Accounting terms - A glossary for the rest of us
Most professions have their own lingo, and accounting is no different. What is different is that you have a vested interest in understanding what your accountant tells you about your financial situation. So, here’s a quick primer on common accounting terms—some business-related, some general—to keep you in the know:
Accounts payable—The amount of money you owe to other people.
Accounts receivable—The amount of money people owe you for goods or services you provide.
Assets—Property/equipment you own with a monetary value (cash, vehicles, stock, accounts receivable).
Balance sheet—A financial document that provides a snapshot of a business’s assets, liabilities and owner equity.
Business entity—The legal structure of a business (sole proprietor, partnership, LLC, S-Corp).
Cash flow—The movement of cash in and out of a business. Ideally, you want a higher flow of income into the business than expenses going out.
Credits/Debits—In accounting, credits are money coming in, while debits are money going out (note: this is reversed in banking).
Depreciation—An asset’s loss in value over time (an automobile, a building, a computer).
Equity—The net worth of a company when liabilities (what’s owed) are subtracted from assets (what’s owned).
Expense—Any costs incurred by you or your business.
Liabilities—Debts owed to another person or entity that you’re responsible for paying.
Net profit/loss—Total revenues minus total expenses equal net profit (if revenues are positive) or net loss (if expenses exceed revenue).
Overhead—Expenses related to running a business (mortgage/rent, utilities, payroll, property taxes, supplies).
P&L—The profit & loss statement (P&L) is an overall look at how well your business has performed and how much income you made or lost over a given period.
Revenue—The income a company brought in from the sales of goods or services, before subtracting expenses.
ROI—Return on investment (ROI) is how much you gained or lost on an investment relative to the amount of money you spent on it.
Working capital—The amount available to run your business when current liabilities are subtracted from current assets.
While these definitions aren’t detailed, they should be enough to let you chat knowledgeably with your accountant—especially if you’re a small business owner. If you’d like to know more, a quick Google search of “accounting glossary” will give you a number of detailed sites to peruse. Here’s to being an informed client!