Accounting Terms You Should Be Familiar With – Part 1

Accounting, like any profession, has its own language.  The wise business owner will make sure that they are aware of the basic terms so that there is no misunderstanding when discussing how their business is performing.   

Here are some of the most common terms briefly explained.If you are unsure of what your Accountant or Bookkeeper means, you should always ask for clarification. 

1 – Accounts Receivable

Accounts Receivable is money that is owed to a business for the product or service they provide once it has been supplied to the customer.  When you sell something, that transaction is shown as a current asset in your balance sheet and a debt in the buyers accounts until they pay you.

2 – Accounts Payable

Accounts Payable are the opposite of Accounts Receivable . They are debts you owe to other organisations for the supply of goods or services to you. When you buy something it becomes a current liability on your balance sheet until you pay the account.

3 – Accounting Period

The Accounting Period is the time span your accounts cover for reporting or tax purposes.  They may not be the same.  You may want to get reports on a monthly or quarterly basis so you can keep track of what is happening with your business.  Tax periods tend to be quarterly, six monthly or annual depending on who you are reporting to or paying.  They key thing is that the Accounting period should remain the same for each purpose.

4 – Accrued Expenses

Anything which is accrued in something that has yet to be paid so accrued expenses are expenses relating to your business that have yet to be paid for.  Depending on how your accounts are structured accruals may be entered into your accounts before they are paid

These are expenses that have been incurred but are yet to be paid.

5 – Accrual Basis Accounting

If you use accrual basis accounting then your accounts will make allowances for such things as accounts receivable and payable, and other similar expenses.  Generally speaking cash based accounting is seen as an easier method but it does not necessarily show the true picture of the financial state of your company.

6 – Assets

Assets is the term used to describe everything that makes up the wealth of your business including cash, stock, equipment, investments, premises etc.  Assets are anything with economic value which can be used to create income for the company.  There are different types of assets which are treated in different ways – see Fixed Assests and Current Assets.

7  – Balance Sheet

You rBalance Sheet is probably the most important of all your financial statements.  It is a record, at a given moment in time, of all your assets and liabilities and equity.  Your Balance sheet should be generated regularly to help in monitoring the financial health of your business.  In a nutshell the Balance Sheet shows the results of the accounting equation ‘Assets = Liabilities + Equity’

8 – Capital

Capital is the term which is used to describe a financial asset or its value. Capital can be in the form of cash or or goods.  Working capital is liquid capital which can be used for day to day expenses and is a good indicator of the overall health of your business.  If you do not have enough capital to meet your regular expenses then  your business is not in good health. 

9 – Cash Basis Accounting

Cah Basis accounting records transactions as they happen and does not take account of expenses or income  that accrues over time until they are actually billed.  It is simpler than accrual basis accounting but does not always give a true picture depending on the type of business you run.

10 – Cash Flow

Cash flow is the balance of income and expenditure at any moment in time. Cash flows in and out of a business on a regular basis.  In a healthy business the overall inflow of cash should be more than the outflow so you  always have the wherewithal to meet your commitments.

11 – Chart of Accounts

Your Chart of Accounts is the index of all the accounts in your general ledger and provides a picture of all your transactions over a specific period.  It is helpful in  organizing your finances and providing insight into the movement of funds within your business. 

12 – Closing the Books

Closing the books simply means the point at which your bookkeeper will  cease recording transactions in order to prepare a report to that point in time.  A good example is the preparation of monthly management reports or your year end.  It is a simple process if you are using cash based accounting but more complex for accrual based accounting where estimates may have to be made.

13 – Cost of Good Sold

Cost of goods sold is the total of expenses relating to the production or supply of goods and services.  It includes things such as materials, labour, transport and  packaging.

14 –  Credit

A credit is an entry into your accounts. Depending on the type of financial transaction, it can either reduce your  assets or increase your equity and/or liabilities. Debits must equal credits for your accounts to balance.