Like other business niches, accounting has its own language and terminology. Accounting terms deal with the financial aspect of an organization; these are important to help run your business Effective communications are particularly important when it concerns the finances of the organization.
The knowledge of basic accounting terminology will ease communications with the accounting department, even if it has been outsourced.
Here is our list of 20 basic accounting terms that every business owner should know:
1. Accounts receivable
Accounts receivable, also known as AR, refers to the money that is paid to the organization by the clients after the delivery or sale of a product or service.
2. Accounts Payable
Accounts payable, also known as AP, refers to the money that the organization owes to its creditors such as suppliers, for the products or services it uses.
One of the most basic accounting terms, assets refer to the wealth accrued by the organization. Assets are owned outright without any loan or lien. Assets may experience depreciation and can be sold. This term covers everything from cash, equipment, supplies and accounts receivable, to properties, buildings, investments and warehouse inventory.
4. Balance Sheet
The balance sheet is one of an organization’s most important financial statements. It is a record of a company’s assets, liabilities, and stockholder equities at a specific point in time. It is generated regularly for monitoring and ascertaining the organization’s financial health.
Capital refers to a financial asset or its value. Financial assets can be goods or cash. A related term is working capital, which is calculated by deducting current liabilities from current assets. It is the amount of money available for the organization to utilize.
6. Cash Flow
Cash flow refers to the expense or revenue that is expected to occur through an organization’s business activities over a specific time period.
7. Cost of Goods Sold
Costs of Goods Sold, also known as COGS, refer to the direct expenses that are associated with the production of the goods that an organization sells. The exact formula used for the calculation of COGS is dependent on the type of goods.
A credit is an accounting entry. Depending on the financial transaction, this entry can reduce the organization’s assets or increase its equity and liabilities.
This is an accounting entry as well. Like credit, its effect on the balance sheet is determined by the financial transaction. Debit can increase the assets or decrease the liabilities of the organization.
10. General Ledger
The general ledger is one of the most important general accounting terms. It acts as the complete record of financial transactions that have been conducted in the history of the organization. All business transactions, such as office expenses, sales, income losses and credit purchases, are meant to be recorded here.
11. Gross Margin
This term refers to the total number of sales made after deducting the associated costs, such as the cost of materials and manufacturing.
12. On Account/On Credit
These terms are used when the organization has sold its products/services on credit. In other words, the payment has yet to be made. This transaction may be governed by terms resulting in interest charges.
This term refers to the total cash that has been collected in financial transactions in one day. Other kinds of revenue are not considered receipts.
Revenue is a basic accounting word that refers to the total income amount of money collected at a specific point of time. The revenue can be made up of credit purchases, cash sales, interest income and subscription fees.
15. Trial Balance
This includes the credits and the debits for a specific account and is listed in the general ledger.
This is a process for the allocation of capital investments into varied or diverse assets for the reduction of risk.
17. Fixed Expenses
These are expenses that will occur on a regular basis. Examples include rent and utilities bills.
18. Variable Expenses
These are expenses that are subject to change at any given point of time. An example of a variable expense would be labour costs.
19. Accrued Expenses
These are expenses that have been incurred but are yet to be paid.
20. Operation Expenses
These are expenses that are not directly linked with producing goods. Examples of operation expenses include insurance expenses and advertising costs.
While there are several more accounting definitions that all management should be familiar with, this list of basic terms used in accounting should help you get the conversation started.
Want to talk accounting with professionals who can reduce the costs on your business expenses? Get in touch with NuVest Management Services to learn more about how you can outsource your accounting needs.