company’s financial situation at a specific date. The reason why it is called a “balance” sheet is that the things owned by the company (assets) must be equal to the claims against those things (liabilities and equity).
Assets
Everything the company owns to run its business successfully, including cash, land, buildings, equipment, tools, furniture, and vehicles.
Liabilities
Everything the company owes, including unpaid bills, loans, payroll, and bonds.
Equity
All the money that is invested in the company by its owners. In small businesses owned by one person or a group of people, the equity is in a Capital account. In larger, incorporated companies, the equity is in terms of shares of stock.
Income Statement Terms
Let’s look at some terms related to the income statement:
Income Statement
This financial statement summarizes of the company’s financial activity over a specific period, such as a month, a quarter, or a year. The statement begins with the Revenue earned, subtracts it with the Cost of Goods Sold and Expenses, and ends with the bottom line, i.e., Net Profit or Loss.
Revenue
All the money that is earned by selling the company’s goods and services. Companies can also earn revenue by selling unneeded assets or earning interest on short-term loans given to employees or other businesses.
Cost of Goods Sold
All the money spent on purchasing or producing the products or services that a company plans to sell to its customers.
Expenses
All the money spent on operating the company. It is not directly related to the sales of individual goods or services.
Other Accounting Terms
You should also know some other accounting terms that are commonly used:
Accounts Payable
The account used to keep a tab on all outstanding bills from contractors, vendors, consultants, and any other individuals or companies from whom the company has bought goods or services.
Accounts Receivable
The account used to keep a tab on all customer sales carried out through store credit. Store credit does not refer to credit or debit card sales; instead, it refers to the sales in which the customer is given credit directly by the store, which will then collect payment from the customer at a later date.
Accounting Period
This refers to the period for which financial activity is tracked. Many businesses track their financial results monthly, and so each accounting period is equal to a single month. Some businesses, however, choose to perform financial reporting on a quarterly or annual basis. Companies that choose monthly financial reports also usually make quarterly and annual reports.
Depreciation
This accounting method is used to track the use and aging of assets. For instance, if you own a car, it will reduce in value over time (unless you have a vintage car that would go up in value). All major assets owned by a business will face depreciation through aging and wear and tear. They will need to be replaced accordingly. Depreciating assets include factories, buildings, equipment, and other major assets.
General Ledger
This is the tome in which all the company’s accounts are summarized.
Interest
The amount of money that a company needs to pay if it has borrowed money from a bank or another entity. For instance, if you’ve bought a car on loan, you need to pay back the rest of the money for the car and the interest on it, which is calculated as a percent of the amount you’ve borrowed.
Inventory
This account keeps a tab on all products that will be sold to customers.
Journals
This is where accountants keep records of day-to-day company transactions in chronological order. The most active accounts, like cash, accounts payable, and accounts receivable, have their own journals.
Payroll
The account tracks employees’ salaries and wages. An accountant’s key role includes managing the payroll. This involves reporting multiple aspects of the company’s payroll to the government, such as taxes paid on behalf of employees, unemployment taxes, and other specifics.
Trial Balance
A trial balance is done as a test to ensure that the books are balanced before putting all the information into financial reports and closing the books for the accounting period.
