If accounting makes your head spin, you’re not alone. Many entrepreneurs feel this way—and rightfully so! It’s a complicated field, after all. But don’t worry, in this article, you won’t actually be doing any math (whew!). Instead, we’ll teach you some basic accounting terms you need to know in order to talk shop with other business owners. Trust us when we say this knowledge will come in handy should you ever decide to sell your company or bring on an investor.
1. Accounts receivable (AR): money customers owe for products or services they used. For example, a power company may bill a customer for the electricity he or she consumed during the prior month.
2. Accounts payable (AP): money a company owes to its debtors.
3. General ledger: a complete record of a company’s financial activities.
4. Journal entry (JE): a financial memo used to track and record each business transaction. A journal entry that is documented correctly will include the date, a description of the transaction, the accounts and amounts to be debited and credited, and a unique reference number.
5. Generally Accepted Accounting Principles (GAAP): a set of accounting standards, rules, and procedures outlined by the Financial Accounting Standards Board (FASB). Accountants who work for public companies in the U.S. must abide by GAAP when they compile their financial records.
6. Revenue (also known as gross income): a company’s total earnings before subtracting any expenses.
7. Cost of goods sold (COGS): the amount of money a company spends producing the products or services it sells.
8. Gross profit: the remaining income after COGS has been subtracted from total revenue.
9. Net income (used interchangeably with net profit): the remaining income after all expenses have been deducted from total revenue (click here for an easy explanation on how to calculate your net income).
10. Inventory: the items a company currently has in stock for sale to their customers or for use in the operation of their business.
11. Capital: the total number of financial assets a company has available on hand, including cash.
12. Fixed expenses: regular occurring costs that do not fluctuate in price. Examples include rent, insurance, and CapForge bookkeeping (we bill on a flat-rate, month-to-month basis).
13. Variable expenses: regular occurring costs that may go up or down in price depending on usage. Examples include utilities, sales commissions, and transaction fees.
14. Operational expenses: the day-to-day costs of running a business. This includes a combination of fixed and variable expenses, like rent, utilities, insurance, labor, equipment, and marketing.
15. Assets: company-owned property or equipment that holds monetary value. Examples include buildings, land, computers, vehicles, and inventory.
16. Depreciation: the accounting record of the loss in value of an asset over time. There are several different ways to calculate and record this, including straight-line, accelerated, and bonus; it just depends on the situation.
17. Appreciation: the accounting record of the gain in value over time of an asset.
18. Annuity: a series of fixed-rate payments made at regular time intervals. Examples include monthly property lease payments, or weekly deposits to a savings account.
19. Audit: an independent inspection of financial records to determine if they are legally compliant and adhere to generally accepted accounting principles (GAAP).
20. Liabilities: financial responsibilities that a company is legally obligated to fulfill. Accounts payable and payroll taxes are examples of liabilities.
21. Liquid assets: the money on hand in a business along with assets that can easily and quickly be converted into cash.
22. Liquidity: the ease with which a company can meet its financial obligations using the liquid assets it has available. In simpler terms, liquidity can be thought of as a company’s ability to pay off debts.
23. Equity: the remaining value after liabilities are subtracted from assets.
24. Balance sheet: a financial document that lists all of a company’s assets, liabilities, and equity.
25. Book value: an asset’s value as recorded on the balance sheet.
26. Overhead: day-to-day operational costs that do not directly contribute to the creation of a product or service, but are necessary to keep the business running. Examples include rent, insurance, advertising, and office supplies.
27. Cash flow (CF): the movement of money, as measured by the total amount of funds being transferred into and out of a company.
28. Bank reconciliation: a process in which the amount listed on the company’s books is matched so that it corresponds with the account balance listed by the company’s financial institution.
29. Business entity: an organization that’s formed by one or more persons for the purpose of selling goods or services. Types of business entities include sole proprietorship, partnerships, LLCs, S Corps, and C Corps.
30. Profit and loss statement (P&L): a financial document that summarizes all the revenues, costs, and expenses incurred within a specific time frame (usually a fiscal quarter or year). Also known as an income statement.
31. Return on investment (ROI): a measurement used to determine the profitability of a product or service. Put another way, it’s how businesses calculate what they get back compared to what they put in.
32. Certified Public Accountant (CPA): a designation awarded to individuals who have passed the Uniform CPA Examination and met all the education and experience requirements as mandated by the American Institute of Certified Public Accountants (AICPA).
33. Accrual accounting: a method in which revenues and expenses are recorded as they occur as opposed to when cash actually changes hands. For example, if a purchase is made using a credit card, the sale is reported in the books immediately, even though payment may not be due for 30 days.
34. Cash accounting: a method in which income is recorded when payments are made, and expenses are reported when the charge has gone through.
A Few Final Thoughts
We don’t expect you to remember each term and be able to recite its definition immediately after reading this article—and you shouldn’t expect that of yourself, either. Learning takes time, and 34 accounting terms is a lot to take in! Our suggestion is to bookmark this page for future reference so you can brush up on your vocabulary from time to time. Before you know it, these concepts will become a regular part of your business lingo.