How many times have you ended a conversation with your accountant more confused than when you started? If your answer is yes “most of the time”, fear not! Many business owners understand the meaning of the accounting words but not what they mean. Add debits, credits, registers, and journals and a business owner’s head could start to spin. Accounting terms are unfamiliar to most people who haven’t studied accounting, but running a business successfully requires some understanding of accounting. We’ve put together this handy list of basic accounting terms along with their common abbreviations (if any) and definitions.
Accounts Payable (AP)
Accounts payable include all expenses incurred by a business but not yet paid. This account is recorded as a liability on the balance sheet because it is a liability of the company.
Accounts Receivable (AR)
The amount of money customers or clients owes a business after goods or services have been delivered and/or used.
Accrued Expense
An expense that has been accrued but not yet paid is called an accrual Expense.
Accounting (ACCG)
A systematic method of recording and reporting the financial transactions of a business or organization.
Asset (A)
Anything owned by the company that has monetary value. These are ranked in order of liquidity, from cash (most liquid) to real estate (least liquid).
Balance sheet (BS)
A financial report that summarizes the assets (what you own), liabilities (what you owe), and equity of a company at a given time.
Book Value (BV)
When a good depreciated, it loses value. Book value indicates the original value of an asset less accumulated depreciation.
Capital (CAP)
A financial asset or the value of a financial asset, such as cash or property. Working capital is calculated by subtracting your current assets from your current liabilities, that is the money or assets that an organization can employ.
Equity (E)
Equity refers to the value that remains after deducting liabilities. Think of the equation Assets = Liabilities + Equity. When you take your assets and subtract your liabilities, what is left is equity, which is the portion of the business owned by investors and owners.
Inventory
Inventory is the term used to classify the assets that a company has bought to sell to its customers and that remain unsold. As these items are sold to customers, the inventory count decreases.
Certified Public Accountant (CPA)
A title awarded to an accountant who has passed a standardized CPA exam and has a lot of experience is a requirement to become a CPA.
Liability (L)
All debts that a company has not yet paid are called liabilities. Common liabilities include accounts payable, payroll, and loans.
Cost of Goods Sold (COGS)
The direct costs are associated with the production of goods sold by a business. The calculation formula depends on what is produced but may include, for example, the cost of raw materials (parts) and the amount of labor used in production.
Depreciation (Dep)
Depreciation is the term that takes into account the depreciation of an asset over time. In general, an asset must have a significant value to justify depreciation. Depreciable common property is motor vehicles and equipment. Depreciation appears as an expense in the income statement and is often classified as a “non-cash expense” because it has no direct impact on a company’s cash flow.
Credit (CR)
An accounting entry that can either decrease the assets or increase the liabilities and equity of the company’s balance sheet, depending on the transaction. With double-entry bookkeeping, two entries are recorded for each transaction: a credit and a debit.
Gross Margin (GM)
Gross margin is a percentage calculated by taking gross profit and dividing it by sales for the same period. It represents the profitability of a company after deducting production costs.
Diversification
The process of allocating or diversifying investments between different assets in order to avoid excessive risk.
Enrolled Agent (EA)
A tax professional who represents taxpayers in matters relating to the Internal Revenue Service (IRS).
Gross Profit (GP)
Gross margin indicates a company’s profit, excluding overhead. It is calculated by subtracting the cost of goods sold from the revenue for the same period.
Equity and owner’s Equity (OE)
In the most general sense, equity is assets with fewer liabilities. An owner’s equity is usually reported as a percentage of the shares an individual owns in the business. The owners of shares are called shareholders.
Income Statement (Profit and Loss) (IS or P&L)
The income statement is the financial statement that shows income, expenses, and profit over a period of time. Earned income is displayed at the top of the report and various costs (expenses) are subtracted from it until all costs are accounted for. the result is net income.
Insolvency
A condition in which a person or organization is unable to meet their financial obligations to lenders when their debts come due.
Net Income (NI)
Net income is the amount earned as profit. It is calculated by taking revenue and subtracting all expenses for a given period, including COGS, overhead, depreciation, and taxes.
Generally accepted accounting principles (GAAP)
A set of rules and guidelines developed by the accounting industry that companies are required to follow when reporting financial information. Compliance with these rules is particularly important for all listed companies.
Net Margin
Net margin is the percentage that represents a company’s profit in relation to its sales. It is calculated by dividing net income by income for a given period.
General ledger (GL)
It is a complete record of financial transactions throughout the life of a company.
Revenue (Sales) (Rev)
It is the money the company makes.
Trial Balance
A business document that collates all records into debit and credit columns to ensure that a company’s accounting system is mathematically correct.
Accounting Period
An accounting period is designated in all financial statements (profit and loss account, balance sheet, and cash flow statement). The period indicates the period of time that is shown in the statements.
Liabilities (current and long-term)
financial debts or obligations of a company incurred in the course of its operations. Current liabilities (CL) are debts that are payable within one year, such as Debts to suppliers. Long-term debt (LTL) is typically payable over a period of more than one year. An example of a long-term liability would be a multi-year office mortgage.
Allocation
The term allocation describes the process of allocating funds to different accounts or time periods. For example, an expense may be spread over several months (as with insurance) or spread across multiple departments (as is often the case with administrative expenses at companies with multiple divisions).
Limited Liability Company (LLC)
An LLC is a corporate structure in which the members cannot be held responsible for the debts or liabilities of the company. This can prevent business owners from losing all of their savings if, for example, someone sues the company.
Present Value (PV)
The present value of a future sum of money is based on a given rate of return. Present value helps us understand why earning $100 now is worth more than earning $100 a year from now, since the cash available can now be invested with a higher return
Cash Flow (CF)
Cash flow is the term used to describe the inflow and outflow of cash within a business. The net cash flow for a given period is found by subtracting the beginning cash balance and the ending cash balance. A positive number indicates that more money went into the company than out, while a negative number indicates the opposite.