One of the tasks that every new or seasoned business owner has to deal with is accounting – and whether you intend to do your own bookkeeping/accounting or hire professionals you will need to become familiar with some basic accounting terms.

These explanations of accounting basics will introduce you to some basic accounting principles, accounting concepts, and accounting terminology. Once you become familiar with some of these terms and concepts, you will feel more comfortable in engaging with your bookkeeper or accountant or simply be better equipped to manage your business.

Balance Sheet

Here are a few terms you’ll want to know when working with balance sheets:

Balance sheet: The financial statement that presents a snapshot of the company’s financial position as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal its liabilities in the balance sheet.

Assets: An Asset is anything that a company owns and can earn income through, for instance, cash, land, vehicles, investments, tools, equipment, furniture, house and building.

Liabilities: Liabilities are ‘debts’ that the company owes, for instance, loans, bonds, and bills.

Equity: All the money invested in the company by its owners. For small businesses, the capital account shows the equity of respective owners, whilst in large businesses or corporations, the owner’s equity may be represented by the value of the shares or stocks he/she owns.

Here are a few terms related to the income statement that you’ll want to know:

Income statement: A Financial Statement documents the difference in revenue and expenses resulting in income.

Revenue: The actual amount of money a company brings in during a particular time period; gross income.

Costs of goods sold: All the money spent to purchase or make the products or services a company plans to sell to its customers.

Expenses: The fixed, variable, accrued or day-to-day costs that a business may incur through its operations.

Some other common terms used in bookkeeping include the following:

Accounting period: The time period for which financial information is being tracked. Most businesses track their financial results on a monthly basis, so each accounting period equals one month.

Accounts payable: Accounts Payable are liabilities of a business and represent money owed to others.

Accounts receivable: Assets of a business and represent money owed to a business by others.

Depreciation: The reduction in the value of an asset over time.

General Ledger: A complete record of the financial transactions over the life of a company.

Interest: The money a company needs to pay if it borrows money from a bank or other company.

Inventory: The account that tracks all products that will be sold to customers.

 Journals: Where bookkeepers keep records (in chronological order) of daily company transactions.

Payroll: Lists the employees who receive a wage or salary. Managing payroll involves reporting the taxes to be paid on behalf of employees, unemployment taxes, and workman’s compensation.

Trial balance: How you test to be sure the books are in balance before pulling together information for the financial reports and closing the books for the accounting period.

Return on investment (ROI): A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment.

Net Income – Net Income equals revenue minus expenses, taxes, depreciation and interest.

Reconciliation: The process of comparing two sets of records to make sure they correspond with one another, e.g. comparing the bank account with the cash book to make sure there are no inconsistencies.

Statement of Account – A written document that shows all charges and payments; accounts receivable statement; accounts payable statement.

Disclaimer:

This article is for information purposes only and you are advised to seek professional advice from your own accountant as your individual situation will vary.