Glossary of coarse Accounting Terms
Bling Lingo made simple
Glossary of coarse Accounting Terms
Today...again...I was scratching my head over an accounting mess, for which the owner had paid a bookkeeper many dollars over many years. How did it happen? If you don't know the basics, you are a sitting duck, my friend. You know, accountants do it on purpose. They use weird words to make you think that they are smarter than you are. To keep you in the dark. Or, the less nasty ones just don't know better.
Good accountants and bookkeepers want you to learn the lingo. They want to help you make the bling, baby! So, read and learn. Keep this glossary handy as you work with your expert money managers. Use it to begin your journey to financial literacy!
Bling Lingo - Glossary of base Accounting Terms...
Accounting Equation: The balance Sheet is based on the basic accounting equation. That is:
Assets = Equities.
Equity of the firm can be held by man other than the owner. That is called a liability. Because we regularly have some liabilities, the accounting equation is regularly written...
Assets = Liabilities + Owner's Equity.
Accounts: firm activities cause increases and decreases in your assets, liabilities and equity. Your accounting system records these activities in accounts. A estimate of accounts are needed to summarize the increases and decreases in each asset, liability and owner's equity catalogue on the balance Sheet and of each revenue and price that appears on the revenue Statement. You can have a few accounts or hundreds, depending on the kind of detailed facts you need to run your business.
Accounts Payable: Also called A/P. These are bills that your firm owes to the government or your suppliers. If you have 'bought' it, but haven't paid for it yet (like when you buy 'on account') you create an catalogue payable. These are found in the liability section of the balance Sheet.
Accounts Receivable: Also called A/R. When you sell something to someone, and they don't pay you that minute, you create an catalogue receivable. This is the estimate of money your customers owe you for products and services that they bought from you...but haven't paid for yet. Accounts receivable are found in the current assets section of the balance Sheet.
Accrual Basis Accounting: With accrual basis accounting, you 'account for' expenses and sales at the time the transaction occurs. This is the most strict way of accounting for your firm activities. If you sell something to Mrs. Fernwicky today, you would description the sale as of today, even if she plans on paying you in two months. If you buy some paint today, you catalogue for it today, even if you will pay for it next month when the contribute house statement comes. Cash basis accounting records the sale when the cash is received and the price when the check goes out. Not as strict a photograph of what is happening at you company.
Assets: The 'stuff' the firm owns. Anything of value - cash, accounts receivable, trucks, inventory, land. Current assets are those that could be converted into cash easily. (Officially, within a year's time.) The most current of current assets is cash, of course. Accounts receivable will be converted to cash as soon as the customer pays, hopefully within a month. So, accounts receivable are current assets. So is inventory.
Fixed assets are those things that you wouldn't want to turn into cash for operating money. For instance, you don't want to sell your building to cover the contribute house bill. Assets are listed, in order of liquidity (how close it is to cash) on the balance Sheet.
Balance Sheet: The balance Sheet reflects the financial health of the firm on a exact date. The basic accounting formula is the basis for the balance Sheet:
Assets = Liabilities + Owner's Equity
The balance Sheet doesn't start over. It is the cumulative score from day one of the firm to the time the description is created.
Cash Flow: The movement and timing of money, in and out of the business. In addition to the balance Sheet and the revenue Statement, you may want to description the flow of cash straight through your business. Your firm could be profitable but 'cash poor' and unable to pay your bills. Not good!
A cash flow statement helps keep you aware of how much cash came and went for any period of time. A cash flow angle would be an educated guess at what the cash flow situation will be for the future.
Suppose you want to buy a new truck with cash. But that buy will empty the bank catalogue and leave you without any cash for payroll! For cash flow reasons, you might pick to buy a truck on payments instead.
Chart Of Accounts: A unblemished listing of every catalogue in your accounting system. Every transaction in your firm needs to be recorded, so that you can keep track of things. Think of the chart of accounts as the peg board on which you hang the firm activities.
Credit: A prestige is used in Double-Entry accounting to growth a liability or an equity account. A prestige will decrease an asset account. For every prestige there is a debit. These are the two balancing components of every journal entry. Earnings and debits keep the basic accounting equation (Assets = Liabilities + Owner's Equity) in balance as you description firm activities.
Debit: A debit is used in Double-Entry accounting to growth an asset account. A debit will decrease a liability or an equity account. For every debit there is a credit.
Direct Costs: Also called cost of goods sold, cost of sales or job site expenses. These are expenses that consist of labor costs and materials. These expenses can be directly tracked to a exact job. If the job didn't happen, the direct costs wouldn't have been incurred. (Compare direct cost with indirect costs to get a great insight of the term.) Direct costs are found on the revenue Statement, right below the revenue accounts.
Income - Direct Costs = Gross Margin.
Double-Entry Accounting: An accounting system used to keep track of firm activities. Double-Entry accounting maintains the balance Sheet: Assets = Liabilities + Owner's Equity. When dollars are recorded in one account, they must be accounted for in an additional one catalogue in such a way that the performance is well documented and the balance Sheet stays in balance.
You may not need to be an scholar in Double-Entry accounting, but the man who is responsible for creating the financial statements great get pretty good at it. If that is you, go back straight through the book and focus on the 'gray' sheets. Study the examples and see how the Double-Entry formula acts as a check and balance of your books.
Remember the law of the universe...what goes around, comes around. This is the essence of Double-Entry accounting.
Equity: Funds that have been supplied to the firm to get the 'stuff'. Equities show rights of the assets or claims against the assets. If man other than the owner has claims on the assets, it is called a liability.
Total Assets - Total Liabilities = Net Equity
This is an additional one way of stating the basic accounting equation that emphasizes how much of the assets you own. Net equity is also called net worth.
Expense: Also called costs. Expenses are decreases in equity. These are dollars paid out to suppliers, vendors, Uncle Sam, employees, charities, etc. Remember to pay bills thankfully, because it takes money to make money. Expenses are listed on the revenue Statement. They should be split into two categories, direct costs and indirect costs. The basic equation for the revenue Statement is:
Revenues - Expenses = Profit
(You'll see a profit if there are more revenues than expenses!...or a loss, if expenses are more than revenues.)
Remember, all costs need to be included in your selling price. The customer pays for everything. In exchange, you give the customer your services. What a deal!
Financial Statements: refer to the balance Sheet and the revenue Statement. The balance Sheet is a description that shows the financial health of the company. The revenue Statement (also called the profit and Loss statement or the 'P&L') is the profit operation summary.
Financial Statements can consist of the supporting documents like cash flow reports, accounts receivable reports, transaction register, etc. Any description that measures the movement of money in your company.
Financial Statements are what the bank wants to see before it loans you money. The Irs insists that you share the score with them, and asks for your Financial Statements every year.
General Ledger: Once upon a time, accounting systems were kept in a book that listed the increases and decreases in all the accounts of the company. That book was called the normal ledger. Today, you probably have a computerized accounting system. Still, the normal ledger is a collection of all balance Sheet and revenue Statement accounts...all the assets, liabilities and equity. It is the description that shows All the performance in the company. Often this listing is called a information trial balance on the description menu of your accounting program. The information trial balance is my beloved description when I am trying to find a mistake, or make sure that we have entered facts in the right accounts.
Gross Profit: This is how much money you have left after you have subtracted the direct costs from the selling price.
Income - Direct Costs = Gross Profit. When this is expressed as a percentage, it is call Gross Margin.
This is a good estimate to peruse each month, and to track in terms of ration to total sales over the course of time. The higher the great with gross margin! You need to have enough money left at this point to pay all your indirect costs and still end up with a profit.
Income Statement: also called the profit and Loss Statement, or P&L, or Statement of Operations. This is a description that shows the changes in the equity of the firm as a supervene of firm operations. It lists the revenue (or revenues, or sales), subtracts the expenses and shows you the profit J! (Or loss L.) This description covers a period of time and summarizes the money in and the money out.
The revenue Statement is like a magnifying glass that shows the information of activities that cause changes in the equity section of the balance Sheet.
Indirect Cost: Also called overhead or operating expenses. These expenses are indirectly related to the services you contribute to customers. Indirect costs consist of office salaries, rent, advertising, telephone, utilities...costs to keep a 'roof overhead'. Every cost that is not a direct cost is an indirect cost. Indirect costs do not go away when sales drop off.
Inventory: Also called stock. These are materials that you buy with the intent to sell, but you haven't sold them yet. catalogue is found on the balance sheet under assets. It is considered a current asset because you will turn it into cash as soon as you sell it. Beware of turning cash into inventory. You may run out of cash. Work with your suppliers to keep catalogue Small.
Journal: This is the diary of your business. It keeps track of firm activities chronologically. Each firm performance is recorded as a journal entry. The Double-Entry will list the debit catalogue and the prestige catalogue for each transaction on the day that it occurred. In your reports menu in your accounting system, the journal entries are listed in the transaction register.
Liabilities: Like equities, these are sources of assets - how you got the 'stuff'. These are claims against assets by man other than the owner. This is what the firm owes! Notes payable, taxes payable and loans are liabilities. Liabilities are categorized as current liabilities (need to pay off within a year's time, like payroll taxes) or long term liabilities (pay-back time is more than a year, like your building mortgage).
Money: Also called moola, scratch, gold, coins, cash, change, chicken feed, green stuff, Bling, etc. Money is the form we use to replacement energy, goods and services for other energy, goods and services. Used to buy things that you need or want. Beats trading for chickens in the global marketplace.
Money in and of itself is neither good or bad. I want you to make lots of it, and do great things with it!
Net Income: Also called net profit, net earnings, current revenue or lowest line. (No wonder accounting is confusing - look at all those words that mean the same thing!)
After you have subtracted All expenses (including taxes) from revenues, you are left with net income. The word net means basic, fundamental. This is a very foremost item on the revenue statement because it tells you how much money is left after firm operations. Think of net revenue like the score of a singular basketball game in a series. Net revenue tells you if you won or lost, and by how much, for a given period of time.
By the way, if net revenue is a negative number, it's called a loss. You want to avoid those. The net revenue is reflected on the balance Sheet in the equity section, under current revenue (or net profit). Net revenue results in an growth in owner's equity. A loss results in a decrease in owner's equity.
Retained Earnings: The estimate of net revenue earned and retained by the business. If net revenue is like the score after a singular basketball game, retained revenue is the lifetime statistic. Retained revenue is found in the equity section of the balance Sheet. It keeps track of how much of the total owner's equity was earned and retained by the firm versus how much capital has been invested from the owners (paid-in capital).
Each month, the net profits are reflected in the balance Sheet as current earnings. At the end of the year, current revenue are added to the retained revenue account.
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