Common Accounting Terms Business Owners Should Know

Accounting Period
A specific period of time covered by financial statements. Accounting periods can be one of several variations depending upon your business:

  • Monthly
  • Quarterly
  • Yearly

Accounts Payable (A/P)
This represents money your business owes for goods and services. A/P can range from your utility bill to the rent on your office to suppliers. Typically you will receive a bill from the vendor for these goods and services; which is normally due within 30 days.

Accounts Receivable (A/R)
The amount of money your business is due for goods and services you have provided. When you write an invoice, the invoice amount becomes a part of your A/R balance. Keeping track of and knowing your accounts receivable balance is an integral part of calculating your accounts receivable turnover, and may be beneficial for future endeavors.

Accrual Accounting
Records transactions when they occur, rather than when payment is made or received. You must use the accrual accounting method if you have employees.

Bank Reconciliation
The process that helps to ensure that your general ledger accounts balanced with your ending bank balance for a specific month. This process is designed to help locate and record any bank charges that may not have been included in your general ledger. It can also help locate any bank posting errors. Bank reconciliations should be executed each month for all active bank accounts.

Cash Accounting
Cash accounting records payments as they are received and expenses as they get paid, not when they’re incurred. Many sole proprietors or small businesses use cash accounting, however, if you have employees, you must use accrual accounting.

Cost of Goods Sold (COGS)
This refers to the direct cost of producing or purchasing product, merchandise, items, etc. that you will then sell. It’s important to keep track of your COGS so that you may accurately calculate your gross and net profits.

Credit
An entry that is made on the right side of any accounting transaction. A credit entry will increase liability or equity accounts, while decreasing an asset account.

Debit
Opposite of credit, debit is an accounting entry that is made on the left side of any accounting transaction. A debit entry increases an asset or expense account and decreases liability or equity accounts.

Depreciation
This represents how much of a particular asset has been “used” over a specified period of time. There are different types of depreciation:

  • Basic Method is a straight-line depreciation, this allows you to report equal depreciation expenses each year, until the asset has been fully depreciated
  • Declining balance
  • Double-declining balance
  • Sum-of-the-year’s digits

Expenses
Expenses pay for items or services, and reflect the cost of doing business. These are a necessity in order to earn revenue. Some examples of expenses you should track include Salaries, Advertising, Rent, and Commissions.

Equity
Stake in a business by owner

Generally Accepted Accounting Principles (GAAP)
These are a common set of rules that have been issued by the Financial Accounting Standards Board (FASB) and include: Basic accounting principles, Standards, and Procedures. Any publicly-traded company in the U.S. must comply with GAAP standards.

General Ledger (G/L)
A complete record of all of your accounting transactions.

Gross Profit
The amount of revenue left after you deduct the cost of providing a service or manufacturing of a product. To calculate gross profit, take your revenue and subtract the cost of costs sold (COGS). The total revenue left is considered your gross profit.

Liability
Reflects a financial obligation or promise your business owes to another entity/company. Liabilities can include:

  • Accounts Payable
  • Accrued Expenses
  • Payroll

Net Profit/Loss
Reflects the final profit or loss of a business after all expenses are calculated. Similar to gross profit, net income deducts the cost of goods sold from revenue received. However, in order to determine your net profit or loss, you will also need to subtract all other expenses from the revenue total.

Overhead
Reflects the cost of doing business that is not directly related to creating a product or service. These costs or expenses can include:

  • Office rent
  • Insurance
  • Utilities
  • Administrative personnel wages

Revenue
Income your business receives from regular business activity. This can range from selling products to providing services. Revenue is anything you receive when customers pay for goods or services.

Please contact our team for any accounting questions or needs you may have!