If you are feeling a little lost when it comes to talking about accounting and bookkeeping, you’re not alone. Sometimes accounting terms can get confusing, and the many words and acronyms used doesn’t help.
If you are working with a good accountant, they will be able to explain the most complicated accounting concepts to you in easy terms. But going in with a basic knowledge of accounting terminology can help bridge the gap.
This will make it easier to talk “business” with other lenders, investors and professionals outside of your accountant’s office.
To get you started, here are the most common accounting terms you will hear when running a business:
Accounts receivable (AR) – The amount of money owed to you by clients.
Accounts payable (AP) – This is money that you owe to a vendor, creditor or supplier.
Accruals – Transactions where cash has not been exchanged. This includes account receivables, which is revenue earned that has not been collected, or accounts payable, which is expenses incurred that have not been paid for. You may also have accrued tax liabilities that need to be remitted to the government or vacation accruals, which is vacation pay earned but not yet taken.
Accrual basis accounting – This is an accounting method where income is recorded when a sale is made -whether or not payment is received at that time. Similarly, expenses are recorded when goods and services purchased are received, not when they are paid.
Assets – These are items of value that you own. This includes current assets, such as cash, prepaid expenses, inventory, account receivable, which can be converted into cash within the year. It also includes long term or fixed assets, such as equipment, vehicles and real estate, that provide benefit to a company for more than a year.
Bad debt – This is an accounts receivable that you are not able to collect on. For example, you performed work for your client, and they are now unreachable or have filed for bankruptcy. It is important to note that bad debt may be tax deductible.
Balance sheet – This is one of the three core financial statements. It summarizes your company’s assets, liabilities owed and equity, which is money you have put into the company as well as net profits you have retained in the company over the years. This statement reflects the company’s financial position (what it owns and owes) as of the date of publication
Capital – Money or assets owned by your company.
Cash basis accounting – This is an accounting method where you record income when cash is received, and you record expenses when you pay your bills.
Cash flow – Money that moves in (revenue) and out (expenses) of your business.
Cashflow statement – This is a financial statement that shows the movement of cash over a specific period of time. It also shows how much cash you have available. This statement is important for ensuring you have the funds to pay staff and vendors as money is due.
Cost of goods sold (COGS) – Expenses directly related to producing goods to sell. This can include raw materials (i.e. wood to make a shelf or ingredients in baked goods) and the labour directly related to producing the good.
Credit – A transaction that decreases an asset (when you pay a bill you credit cash), increases a liability (when you receive a bill you credit AP) or increases equity (when you invest in your own company).
Debit – A transaction that increases an asset (when a customer pays a bill you increase cash), decreases a liability (when you pay a bill you decrease AP) or decreases equity (when withdraw money from your own company).
Depreciation – The reduced value of an asset over its lifetime, usually due to wear and tear. This is used to track the value of long term assets such as computers, vehicles and equipment over their foreseeable lifetime.
Equity – Money/assets invested in the company by the owners/shareholders. This may be referred to shareholder equity or owner equity and is equal to assets less liabilities. When a business sells, the equity is paid out to the owners/shareholders.
Expenses – Costs associated with doing business. There are different types of expenses:
Fixed expenses – Costs that don’t vary and must be paid regardless of performance. This includes rent, utilities, regular wages, etc.
Variable expenses – Costs that vary in relation to sales, production, etc. This could include postage, materials, overtime wages, etc.
Operational expenses – Expenses that are related to a businesses day-to-day operations. Operational expenses can be fixed or variable.
Accrued expenses – Expenses incurred but not paid.
Fiscal year – The time-period a company uses for accounting purposes. Common fiscal years are January to December and April to March.
General ledger – Complete record of business transactions over the life of a company.
Gross profit – Revenue less COGS.
Income statement – An important financial statement that gives an overall picture of your company's transactions including revenue, gross income, expenses and net income. It also shows whether a company is making profit or loss for a given period.
Liabilities – Debts and financial obligations. This includes current liabilities that are payable within a year, such as money owing to suppliers and tax payable. Long-term liabilities are payable over a longer period of time, such as mortgages, pensions etc.
Liquidity – How easily a business can convert assets to cash.
Net profit – Total earnings equal to revenue less expenses, usually before tax is deducted. If your expenses are greater than your revenues, you will have a net loss.
Profit and loss statement – Also known as the P&L statement. See income statement.
Revenue – Total amount of money your company generated before expenses.
Working capital – Amount of cash you have available after you subtract current liabilities from assets.
Do you have any further accounting questions for your Ontario-based business? Get in touch with Koroll & Company today. We would love to answer any questions that you may have!