Accounting Terms You Should Know
As a business owner, you may choose to outsource the accounting aspect of your firm or handle it personally. Whichever way, it's best to familiarize yourself with accounting terms to adequately manage finances or stay updated with the activities of a hired accountant.
Some key terms to keep in mind are:
The amount a business owes to vendors and creditors for services or products purchased is regarded as accounts payable.
It's usually a short-term debt which a business must pay as scheduled to avoid a default. An example of this is an amount owed by the textile industry for raw materials supplied.
Account receivable is a direct opposite of account payable. It's the total amount owed to a business. For example, if a restaurant sells a dozen of pastries to another business on credit, the amount due becomes receivable.
The accounting period refers to the length of time for which financial statements are issued. Since an accounting period represents financial activities over a period, it's often used to analyze and compare financial performance from different periods. For example, publicly funded companies have four accounting periods which are reported to the Security and Exchanges Commission.
Assets encompass resources with economic value for which is expected to bring future benefits. Assets generate cash flow, reduce expenses on production, and increase business revenue. An example of assets is company equipment and edifices.
Balance sheets evaluate the financial state of a business and tell the worth of a business. The liabilities, assets, and shareholders’ equity are revealed in a balance sheet.
Capital is the financial capacity of a business to manage day-to-day business activities. It's the available funds in the account of a business. In some cases, capital is alternatively referred to as working capital used for daily business needs.
A common financial term is cash flow. Cash flow is the total outgoing and incoming money. It entails operation costs, investments, and earnings.
Closing books, a physical ledger book used by accountants to record financial transactions for a timeline. A closing book is detailed and contains all necessary information that ensures accuracy in the transactions of a business. In the event of any complication, accountants use closing books at the end of the year as a reference.
Credit and Debit
Credit and debit are elements of a double-entry bookkeeping system. Credit is recorded on the right side of a business account. Credit are entries that decrease an expense or asset account. Debit is on the left hand of the account and it increases the asset account.
Depreciation helps to determine the decreasing value of a company's assets. Some assets like machines loses efficiency as time goes by. By calculating depreciation, a business can take a certain amount as a deduction which is spread out over time.
The profits of a business paid to shareholders in form of cash as compensation for investment is regarded as a dividend. Dividends can be distributed as cash or added to shares of stocks.
Expenses are the total cost of running a business. A couple of expenses are fixed and remain the same over months. According to the IRS, a company can take deductions on some expenses if eligible.
Equity equals assets minus liabilities. It's called owners equity and alternatively known as stockholders’ equity. When a business sells all assets, equity is the leftover amount shared to shareholders after debt payment.
Fixed costs remain constant and not subject to change over a period. It includes salary, rent, and insurance.
Inventory has a record of raw materials used in the production of a finished product. It further comprises half-baked goods and finished products.
Liabilities are the amount owed as loans, mortgages, and accumulated expenses.
Net income is the total amount earned after taxes. Gross income differs from net income -- gross income is the total amount earned while net income is determined after expenses and taxes are subtracted.
Payroll is made of hours of work and pays that commensurate based on agreed salary and wages.
Return on Investment
Popularly known as ROI, return on investment measures the efficiency for multiple investments. The investment with the highest profit is considered the preferred choice and most beneficial.
Gross income from a business is referred to as revenue. It's gathered through sales from the day to business transactions. It comes from the sales of products and services.