Understanding Accounting Jargon

Accounting is full of technical jargon and unfamiliar terms that can be frustrating to small business owners. This is perhaps one of the main reasons why small business lack confidence when it comes to bookkeeping. According to Quickbooks 2015 Small Business Accounting Report, only 40% of business owners surveyed considered themselves to be “extremely” or “very knowledgeable” in the areas of accounting and finance. In this blog post, we highlight some of the commonly-used accounting jargon so that you can feel more confident when speaking to your accountants or bookkeepers!

Accounts Receivable

Accounts receivables are any debts owing to you by customers.

Accounts Payables

Accounts payables are debts owing to suppliers for goods or services purchased.

Accrual Basis

Under accrual basis of accounting, income is recognized when services are rendered (although customers have not paid up), and expenses are recorded even when the bills are unpaid.

Accrued expenses

A list of expenses that have been incurred but are not yet billed by suppliers.

Assets

Assets are resources containing economic value that are expected to provide benefits in the future. These could include current assets, such as inventory, cash, accounts receivables, or fixed assets, which include property, vehicles, or machinery.

Bad Debt

Bad debt refers to any amounts owing from customers that are uncollectible.

Depreciation

Depreciation reflects the gradual decrease in value of an asset over a period of time.

Expenses

There are various types of expenses in accounting:

Fixed expenses - Costs that remain constant despite variations in sales or production; for example, rent, wages or utility bills.

Variable expenses - Costs that fluctuate depending on sales and production; for example, if you are a bakery, your production costs will increase with increased sales.

Operational expenses - Costs that are integral to running of your daily operations; for example; office supplies, software subscriptions, consulting fees, etc.

Financial Year

Financial year refers to the period of time used by a company for the compilation of financial reports in accounting.

Financial Statements

Financial statements are formal records that communicate the business activities and the financial performance of a company. Financial statements include the balance sheet, income statement and the cash flow statement. Read more here.

Forecasting

Forecasting is the process of anticipating future trends using the company’s historical data.

General Ledger

Accountants use a general ledger to record financial transactions and data for companies. It includes debit and credit account records.

Gross Profit

Gross profit refers to the profit businesses make after subtracting the costs related to supplying their services or making and selling their products.

Inventory

Inventory refers to the materials used by a company to produce the goods for sale to customers. For a company where no production takes place, its inventory will refer to finished goods ready for sale.

Journal Entry

This refers to a business transaction recorded in a business’s general ledger (includes the journal entry date and number, account name and number, debit, and credit).

Liabilities

A liability is when someone owes someone else money. Types of liabilities can include loans, mortgages, accounts payable, and accrued expenses.

Net Profit

Refers to the income remaining after all expenses are subtracted from revenue.

Revenue

Revenue refers to earnings made from the sale of goods and services, before deduction of any expenses.

Shareholders’ equity

Equity refers to the funds contributed by the shareholders (or owners) of the company.

Retained Earnings

Retained earnings refers to the accumulation of earnings (revenue less expenses) of the company in the balance sheet.

Working Capital

Refers to the balance after deducting current liabilities from current assets. It is the amount of funds available for daily operations of the company.

Speak to your accountant

We understand that making sense of accounting jargon as a layman can be overwhelming at times. If you have any queries, feel free to drop us a message or email us and let us know how we can assist you. Our general response time is one business day.

Sources:
"What’s My Accountant Talking About? Jargon Explained"
https://www.quaderno.io/blog/whats-accountant-talking-jargon-explained. Accessed 5 June 2021