10 Accounting Terms Explained
Like most industries, accounting has its own jargon for describing certain things within the industry, and while these terms might make communication easier for accountants talking to tax professionals and other accountants and bookkeepers, it can leave a lot of other people feeling lost. That can make it scary and counterproductive when you’re trying to have a conversation about your finances. If you feel like your accountant is speaking a different language, here’s a translation of a few of the most commonly used accounting terms.
Accounting Period: This refers to the amount of time covered by a financial statement or operation. It can refer to fiscal years, calendar years, quarters, or even months. For example, if you bill your clients on a monthly basis, then each month constitutes one accounting period.
Balance Sheet: This is also known as a “statement of financial position” because it gives a snapshot of your company’s financial standing. It lists all the business’ assets and liabilities, as well as each owner’s equity in the company.
Chart of Accounts: This is a master list of everything in your company’s bookkeeping system, including all your company’s assets, equity, expenses, liabilities, and revenues.
Double-Entry Bookkeeping: This system of bookkeeping records each transaction twice: once as a credit and once as a debit. Once the total of all the recorded credits and debits equals zero, the books are considered balanced. While single-entry bookkeeping systems only record a business’s revenues and expenses, double-entry bookkeeping includes assets, liabilities, and equity.
Equity: Essentially, equity refers to the amount of money that would remain if a business sold off all its assets and paid off all its debts. This is why equity is used to describe an owner’s or investor’s share in the company. It’s a way of defining what their share of the company would be worth if the business were to be dissolved.
Fixed Cost: This is also sometimes known as a fixed expense, and it refers to business expenses that remain constant regardless of the company’s output or revenues. For example, rent and employee salaries tend to be fixed costs, while compensation for hourly or part-time employees might vary based on the company’s output.
Gross Profit: This is also sometimes referred to as gross income, and it refers to the value of the products or services sold by a company before any business expenses (including the cost of acquiring or making the goods sold) are factored in. If the gross profit turns out to be a negative number, it is called a gross loss.
Income Statement: This refers to a document that lists all the revenue generated by a company in a given accounting period, minus business expenses. It is also sometimes referred to as an earnings statement, a profit and loss statement, a statement of operation, or a statement of financial results.
Liquidity: This refers to how easily an asset can be converted into cash. When an asset can be quickly and easily converted into cash, it is known as a liquid asset, such as accounts receivable, securities, and money market instruments.
On Credit: Any time a business provides a product or service without taking payment upfront, the payment is referred to as “on credit” or “on account.”
Hopefully, this list has made it easier for you to understand your finances and some best practices for managing them, but if you’re ready to hand your books off to a professional while you focus on doing what you do best, it might be time to get a Bookkeeping Doctor on your side. You can fill out this short form to schedule your FREE consultation to see which bookkeeping services would best support your business.