Accounting is a necessary and important part of running a small business, and it’s important to understand the vocabulary used when managing your books.

dictionary-1799_640-e1616466684279-blackwhite

We’ve put together a glossary of some of the most common and essential terms you’ll need to know to understand your accountants, and the various reports generated by your accounting software.

Accounts payable

The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered.

Accounts receivable

The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used.

Appreciation

When the value of an asset or investment grows.

Assets

Anything a business owns. Land, office buildings, furniture, computer equipment, machinery, copyrights, trademarks, etc. An asset is pretty much anything of value that can be converted into cash, whether in the short or long term.

Balance sheet

A financial report that summarises a company’s assets (what it owns), liabilities (what it owes) and owner or shareholder equity, at a given time.

Capital

A financial asset or the value of a financial asset, such as cash or goods.

Cash flow

The money coming into a business (income, sales, investments) and the money going out (business expenses).

Cost of goods sold

The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example this may include the cost of the raw materials (parts) and the amount of employee labour used in production.

Credit

An accounting entry that may either decrease assets or increase liabilities and equity on the company’s balance sheet, depending on the transaction.

Debit

An accounting entry where there is either an increase in assets or a decrease in liabilities on a company’s balance sheet.

Depreciation

When an asset or investment loses value, usually over a number of years. Common examples of assets that depreciate include automobiles and computer equipment.

Expenses

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

Liabilities (current and non-current)

A company’s debts or financial obligations incurred during business operations. Current liabilities (CL) are those debts that are payable within a year, such as a debt to suppliers. Non-current liabilities (NCL) are typically payable over a period of time greater than one year e.g. a multi-year mortgage for office space.

Payroll

The money paid to employees through salaries, wages, bonuses, and deductions.

Profit

A company’s net earnings, calculated by subtracting total expenses from total revenues.

Profit and loss statement

A financial statement that is used to summarise a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time, such as quarterly or annually.

Revenue

The total amount of money a business collects in exchange for goods or services.

Stock on Hand

The goods you have available to sell.

 

We hope this glossary of common accounting terms helps you to better understand your business’ financial position. Feel free to contact us with any questions or clarifications!