25 Accounting Terms All Business Owners Should Know
In the business world accounting terms are often used. There may be times you are unsure of some of the words that are stated by your accountant. To help aid that confusion here is a list of 25 common accounting terms:
1. Accounts Payable This includes all expenses that a business incurs but has not yet paid. On a balance sheet Accounts Payable is recorded as liability as it is a debt owed by the company.
2. Accounts Receivable Includes all of the revenue (sales) that a company provides but has not collected the payment on.
3. Accrued Expense An expense that incurred but hasn’t been paid is described by the term Accrued Expense.
4. Asset Anything that the company owns that has a money value. This value is listed in order of liquidity, from cash (most liquid) to land (least liquid).
5. Balance Sheet (BS) The financial statement that reports on all companies assets, liabilities, and equity.
6. Inventory Classify the assets that a company has purchased to sell to its customers that remain unsold.
7. Liability All debts that a company has yet to pay are referred to as liabilities. Common liabilities include payroll, loans, and accounts payable.
8. Cost of goods sold Expenses that are directly related to the creation of products and services. What are not included in this category are costs that are needed to run the business. An example of cost of goods sold is the cost of materials, or direct labor.
9. Depreciation This term accounts for the loss of value in an asset over time.
10. Expense Any cost that is incurred by the business.
11. Gross Margin A percentage calculated by taking gross profit and dividing it by revenue for the same period. This represents the profitability of a company after deducting COGS.
14. Net Income The dollar amount that is earned in profits. This is calculated by taking revenue and subtracting all expenses in a given period, including COGS, Depreciation, Taxes, and Overhead.
15. Accounting Period The accounting period is designated in all financial statements. The accounting period communicates the span of time that is reported in the statements.
17. Business Entity The legal structure, or type, of a business. Company formations include, Sole Proprietor, Partnership, Limited Liability Corporation (LLC), S-Corporation, and, C-Corporation. Each of these entities has a set of requirements, tax implications, and laws.
18. Credit An increase in liability of an equity account, or decrease in an expense account or asset.
20. General Ledger Is the complete record of a company’s financial transactions. The general ledger is used in order to prepare all financial statements.
22. Overhead Expenses that relate to running the business. They do not include expenses that make the product or deliver service.
23. Return on Investment This term is used to include returns on various projects and objectives.
24. Trial Balance A list of all accounts in a General ledger with their balance amount. The total debits must equal the total credits.
25. Variable Cost These are costs that change the volume of sales and are opposite of fixed costs. Variable costs increase more sales because they are expenses that are incurred in order for the sale.