The Importance of Understanding Accounting Terms & Definitions
Creating, reading and understanding your financial lingo and reports is key to understanding the health of your business.
Business owners may find this accounting dictionary useful for understanding basic accounting terms, concepts, and acronyms. A broad understanding of the major principles of accounting can help business owners keep track of and analyze their business’s financial information.
This is key to making sound business decisions to help you grow, prosper and succeed.
- Accounts Payable Money that you owe to suppliers and creditors.
- Accounts Receivable Money that is owed to you.
- Assets Any and all items of value owned by a business, such as money you have in the bank, equipment, inventory.
- Bank Reconciliation Comparing the bank’s records of transactions with that of the business. Both records must have the same balance at any point in time.
- Capital The total amount of a business’s borrowed and owned funds. This often is what you have available to fund operations.
- Cash Flow Cash Flow is how much money is going into your business, how much is going out, and what is leftover.
- Statement of Cash Flows Although this is one of the most important financial statements, it is often ignored. The Statement of Cash Flows shows the cash in and out of the business. These inflows/outflows typically represent 3 main categories – Operating, Financing and Investing. This is the statement that reflects a firm’s liquidity.
- Cost of Goods Sold The costs directly related to producing the product that you sell. These can be direct costs such as parts, or indirect costs, such as labour. Typically used for businesses that sell products.
- Cost of Services Industries that are service-based would use this account to track expenses related to providing the direct sale of services. Sales less COGS equals your Gross Profit.
- Depreciation Tracks the value of an item over time. Depreciation is usually calculated on asset purchases that will have value for more than a year, such as a computer or manufacturing equipment.
- Dividend The distribution of a company’s profits among members and shareholders.
- Financial Statements Reports created from accounting records to summarize a business’s financial status. These are key to understanding the financial health of your business to make informed business decisions. The main ones to keep an eye on are Profit & Loss, Balance Sheet, Cash Flow, Accounts Payable and Accounts Receivable.
- Fixed Assets Things owned by a business such as land, facilities, vehicles and equipment that contribute to earning revenue, but are not sold as part of their regular business transactions.
- Fixed Costs Expenses that must be paid, regardless of income activity, such as overhead.
- General Ledger Contains all the accounts for recording transactions relating to a company’s assets, liabilities, owners’ equity, revenue, and expenses. It represents the opening balance of an account, lists all of the transactions that have taken place within the account, and then provides a closing balance of that account, which is what your financial statements are created from.
- Gross Profit Net sales minus the cost of goods sold equals gross profit.
- Income Statement A financial statement that shows a company’s financial activity over a period of time, such as a month, quarter or year. It includes income, costs of goods sold, expenses, and the resulting profit or loss. Also called a Profit and Loss Statement.
- Inventory The value of items a business purchases as part of its services and of goods they have for sale.
- Net Profit All forms of income less all expenses over the same period equals net profit.
- Net Worth The owner’s interest in a business. All liabilities less the business’s assets equal net worth.
- Non-Cash Working Capital All current assets net of cashless all current liabilities equals non-cash working capital. Banks or investors use this in determining how much working capital is required by the business to support ongoing operations.
- Operating Expenses Expenses incurred from running a business during an accounting period. It does not include the cost of goods/services sold.
- Petty Cash A small amount of cash on hand for minor expenses.
- Retained Earnings The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period.
- Return on Investment (ROI) Net profit vs. invested amount, after income tax.
- Term Loan A loan that is given for a fixed period of time and is paid in regular installments.
- Trial Balance A report which lists all of the accounts in a company’s financial record-keeping system and their balances. The value of all the debit value balances equals the total of all the credit value balances.
- Variable Costs Business expenses that vary from period to period, such as advertising or commission costs. Unlike fixed costs which are consistent over time and not relative to sales.