Accounting, you either love it or hate it, but there is no getting around it…
From the sole proprietor to the CEO of a large corporation if you are in business you have got to have, at least, a basic level of accounting knowledge and be able to read, if not prepare, financial statements. The following provides definitions of basic accounting terminology that everyone should know the meaning of:
- ASSETS: Things you own and which are convertible into cash. They must be quantifiable (able to be measured and counted) for them to be listed on the Balance Sheet.
- CURRENT ASSETS: Assets that can be converted to cash within one year
- CURRENT LIABILITIES: Things that are owed (debts)
- EQUITY: The difference between Assets and Liabilities. The ‘worth’ of the business
- FIXED ASSETS: Assets with a useful life exceeding one year, and will not be converted to cash within a year
- GROSS INCOME: Total Revenue (sales) less the Cost of Goods Sold (cost of sales). Gross Income is a measure of how well a company is utilizing its capital and capacity.
- LIABILITIES: Obligations due within one year
- LONG-TERM DEBT: Loans, mortgages, and other debt with maturities of more than one year
- NET EQUIPMENT/FACILITY: The original cost of fixed assets (land, buildings, vehicles, etc.) less accumulated depreciation
- OPERATING INCOME: Income resulting from a business’s primary operations, excluding any extraordinary income and expenses. Also termed Earnings Before Interest and Taxes (EBIT), it presents a more accurate picture of a business’s profitability than does the Gross Income.
- ACCRUAL BASED ACCOUNTING: Means Revenues are reported on the Income Statement when they are received. When a sale is made by no cash is received an Account Receivable is recorded. Under the accrual method expenses are also reported when the cash is received.
- COST OF GOODS SOLD: The direct costs associated with the production of the products/services sold by the company. This includes the cost of production materials, labor costs of production, and any other direct production costs.
- CAPACITY: The business’s ability to repay debt in a timely basis. It is determined by deducting total cash outflows from the company’s total income during a month.
- CAPITAL: Money invested in the business to generate income.
- CASH BASIS ACCOUNTING: Means recording Revenues and related Expenses only when the corresponding cash is received.
- GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: GAAP are the standards and commonly accepted ways of recording and reporting accounting information.
- GROSS MARGIN: Revenues (sales) less Cost of Goods Sold. Gross Margin represents the amount of revenue the business retains after incurring the direct costs of production of the product or service.
- NET INCOME: Equal to net earnings (profit). It is Sales less the Cost of Goods Sold, less SG&A (sales, general, and administrative) expenses, depreciation, interest, taxes, and all other expenses.
- ACCOUNTS PAYABLE: The amount of money a company owes creditors/suppliers, etc. in return for goods or services delivered.
- ACCRUED EXPENSES: An incurred expense that has not as yet been paid.
- BALANCE SHEET: A financial report that summarizes a company’s assets, liabilities, and equity as of a given date.
- CREDIT: An accounting entry that decreases assets or increases liabilities or equity.
- DEBIT: An accounting entry that increases assets or decreases liabilities or equity.
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization
- FAIR MARKET VALUE: The price that property would sell for on the open market.
- FIXED EXPENSES: Payments that occur on a regular bases: rent, utilities, etc.
- GOODWILL: The established value of the company’s Brand regarded as a quantifiable asset. The excess price of the business over its market value.
- NET SALES: Gross Revenues less returns, allowances, and discounts.
- OPERATING EXPENSE: An expense not directly associated with the production of a product/service, ie. promotion, taxes, salaries, healthcare.
- PROFIT & LOSS STATEMENT (P&L): A financial report that summarizes the business’s performance, detailing revenues and expenses over a period of time, ie. month, quarter, year.
- TRIAL BALANCE: A report in which all ledgers are compiled into debit & Credit columns in order to ensure a business’s double-entry bookkeeping is correct.
- RETURN ON INVESTMENT (ROI): The evaluation, in percentage terms, the performance of the business as it relates to invested funds. ROI = Net Profit divided by invested capital.
- REVENUE: Total amount of Revenue prior to any deductions for returns, allowances, and discounts.
- VARIABLE EXPENSES: Expenses that vary, ie. marketing
- WORKING CAPITAL: Current assets less current liabilities. Indicates the amount of money that can be put to work.
- * We thank Callie Melvik of Rasmussen College for her help in compiling this glossary.
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