Business owners spend hours attending meetings with the accounting department.
Since cash flow is one of the important aspects of any business, every business owner needs tight scrutiny and checks to maintain accurate records.
However, if you are not from a finance background, you may spend additional hours to understand these concepts while missing important discussions in a meeting.
We have gathered the top 50 terms to help business owners save time while attending their next meeting with the finance department.
We divided these terms into three layers: balance sheet, income statement, and general terms.
Part 1: Balance Sheet Terms
The balance sheet is a financial report that lists a company’s assets, liabilities (what it owes), and shareholders’ equity. We have mentioned frequently used balance sheet terms in the coming section.
Anything with a financial value that the company owns is known as an asset. It is further divided into fixed and current assets. Fixed assets are the assets that give long-term benefits to the company while current assets can be converted to cash within one year.
2. Accounts Payable (AP)
It is the sum owing to a creditor for goods supplied or services rendered. All of the costs that a company has incurred but has not yet paid are included in accounts payable. It is listed as a liability on the balance sheet because it is a debt owed by the company.
3. Accounts Receivable (AR)
The sum of money that customers or clients still owe a company after receiving and/or using products or services. This is the amount that the company will receive in the current period or the next.
4. Accrued Expense
It is an expense that has been recognized in the balance sheet but has not yet been paid.
5. Book Value (BV)
The book value represents the original value of the asset at the time it was bought, less any depreciation.
6. Cash and Cash equivalents
These are liquid assets which include treasury bills and short-term certificates of deposit (CODs). It also includes the cash company currently has.
7. Customer Prepayments
Customer prepayments are made in advance to the customers by the company before the customers have provided their services.
8. Deferred Tax Liability
This is a tax liability that is recognized in the accounts but is due at a later date.
9. Dividends Payable
These are the dividends that have been authorized for payment but have not yet been issued.
Equity generally refers to assets minus liabilities. The amount left is what is owned by investors and owners.
11. Interest Payable
The interest that is yet to be paid is known as interest payable. It can also be compounded interest due to past periods.
Inventory is the goods available for sale. Inventory is purchased or manufactured by the company to sell to its customers. This account keeps on changing when restocking and generating sales.
Liability is what a company owes. It includes accounts payable and loans.
14. Marketable Securities
Marketable securities can be converted to cash quickly. These are equity and debt securities for which there is a liquid market.
15. Prepaid expenses
Prepaid expenses are the expenses that the company has already paid such as insurance, advertising contracts, or rent.
16. Retained Earnings
These are the total earnings a company either reinvests in the business or uses to pay off debt. The remaining amount is distributed to shareholders in the form of dividends.
Part 2: Income Statement Terms
An income statement is also known as a profit or loss statement. We have mentioned popular terms used in the income statement in the coming section.
17. Cost of Goods Sold (COGS)
COGS includes the costs that have been incurred directly for manufacturing a product such as direct labor costs.
Depreciation is a non-cash expense as it doesn’t directly affect the company’s cash flow. It is the gradual decline in the value of an asset over a period of time.
Expense is any cost incurred by the business during its operations.
20. Gross Margin
Gross Margin represents the profitability of a company after deducting the cost of goods sold. It can be calculated by:
Gross Margin= Gross profit/ Revenue for the same period
21. Gross Profit (GP)
It doesn’t include overhead expenses. It can be calculated by:
GP = Revenue – COGS
22. Net Income
Net income represents the profit earned by a company by subtracting all the liabilities from the given revenue. It is calculated by:
Net Income = Revenue-(Expenses)-(taxes)-(depreciation)
23. Net Margin
Net Margin is simply the percentage of net income. It is calculated by:
Net Income/Revenue for the same period
24. Revenue (Sales)
Revenue is the amount earned by a business through sale transactions.
Part 3: General Accounting Terms
In addition to the income statement, and balance sheet terms, there are some general terms used in bookkeeping that are important to understand. They are mentioned below:
25. Accounting Period
All financial statements contain a designation for an accounting period. The timeframe conveys the time covered by the statements.
26. Generally Accepted Accounting Principle
Generally accepted accounting principles (GAAP) are a collection of regulations and standards that businesses must adhere to when disclosing financial data. All publicly traded organizations need to abide by these regulations.
27. General Ledger
The whole record of a business’s financial transactions is kept in the general ledger. All of the financial statements are created using the general ledger.
28. Business Entity (Legal Entity)
This is a legal business that includes sole proprietorship, partnerships, limited liability corporations (LLC), S-Corps, and C-Corporations. Each entity is subject to different rules, regulations, and tax ramifications.
The procedure for gathering, documenting, and reporting on a business’s financial activities.
Capital is the liquid amount a company or an entity holds to spend on its expenditures.
31. Cash Flow
Cash flow refers to the inflow and outflow of cash in a firm. A positive figure shows that there was more money flowing into the company than leaving it, whilst a negative number shows the opposite.
32. Certified Professional Accountant (CPA)
An accountant that holds additional expertise as compared to a normal accountant, and passes competitive exams required by the government is called CPA.
An accountant can obtain the professional designation of CPA by passing the CPA exam and meeting the state-specific requirements for education and work experience.
A credit is an amount that increases a liability or decreases an asset account. In simple words, any money that goes out of your account will be known as credit.
A debit is an addition to an expense or asset account and a decrease in an equity or liabilities account. In simple words, any money that goes into your account will be known as debit.
Diversification is normally referred to as distributing capital among numerous assets such that the performance of any one asset should not determine the performance of the entire portfolio.
Furthermore, investors normally use this strategy to lower the risk.
The amount paid on a loan above the principal repayment is called interest.
37. Journal Entry
Updates and modifications to a company’s books are made through journal entries. Every journal entry needs to have an account code, a date, a debit or credit, an amount, and a unique identifier to be recorded.
It is how quickly something can be converted into cash. For instance, stocks are more liquid than real estate because you can sell equities more rapidly and convert them into cash.
Information that has the potential to affect decisions is referred to as material. All Material factors must be stated under GAAP.
40. On Credit/ On Account
On credit refers to buying a commodity while making the payment at a later date. When a purchase is made on credit, the money is deferred until a later date, but the buyer still receives the benefits of the purchase right away.
Expenses related to operating the firm are referred to as overhead. They exclude costs associated with producing the good or providing the service. For instance, rent and executive salaries are frequently included in overhead.
42. Payroll Account
An account that a company uses to track payments for employee salaries, wages, bonuses, and deductions is known as payroll.
43. Present Value
Present value refers to an asset’s value right now rather than at a later date. It is predicated on the idea that, because of inflation, money now is worth more than money tomorrow.
A receipt is a record that attests to the payment’s existence. When a firm offers its product or service, it generates receipts to keep a record.
45. Return on Investments (ROI)
This phrase originally referred to a company’s profit return, divided by the investment needed. However, the phrase is now used more broadly to refer to returns on various projects.
46. Trial Balance
The trial balance is a complete statement containing all the debit and credit entries. Moreover, it also mentions any disagreements that can indicate an error in the statement.
47. Variable Cost
Variable costs fluctuate based on multiple factors in a business. These are not fixed costs that a business has to pay, rather they vary and are highly dependent upon their factors.
48. Subsidiary Account
Accounts that fall under a control account are called subsidiary accounts. For example, “supplies” include “office supplies” and “cleaning supplies”, and this account will be known as a subsidiary account.
A write-down or write-off is a financial transaction that lowers the asset’s value.
50. Promissory Note
A promissory note is a written promise to pay back a loan.