26 Accounting Terms All Business Owners Must Know
The finance domain consists of its own accounting terms and definitions that maybe incomprehensible to laymen. You often go baffled after sitting with your accountant or while going through your accounting software. Although, a business owner or CEO must definitely be aware of these terms and what it means to take more informed decisions. Having knowledge on these aspects help for effective communication on financial matters as well as to run a successful business. We have curated such 25 accounting terms and definitions that will be useful for you in the long run.
1. Accounts Payable
Accounts Payable are short-term dues owed by your firm to its creditors. It is the amount payable for the goods and services purchased on credit that needs to be paid in a short period of time. Accounts payable comes under Liabilities. Stock, services, or utilities may be considered as Accounts payable.
2. Accounts Receivable
Account receivable is the amount owed to your company for the goods or services used on credit by the customers. Account receivable is charted as current asset in the balance sheet.
3. Admin Expense
Admin expenses or administrative expenses are expenses your company incurs which is not specifically bound to any function like production, manufacture or sales. As mentioned, these expenses are not related to any specific department or unit but to the whole organization.
E.g. Salary of the senior executives
General expenses – IT utility expenses
Assets are tangible and intangible resources your company owns that produce value in the future. Assets are generally reported on a company’s balance sheet. It is brought out to bring benefit to the operations of the organization.
Example of assets
Tangible Assets – cash, equipment, Land, Property, Tools, vehicles
Intangible assets – stock, debtors, prepaid expenses, copyrights, patents, and trademarks, account receivables, bank accounts
5. Balance Sheet
A balance sheet presents the company’s assets, liabilities, and shareholder’s equity. A balance sheet is one of the key reports to evaluate a business’ performance. The balance sheet gives the picture of what the company owns, owes, and investment amount.
6. Bank Reconciliation
Bank Reconciliation is a process that matches the cash balance in your company’s books of account with the corresponding cash balance in the bank account. Bank reconciliation should be conducted at regular intervals to ensure that your account records are accurate. It helps to detect fraud and cash distortion.
A contact in accounting is any person or company associated with your company you need to keep track of. The Contact can be a Supplier or Customer or both.
8. Cost Of Goods Sold
Costs of goods sold (COGS) refers to the amount which includes cost of materials and labor that incurred to produce the goods or service. It is the answer to, how much it costs to create a product. Cost of goods sold includes direct material and labor expenses that make up the production of an item.
9. Current Liabilities
Current liabilities represent the short-term obligations of a company to be paid to the creditors within a year. It is an account payable which requires full payment within the current accounting period.
Current liabilities come under liabilities in the balance sheet. It is considered as the payment for revenue generated from functional activities of the company.
10. Detailed General Ledger
Detailed general ledger is the fundamental report of all your business activities. It contains all the debit and credit transactions performed by the company. It is the summary of your business transactions.
Dividend is the distribution of portion of your company’s earnings to a particular division of the shareholders. It is typically determined by the board of directors of the company. Dividend can be given in the form of cash or stock.
Equity is the residual value of the owner’s interest in a company after all the debts are paid off. Equity is generally referred as shareholders’ equity for corporations and owner’s equity for sole proprietorship.
How to calculate equity:
Equity = Assets – Liabilities
An expense of a company or an individual is the cost incurred by the attempts to generate revenue. Expense is the money spent in the activities for making profit while running a business.
14. Income Receipts
An income receipt contains the details of the cash received by your company. It often acts as a proof slip to show that the money has been paid. The income receipts section under income contains a list of all the income receipts of your company as a reflection of the paid invoices.
An invoice is a document or bill issued by you to the customer notifying the payment of goods or services. Payment terms include the transaction list, payment amount and date, and due amount to be paid too. Invoicing is important as it enables quick payment of the products provided by you.
Journal is a record of all the financial transactions of your business sorted by date. Also known as book of original entry, journal helps in further transfer or reconciliation of the data.
An entry in Journal gets updated automatically when a transaction happens as well as a new journal can be added manually.
Liabilities are the financial responsibilities a company owes to its suppliers or contacts. It is the existing obligations of the company, based on past transactions, intended to meet in the future. Liabilities also referred to as ‘payables’ are found on a company’s balance sheet. On a balance sheet, Liabilities are categorized according to the due time of the obligation – Long term liabilities and current liabilities.
Current liabilities: Current liabilities are financial obligations payable within a year.
Other current liabilities: Other current liabilities are those current liabilities that are not listed into any specific category on the balance sheet.
Other liabilities: Other liabilities are liabilities that a company must pay but that are too small to record separately on a balance sheet.
Long term liabilities: Long term liabilities are those liabilities that are not due until at least a year later.
18. Opening Balance
Opening balance is the initial amount of money available in the beginning of an accounting period. It could be the amount that is brought forward from the end of a previous accounting session or as a new start.
19. Other Current Liabilities
Other current liabilities are those current liabilities that are not listed into any specific category on the balance sheet.
20. Purchase Receipt
A purchase receipt contains the details of the cash spent by your company. It serves as a basis to show that the money has been paid. The Purchase Receipts section under Expense consists of a list of all the payment receipts of your company as a reflection of the paid invoices.
Product is the goods or services involved with your company. Every business places reliance on products to produce revenue. This section functions to track goods and services provided and taken by your company. A list of all the products related to your business can be viewed here.
22. Product Category
A product category is a group of products providing similar benefits. Product category represents a type of product or service that help your organization to organize your products. Categorizing products according to similarity provides insights into marketing trends and customer experiences.
23. Profit and Loss Report
The profit and loss report or the income report details the total income and expenses of your business at a given point of time. It gives a financial overview of your company by measuring the profit by cutting the expenses from income.
24. Trial Balance Report
The trial balance report is a document that lists the closing balances of each general ledger account of the company. It helps to find the disparities in the sum total of your accounts and ensure that all your accounts are in balance.
VAT is a type of tax levied on good and services at each stage of its sale, initiating from the production stage to the final consumer of the product.