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COMMON ACCOUNTING TERMS EXPLAINED

We all know accounting terms can be confusing and just downright hard to understand, I mean English, please?

We are hoping after this blog you will have the basic guide to all accounting terms you need to know and can finally understand those terms in “English” and better understand what’s really going on when we speak to you.

 

                          ACCOUNTING TERMS

  1. Accounts Payable (AP)

Accounts Payable include all of the expenses that a business has incurred but has not yet paid. This account is recorded as a liability on the Balance Sheet as it is a debt owed by the company.

  1. Accounts Receivable (AR)

Accounts Receivable include all of the revenue (sales) that a company has provided but has not yet collected payment on. This account is on the Balance Sheet, recorded as an asset that will likely convert to cash in the short-term.

  1. Accrued Expense 

An expense that been incurred but hasn’t been paid is described by the term Accrued Expense.

  1. Asset (A)

Anything the company owns that has monetary value. These are listed in order of liquidity, from cash (the most liquid) to land (least liquid).

  1. Balance Sheet (BS)

A financial statement that reports on all of a company’s assets, liabilities, and equity. As suggested by its name, a balance sheet abides by the equation .

  1. Book Value (BV) 

As an asset is depreciated, it loses value. The Book Value shows the original value of an asset, less any accumulated Depreciation.

  1. Liability (L) 

All debts that a company has yet to pay are referred to as Liabilities. Common liabilities include Accounts Payable, Payroll, and Loans.

  1. Depreciation (Dep)

Depreciation is the term that accounts for the loss of value in an asset over time. Common assets to be depreciated are cars and equipment. Depreciation appears on the Income Statement as an expense and is often categorized as a “Non-Cash Expense” since it doesn’t have a direct impact on a company’s cash position.

  1. Gross Margin (GM)

Gross Margin is a percentage calculated by taking Gross Profit and dividing by Revenue for the same period. It represents the profitability of a company after deducting the Cost of Goods Sold.

  1. Gross Profit (GP)

Gross Profit indicates the profitability of a company in dollars, without taking overhead expenses into account. It is calculated by subtracting the Cost of Goods Sold from Revenue for the same period.

  1. Income Statement (Profit and Loss) (IS or P&L)
    The Income Statement (often referred to as a Profit and Loss, or P&L) is the financial statement that shows the revenues, expenses, and profit over a given time period. Revenue earned is shown at the top of the report and various costs (expenses) are subtracted from it until all costs are accounted for; the result being Net Income.

  2. Business (or Legal) Entity

This is the legal structure, or type, of a business. Common business formations include Sole Trader, Partnership, Private Company, Discretionary Trust and Unit Trust. Each entity has a unique set of requirements, laws, and tax implications.

  1. Diversification

Diversification is a method of reducing risk. The goal is to allocate capital across a multitude of assets so that the performance of any one asset doesn’t dictate the performance of the total.

  1. General Ledger (GL)

A General Ledger is the complete record of a company’s financial transactions. The GL is used in order to prepare all of the Financial Statements

  1. Liquidity

A term referencing how quickly something can be converted into cash. For example, stocks are more liquid than a house since you can sell stocks (turning it into cash) more quickly than real estate.

  1. Overhead

Overhead are those Expenses that relate to running the business. They do not include Expenses that make the product or deliver the service. For example, Overhead often includes Rent and Wages.

  1. Return on Investment (ROI)

Originally, this term referred to the profit that a company was making (Return), divided by the Investment required. Today, the term is used more loosely to include returns on various projects and objectives. For example, if a company spent $1,000 on marketing, which produced $2,000 in profit, the company could state that its ROI on marketing spend is 50%.

  1. Trial Balance (TB)

Trial Balance is a listing of all accounts in the General Ledger with their balance amount (either debit or credit). The total debits must equal the total credits, hence the word balance.