Learn the Lingo: Do You Know These 17 Accounting Terms?
Double-entry accounting is an old discipline. Really old. Like, hundreds of years old. But it’s still in use today. It’s the bookkeeping practice that accountants and bankers and corporations use to report financial transactions.
And it’s the system that’s used to develop cloud-based accounting applications for small businesses. If you’ve decided that it’s time for you to implement such a solution for your company’s financial management, there’s some terminology that you will undoubtedly run across. Application developers try to make their sites more accessible with familiar language, but the concepts behind the words and phrases are the same.
Here are 17 you should know:
Accounts Receivable. Money your customers owe you that has been invoiced (usually) but hasn’t been received
Accounts Payable. Money you owe to individuals and companies that have provided you with products and services
Assets. Anything of monetary value that your business owns and uses in order to operate, like property, cash, vehicles, and office furnishings
Balance Sheet. A report that documents your company’s financial position — your assets must be equivalent to your liabilities and equity — on a specific date
Chart of Accounts. A master list of all of your company’s accounts (assets, liabilities, equity, revenues, expenses); transactions are assigned to more specific account categories like inventory, income tax payable, and interest income
Cost of Goods Sold. Direct costs related to the production of your company’s products
Credit. An accounting entry that decreases an expense or asset account, or increases liability or equity accounts
Debit. As opposed to a credit, it decreases a liability or equity account, or increases asset or expense accounts. Every transaction consists of a debit and credit that must balance each other. Small business accounting websites assign debits and credits in the background so you don’t have to deal with them.
Depreciation. It’s complicated. There are multiple methods that are used in accounting. Refers to fixed assets (machinery, computers, vehicles, etc.) that will be used for more than a year but which will decline in value. Cloud-based accounting applications sometimes venture into this territory, but it really should be handled by an accountant.
General Ledger. A master list of your company’s financial transactions
Income Statement. A report that is sometimes called Profit and Loss because it calculates your company’s profit or loss for a specific period
Invoice. A bill you send to customers for products and services they have received or are receiving
Journal. Records all of your company’s transactions with descriptions and debit/credit entries.
Liabilities. What you owe to suppliers and vendors
Purchase Order. A form that requests goods from a supplier
Revenue. Your company’s gross income
Statement. A document that provides an accounting of what customers owe (and sometimes, what they’ve paid) during a specified period
These are very simple definitions of complex concepts that are sometimes defined slightly differently by various accounting professionals. You don’t have to have a deep understanding of them if you use a cloud-based accounting application and consult with a financial advisor periodically, but it’s good to be acquainted with the theory behind the numbers.