August 18, 2017

Accounting and Bookkeeping Terms

The accounting and bookkeeping business has a language all it’s own. Don’t worry as most business owners don’t know or understand all the terms on this page. So you feel comfortable, here’s a list of common accounting terms and their definitions.

Accounts payable – The amount owed by a business to its suppliers or vendors for goods and services purchased on credit.

Accounts receivable - The amounts owed to a business from its customers or clients for goods or services provided on credit.

Accrual accounting - A method of accounting where income and expenses are recorded in the periods in which they occur, not necessarily the periods in which cash in exchanged.

Accrued liabilities - These are amounts owed by a business to its suppliers or employees that relate to the current period but which it has not yet been invoiced. Also called accrued expenses.

Bad debts - The estimated amount of credit sales that have become questionable as to collectibility in the current period.

Balance sheet - One of the three main financial statements prepared by a business. The balance sheet displays everything that is owned and owed by the company that has a measurable financial value.

Bank reconciliation - The process of comparing and reporting differences between the bank balance on the bank statement and the bank balance in the ledger.

Book value - The value of assets, liabilities, and equity recorded on the balance sheet of a business. Book value may differ from replacement cost or market value.

Break-even point - The point in a business’s operations where revenue is sufficient to cover expenses.

Budgeting – The process of planning and projecting revenue, expenses, and capital expenditures for future fiscal periods.

Capital assets - The tangible operating assets of a business. These assets generally provide the business with operating capacity as opposed to being held for resale. They have a relatively long life.

Cash basis accounting - A method of accounting in which financial transactions are recognized in the period in which cash is transfered, not necessarily the period to which the event relates. Generally accepted accounting principles usually do not allow cash basis accounting.

Cash-flow - The inflows to and outflows from an entity, regardless of the sources.

Cash-flow statement - Also known as the statement of changes in financial position, this is one of the three main financial statements of a business. In most general terms, it shows why there is an increase or decrease in cash during the year. These increases and decreases are summarized into operating, financial, and investing activities.

Chart of accounts - The set of accounts used by a business that make up its general ledger. These accounts are standard to that organization, and all transactions must be recorded using these standard accounts unless a change is granted by management.

Cooking the books - A term for the process of making the financial results look good. Although there are many acceptable choices that can be made with respect to accounting policies, some of which make the books look better, “cooking the books” generally involves fraudulent methods of recording nonexistent transactions or transactions with values different from what is being recorded.

Cost accounting - Cost accounting is usually more narrowly defined as accounting for the costs of manufacturing goods and apportioning them to the correct products in the correct periods.

Cost of goods sold - The purchase or manufacturing costs of the goods that were sold during a particular period. The costs related to the goods not yet sold are accounted for in inventory on the balance sheet.

Current assets - A category of assets on the balance sheet that represents cash and assets that are expected to be converted into cash within one year.

Current liabilities - A category of liabilities on the balance sheet that represents financial obligations that are expected to be settled (paid) within one year.

Current ratio - A solvency ratio that measures whether a business has enough resources to pay its bills in the next 12 months. It is calculated by dividing current assets by current liabilities.

Debits and Credits - Accounting terms representing the increases and decreases in ledger accounts. Debits represent increases to assets and expenses, and decreases to liabilities, revenue, and equity accounts. Credits represent increases to liabilites, revenue, and equity accounts, and decreases to assets and expenses.

Debt - The amounts owed by a business to outside persons or businesses. It is sometimes more narrowly defined as to exclude accounts payable and only include loans that have fixed interest rates and repayment schedules.

Financial statements - The main summary financial reports produced by a business’s accounting and bookkeeping system. The three main financial statements are the business sheet, the income statement, and the cash-flow statement.

Fixed assets - An older term for capital assets.

Generally Accepted Accounting Principles (GAAP) - The collection of standards and practices required to be used by businesses to record and present the results of their financial activities and their records of what they own and what they owe. GAAP can be different between industries and between countries.

Gross income - Another term for revenue.

Gross margin - Represents revenue minus the cost of goods sold in the period.

Income statement - One of the three major financial statements of a business. The income statement shows operating activity over an operating period from revenue, expenses, and extraordinary gains and losses.

Insolvent – A term used to describe a business that does not have enough assets to meet its debt obligations in the short term. Insolvency must be corrected quickly or it could lead to bankruptcy.

Inventory - Goods held for resale but not yet sold at the end of an operating period.

Liability – Something that is owed by the business to outside parties. Liabilities can be current or long-term, depending on when the obligations is to be settled.

Liquidity – The ability of an asset to convert into cash or its ability to be easily sold. Assets are shown on the balance sheet in the order of their liquidity, the most liquid (cash) being listed first.

Long-term liability – An obligation that is not expected to be settled within one year. The current portion of these liabilites is shown in the current liability section of the balance sheet.

Management accounting – The accounting done internally to assist managers in their decision-making role. Management accounting generally encompasses budgeting, forecasting, unit costing, and ratio analysis.

Net book value – The difference between the original cost of a capital asset and its accumulated depreciation.

Net income – The income left in an accounting period after all expenses have been deducted from revenue. The term net income is only used if the revenue exceeds the expenses.

Net loss - The deficit for an accounting period that occurs when the expenses for that period exceed the revenue.

Owners’ equity - The amounts owed by a business to its owners rather than outside parties.

Periodic inventory – A method of accounting for inventory by which all purchases throughout the operating cycle are posted to cost of goods sold. Inventory is physically counted at the end of the period, and the adjustment for goods sold is made at that point. With this method, inventory is correct only at the end of the period.

Perpetual inventory – A method of accounting for inventory by which goods are recorded as being removed from inventory as they are sold. With this method, inventory is always theoretically correct and is checked against a physical count at the end of the period.

Posting – The process of summarizing general journal entries and recording them in the general ledger.

Profit and loss statement – Another name for an income statement.

Retained earnings - The amount of cumulative net income that remains in the business that has not been paid out to the owners.

Revenue – The amount of net assets generated by a business as a result of its operations.

Solvency – The ability of a company to settle its liabilities with its assets.

Statement of cash flows - One of the three main financial statements. The statement of cash flows explains the changes in assets, liabilities, and net equity for the period.

Taxable income – The amount of the net income that is subject to income tax. It will differ from net income per the financial statements by any differences between GAAP and tax regulations.

Total debt ratio – A measure of the long-term solvency of your company. It is calculated by dividing total debt by total assets.

Transaction – A financial business event that is recorded in a business’s books.

Write-down – An accounting entry to reduce the carrying value of an asset, such as inventory, to its market value.

Write off – A slang term for expensing a cost in the books of a business.