As a small business owner, you may be responsible for handling much (if not all) of the accounting for your business. Even if you hire a trained professional who handles the accounting for you, having at least some functional knowledge of accounting language can help you avoid mistakes and confusion. As with any subject, knowing certain accounting terms can also make you appear smarter, which may even help you impress a potential client or investor.
Now that you’re ready to increase your accounting vocabulary, here are 29 terms you should make an effort to remember:
Depending on your business, you could have any number of these, both for your company and its customers. In its purest form, an account is a record of financial transactions (i.e. deposits, expenses, receipts, etc.) relating to a particular period or purpose.
The most basic accounting term you can know, "accounting" is the process by which you maintain and organize your financial accounts. It essentially means that you have established a system to document and retain financial information.
3. Accounts Payable (A/P)
An accounts payable (A/P) system tracks the money you owe to your creditors, vendors, contractors, consultants and others. Be sure to list the sum of the accounts payable you owe as a current liability on your balance sheet.
4. Accounts Receivable (A/R)
An accounts receivable (A/R) system tracks everything that your debtors owe you, usually comprised by the sum of all outstanding invoices. Although they are outstanding, you should list the sum of your accounts receivable as current assets on your balance sheet.
5. Accrual Basis
This refers to an accounting method that says, when a transaction occurs, you recognize the revenue or expense at that time regardless of whether a payment has been received or paid. The term "accrual" refers to any entry of a revenue or expense when no cash is involved. This is opposed to accounting on a cash basis, which is defined in item No. 9.
Similar to depreciation, amortization is used to expense intangible assets over a specific period of time. It roughly matches an intangible asset’s expense with the revenue it generates. For example, if your company purchased a patent for $10 million, and the patent’s useful life is 10 years, your company’s yearly amortization expense for that patent would be $1 million.
7. Average Cost
The total cost for all your product units produced or bought divided by the number of individual units.
8. Balance Sheet
A statement of your business' assets, liabilities and capital/equity, which details the balance of assets versus debts at a specific point in time. In a sense, a balance sheet provides a picture of your business's financial position on a given day, such as the beginning of the year. This can then be compared to a past balance sheet, such as one year prior, to see changes to your assets, debts and equity.
9. Cash Basis
As oppose to the accrual basis, accounting on a cash basis requires recognizing revenues and expenses only at the time you actually receive or pay out physical cash.
10. Cash Flow
A cash-flow statement or projection tracks the cash you have coming in (from sales, investments, selling of assets, loan proceeds, etc.) and out (to cover operating expenses, pay debts, purchase assets, etc.) during a specific timeframe. It is meant to represent the difference between the cash you have available at the beginning of an accounting period and what you have available at the end of that period. When using accrual-based accounting, a cash-flow statement can accurately depict the status of a company’s liquid assets, as opposed to what’s owed. The SEC requires quarterly cash-flow statements for publicly traded corporations.
11. Current Asset
Typically, current assets are those assets (e.g. non-restricted cash, marketable securities, inventory, etc.) that you can use or convert to cash within 12 months.
12. Current Liabilities
These are your debts and obligations that you can repay in less than one year, including accounts payable, credit cards and some loans.
This is a way to expense the cost of a tangible asset over its useful life. A computer, for example, could be depreciated over several years for tax purposes. Another type of depreciation is when an asset loses value because of market changes, such as the value of a house.
An abbreviation for “Earnings Before Interest, Taxes, Depreciation and Amortization,” this is used to show a company’s profitability without the effect of financing and accounting decisions. To accomplish this, interest, taxes, depreciation and amortization are added back to net income.
Equity is ownership, and it can be defined in many contexts. For accounting purposes, equity is your business' net worth or value, which is calculated by deducting your total liabilities from your total assets. It can also refer to “shareholder equity,” which represents the amount by which a company is financed through shares.
16. Fixed Asset
A long-term piece of property (hence the word “fixed”) that you own and use to generate income, such as land, buildings and major pieces of equipment. You won't consume or convert a fixed asset into cash within a year.
17. General Journal
This is the master document in which you record all transactions. General journals typically show dates, account titles, posting reference, debit and credit columns.
18. Income Statement
Often referred to as a Profit and Loss Statement, an income statement is a monthly or annual report that details the earnings of a company by stating the business' revenues and expenses during an allotted timeframe.
19. Net Income
This is your business' total earnings, also known as profit. You calculate your net income by subtracting your expenses—including the cost of doing business, taxes, interest depreciation, interest, taxes, etc.—from your total revenue.
20. Long-Term Liabilities
Your debts or obligations that you will repay over more than one year's time, including loans, deferred tax liabilities and employee pensions.
The act of recording a transaction in an account.
See No. 19, “Net Income.”
23. Profit and Loss Statement
Also referred to as a “P&L Statement,” it is the same as No. 18, “Income Statement.”
This is the process of comparing two sets of financial records (e.g. two accounts) to ensure that the figures balance out at the end of a specific period.
Income earned by your business via normal business activities, including sales of products or services. You may also receive revenue from royalties, dividends or interest paid to you from other companies.
26. Sales Receipt
A document that records a sale when a customer or your business pays for a product or service in full.
A summary of the activity of a specific account over a period of time.
28. Trial Balance
Prepared periodically to ensure that the entries in your business' bookkeeping system are accurate, a trial balance is used to compile all the balances of all ledgers into debt and credit columns. It tells you whether your debits and credits are balanced, and it’s particularly useful when you spot a potential accounting error.
A write-off is a way to expense an asset of earnings in a company or to take a loss. A dinner with a client, for example, can be written off as an expense because it was related to your business. A customer that does not pay their bill can be written off as a loss, since you will never get the money that is owed, even though the customer received the service or product from you.