Have you ever traveled to a country with a common language different than your own?
Navigation in an unfamiliar place can instantly become a sweat dripping, nail biting nightmare. Even simple tasks such as ordering from a menu can become a challenge. No matter how intellectual a person is, language is something that can make the smartest of people become as useful as a dried out highlighter. The interesting thing is that even in their normal routine, a person faces many different lingos without even realizing.
For example, a football fan could listen blindly to a sports commentator and know how the game was coming along while a person not familiar with the common terminology would be completely lost. Most likely they’d even be agitated by the fall of “gibberish” raining down on them.
Many other industries including film production, truck drivers, medical professionals, and even video game fanatics have developed lingo over time that can leave bystanders wondering what planet they’ve just landed on. Unfortunately for most small businesses, accounting did not escape this phenomenon.
As a business owner with many responsibilities, becoming familiar with common accounting terms can easily fall into the void of that never ending to-do list titled “Eventually”. However, when it comes to collaborating with your CPA and bookkeeper, you may have found yourself in that “agitated an drowning in mumbo jumbo” type situation. Becoming familiar with just a few common accounting terms can arm you with a better understating.
Here are ten to get you started:
Accounts Recievable: money owed to your business by customers. You’ll normally hear this referred t as “A/R”
Accounts Payable: money you owe to vendors. This account is also commonly shorteded to (you guesses it) “A/P”. This is where your business has received goods or services that you need to pay for.
Balance Sheet: a report displaying your business assets, liabilities and equity at a certain point in time.
Profit and Loss: a report displaying your business revenue versus expenses to show net profit at a certain point in time.
Liabilities: financial obligations or debt that is owed from the business to another entity. Some examples of a liabilities are loans, accounts payable, mortgages, etc.
Asset: something your business has acquired or purchased and has monetary value. This includes tangible things such as cash, buildings and inventory, as well as intangible things such as rights.
Accruals: a transaction that records an expense or revenue when no physical money has been exchanged. For example, a customer receives services from your business and agrees to pay at a later time. While no money was exchanged, the transaction is still recorded to recognize the revenue that has been earned.
Fiscal Year: a twelve month period that a business uses for accounting purposes such as reporting and budgeting. A fiscal year does not have to be the same as a calendar year. For example, a business can have a fiscal year that is October-September rather than January-December.
Equity: the amount of funds invested in a business plus all historical earnings that have been kept by the business.
Chart of Accounts: a record of all the accounts in a business accounting system. An account is simply a special record for each type of asset, liability, equity, revenue or expense account that a business uses. For example, an account that a business could have listed on the chart of accounts could be “Repair and Maintenance” which would be classified as an expense account.
While these explanations are merely a quick overview of each term, a simple understanding of a wide variety of accounting terms can give you a better grasp of what goes on with your business’s finances. Navigating through what once used to be unfamiliar and frustrating can become a walk in the park (or should I say office?)