Accounting Terms Explained
Let’s face it, accounting is complicated, unless you are an accountant. There are so many terms and acronyms that are confusing! It is almost like another language. I want to simplify it for you today. I am going to explain some of the most used accounting terms and phrases.
Accounts Receivable - These are the amounts owed to a business by its customers. So, any goods or services will be invoiced, billed, or taken at point-of-sale. These will in turn be credits to your account/business.
Accounts Payable - This would be the opposite of receivables. This would be any monies owed to vendors or suppliers for the goods or services you provide. These would be debits from your account/business.
Accruals - Credit and debits that have been recorded but no payment has been collected. This form of accounting is used in various industries that have big projects that can take a while to complete.
Assets - Everything the business owns. (Cash, equipment, products, copywrites, etc.) So, this would be anything in your company that has “value”.
Liabilities - This would be everything that a business owes including loans, credit card balances, taxes, payroll, rent, or subscriptions.
Equity - This would be the “value” of an asset owned by the company. To calculate this, you would take the difference between the assets and liabilities.
Expenses - The cost of running a business. The different types of expenses can be fixed, variable, accrued, and operating.
Burn Rate - A calculation that tells you how quickly a business is spending money. This is especially important for start-up companies.
COGS - (Cost of good sold) This is the total cost of goods or products that is sold by the business.
GAAP - (Generally Accepted Accounting Principles) This is a commonly used accounting procedures that the Financial Accounting Standards Board issues.
Capital - Funds held in bank accounts or that have been obtained from financing. This money will be used to grow or run the company.
Fiscal Year - This is a financial year. It does not necessarily correspond with a calendar year. It is when you choose to start and end your companies’ finances on a yearly basis.
Gross Margin - This would be your net sales minus COGS, or your cost of goods sold.
Profit - The bottom line, and what your company is making after expenses, COGS, and adding in income.
Depreciation - Any business that have any assets should understand what this is. This is how much the value of an asset goes down over time with wear and tear.
Revenue - This is money a company has made before any expenses are taken out. Do not confuse this with profit.
Well, one or two things have happened now. You either feel educated on accounting terms or your head is swimming with this new information. Accounting does not have to be complicated. That is what accountants are for! Here at PennyRoyal Accounting, LLC our accountants have over 40 years of combined experience and have all the knowledge and expertise needed to keep your books clean and give you the financial advice you need. Contact us today for a free consultation or a custom quote!