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Some of the most common accounting terms, explained…

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Farnell Clarke

Some of the most common accounting terms, explained…

There are a lot of terms used within accounting and for some it can be hard to remember them all. We are sharing some of the most common ones used (for small businesses).

Let’s get started…

Accounts receivable (AR): the amount of money owed by customers or clients to a business after the goods/services have been sold/used.

Accounts payable (AP): the amount of money that a company owes creditors (such as suppliers for example) in return for goods and/or services they have delivered.

Accrual accounting: records transactions as they occur, instead of when payment is made or has been received.

Assets (fixed) (FA): long-term assets that provide benefits to a company for more than one year.

Assets (current) (CA): assets that are converted to cash within one year.

Asset classes: a group of securities that behaves similarly in the marketplace. These are equities or stocks, fixed income or bonds, and cash equivalents or money market instruments.

Balance sheet (BS): a financial report that summarizes what a company owns, owes, and owner or shareholder equity, during a given time.

Bank Reconciliation: process by which you ensure that your general ledger accounts are in balance with your ending bank balance for a specific month.

Capital: is the financial assets that a business needs to produce the goods and services it sells.

Cash accounting: records payments when they are received and expenses when they are paid, not when they’re incurred.

Cash flow (CF): the revenue expected to be generated through business activities over a period.

Cost of goods sold (COGS): the direct cost of producing or purchasing the items you have for sale.

Credit: this is an accounting entry that is made on the right side of any accounting transaction in a T-account ledger. A credit entry will increase a liability or equity account, while it will decrease an asset account.

Debit: is an accounting entry that is made on the left side of any accounting transaction T-account ledger. A debit entry will increase an asset or expense account and decrease a liability or equity account.

Depreciation: represents how much of a particular asset has been used over a certain time.

Diversification: allocating or spreading capital investments into varied assets to avoid over-exposure to risk.

Expenses: this pays for items or services and are a necessity for your business to earn revenue.

Equity: is the owner’s stake in a business.

Generally accepted accounting principles (GAAP): rules and guidelines to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

General ledger (GL): complete record of the financial transactions over the life of a company.

Journal entry: this is common with manual bookkeeping systems; journal entries are still used today to record financial transactions.

Liability: this is a financial obligation your business owes to another entity. Things such as accounts payable, accrued expenses, and payroll are all considered liabilities.

Net income (NI): this is a company’s total earnings. It is calculated by subtracting total expenses from total revenues.

Payroll: an account that lists all employees and any wages and salaries due them.

Profit and loss statement (P&L): this is used to review and summarize a company’s performance and financial position during a specific period, normally quarterly or annually.

Return on investment (ROI): used to evaluate the financial performance relative to the amount of money that was invested. This is calculated by dividing the net profit by the cost of the investment.

Revenue: the income that your business receives from regular business activity.

There are many more terms used than this, but here is a good place to start. If you ever have any questions or need any advice, we are always here to help you. Get in touch with us today.


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