Accounting is no different from any other industry in having its own lingo. Accounting terminology is exceptionally complicated, making it impossible for someone without background in the field to grasp and comprehend every single one of them.
Even if your accountant handles the majority of your company’s accounting procedures, it is still important for you to become familiar with the terminology related to it so that you can make better short- and long-term decisions. This will give you a better understanding of your company.
Here are the top 30 accounting phrases (along with their definitions) that you should be familiar with for your business endeavours.
1. 401(k) and Roth 401(k)
Employee savings schemes are similar to 401(k) plans. They are provided by the employer and mostly financed through a payroll deduction made by the employee. In addition to 401(k) plans for private businesses, various comparable programmes are available for other organisations, including 403(b), 457, and Thrift Savings Plans (TSP) for schools and public institutions.
An asset is a distinguishable component of the business’s assets with a positive economic value for the latter, that is, a component producing a resource that the entity owns as a result of past events and from which it anticipates future financial benefits. All of these things correspond to what the company possesses (its revenue). Fixed assets and current assets are the two categories that make up the assets.
3. Account receivable
A company with numerous clients must identify its receivables. The amount of unpaid invoices that are still outstanding after a business has delivered goods (or products) or services to its clients is included in the account receivable.
4. Accounting Period
The accounting period identifies the time frame in which a corporation records all of its economic data in order to generate its financial statements. The length of an accounting period is typically twelve months. This time frame is typically a calendar year, though this isn’t always the case. Bringing together the representations of an organization’s value and performance is the goal of the accounting year.
5. Balance sheet
The balance sheet is a financial statement that summarises the position of the company’s finances at a specific point in time, typically the year’s end. It lists the company’s assets and liabilities, or the resources committed to funding the company’s assets (e.g., share capital, loans, etc.).
6. Book value
Generally speaking, the word “book value” in accounting refers to a company. A company’s equity, which is the total of all of its assets less all of its liabilities, determines its book value. It enables potential investors to understand what a firm is worth when all of its debts and assets have been repaid.
Book value = Total assets – total liabilities
7. Cash flow
The term “cash flow” describes the inflow or outflow of cash that a firm experiences over a given period of time. Therefore, a cash flow refers to the movement of money in liquids that was caused by the regular business operations of the corporation during the fiscal year.
8. Certified public accountant (CPA)
The certification of a chartered accountant, which differentiates qualified accounting specialists devoted to defending the public interest, is a licence required for the practise of chartered accounting.
An accountant must complete a four-part exam and at least 150 hours of rigorous accounting coursework in order to obtain a CPA licence.
9. Cost of goods sold (COGS)
The total sum that a company pays its suppliers when it sells items is known as the cost of goods sold. In general, the concept of “cost of purchases of goods sold” can be expressed by asking how much the customer’s purchased goods cost. By concentrating on the items bought and changes in inventory, you can find this purchase cost by looking at a company’s income statement.
Purchase of goods plus change in inventory (starting stock minus final stock) equals cost of goods sold (COGS). After inventory, a final stock estimate is made.
In accounting, a credit denotes a transaction that resulted in a debt or a profit. A credit transaction can therefore be used to lower a debit balance or raise a credit amount.
11. Current assets
Current assets are made up of things that are used to calculate accounting income but aren’t meant to stay on the balance sheet for a long period. It includes prepaid expenses, trade receivables, and inventories.
All transactions where the business is owed money by other parties are represented by accounting debits. For instance, if a customer purchases a good or service from a business but does not pay for it, this transaction is recorded in the debit column.
Depreciation (formerly known as “provisions for depreciation”) is a financial term that refers to the loss or decline in asset value that is recorded at the conclusion of a company’s fiscal year. Depreciation is the unilateral accounting acknowledgement of a company’s poverty or/and a depreciation of its assets.
A company can fund its operations through debt, equity, or a combination of the two. Equity is money that shareholders or investors invest in the business.
Variable costs, also known as operating costs or activity costs, are associated with business operations and are based on the volume of tasks carried out by the company.
On the other hand, fixed fees, often known as structural fees, are unrelated to the level of company activity. Even if the company does not make any revenue, they nevertheless incur costs.
These costs exist for the operating, financial, and extraordinary expense kinds that are listed in the income statement.
16. Fixed assets
The phrase “fixed asset” in accounting refers to property designed to perform a company’s function over time. Financial fixed assets, tangible fixed assets, and intangible fixed assets are the three types of fixed assets.
17. Generally Accepted Accounting Principles (GAAP)
A set of guidelines, regulations, and principles known as generally accepted accounting principles (GAAP) must be adhered to by Canadian public firms when creating their financial statements. By creating a standardised accounting system, GAAP makes it simple to compare businesses with one another, even those in completely unrelated industries.
18. Gross margin (GM)
The tax-free difference between the selling price and the total cost of the goods and services sold is known as the gross margin. As a result, it enables one to determine if a particular activity is likely to be profitable or not. Setting a gross margin per product, for instance, will be helpful when creating a price strategy and enable suppliers to be negotiated purchasing costs.
19. Gross profit (GP)
Gross profit is the money a company has left over after deducting all of the direct expenses associated with creating or acquiring the goods or services it offers. The more the business can contribute to indirect costs and other expenses like interest, the higher its gross profit will be.
20. Income statement (profit and loss statement)
The income statement is an annual accounting statement that lists all of a company’s earnings and outlays for a specific time period. It provides the company’s bottom line. There is no room for compensation between spending and revenue items. The profit or loss for the accounting year is the sum of the expenses minus the income (balance). It allows one to see whether there are too many or not enough resources.
A company’s inventory refers to the process that enables a census of all the items it owns as of a particular date. Although it is frequently done right before an accounting period comes to a conclusion, taking inventory is not required. This actual time provides for a greater link between the stock and the accounting records.
Items that are included in the company’s assets yet have a negative value for the entity are referred to as liabilities. It contains all of the company’s obligations to third parties, which enable it to fund its assets but result in a drain on resources. Together, they make up the balance sheet for the corporation and are symmetric on the asset side.
23. Net income
Is the amount of book profit that remains for a business after all costs have been met. Net income is calculated by deducting sales revenue.
24. Net margin
Is determined by dividing a company’s revenue for a certain accounting year by its net profit for that same time. With the aid of this indicator, it is possible to evaluate the overall success of a company after each sale of a good or service.
The first level of profit, which is obtained as follows, corresponds to the gross margin.
Turnover – charges = net margin.
The phrase “payroll” refers to the sum of money given to a natural person as compensation for labour. On a payslip with security, the pay is calculated. There are many variables used in the payroll calculation that relate to wages and employer costs.
26. Present Value (PV)
Present value (PV) is the higher of the asset’s market worth and use-value, which is the value of the anticipated future financial gains from using the asset and selling it.
For instance, if an asset has a market value that is higher than its worth when used and lower than its net book value. In order for the good to be valued in the balance sheet at its market value, depreciation must then be recorded for the difference between these two values.
A document used to acknowledge payment for a good or service is known as a payment receipt, or simply “receipt.” It is sent to the lessee (buyer), who receives the commodity or service, by the lender (seller), who will provide an invoice.
28. Return on Investment (ROI)
Return on investment, sometimes known as ROI, is a metric for comparing returns on investments. The benefits of the investment divided by the investment’s cost serves as the basis for calculating the return on investment.
To compare various investments, the return on investment is therefore a crucial metric. When you account for the amounts invested as well as the money that has been won or lost, it calculates the return on investment.
29. Trial Balance (TB)
An accounting statement used in a double-entry accounting system is the trial balance. The report adds up all the debits and credits and is used to spot any transcription mistakes. After numerous records have been entered, it is frequently prepared towards the conclusion of the accounting period. One frequent and automated feature of contemporary accounting software is the development, updating, and reporting of the trial balance.
30. Variable Cost (VC)
Costs that change according to the number of a business’s tasks are called variable costs. In management accounting or cost accounting, this phrase is employed. It alludes to a group of fees that change depending on the difficulty of the company’s tasks.
Contrary to fixed costs, which don’t change over time no matter how many jobs the organisation completes during that time, variable costs fluctuate. A variable cost fluctuates roughly in proportion to the output. This cost is made up of production-related running expenses, hence it is somewhat correlated with the revenue generated.
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