Sometimes one of the most difficult languages for the new entrepreneur to understand and learn is the financial language. Your Accountant or Book keeper provides financial statements to you on a monthly base and you try to make heads or tails of the information on them.
Accounting/ bookkeeping is simply keeping track of the money. How you got the stuff (Assets) and how you paid for that stuff. –and when you learn the terminology it is quite simple. Here is a handy reference list to help you out.
A Glossary of Accounting Terms
- Accounts Receivable – work for which you have sent out an invoice but have not yet received payment.
- Accounts Payable – Expenses for which you have received an invoice for but have not yet paid.
- Accrual – a system of accounting wherein the income and expenses are recognized and matched in the period they are incurred rather than when they are paid for.
- Asset – Items purchased that have an economic benefit beyond one year or accounting cycle. What you own.
- Amortization – The allocation of an asset to expense over a specified period of time. AKA Depreciation.
- Balance Sheet – A statement showing a company’s assets, Liabilities, and Equity as of a specific date.
- Cost of Goods Sold (COGS) Cost of goods sold is usually the largest expense on the income statement of a company selling products or goods. It the direct cost of manufacturing or purchasing the products or goods that you sell.
- Dividends – After tax money paid out to shareholders of a company.
- Equity – A Company’s cumulative income or loss. The investment of money invested by the owners of the company.
- Liabilities – A financial obligation, what your company owes to other suppliers, government agency or loans.
- Income Statement – This statement shows revenues less expenses over a period of time.
- Pre-paid expenses – amounts paid in advance for future expenses. Considered an asset until the expense is realized.
- Pre-paid Sales – Payment received from customers before a service or product is provided. Considered a liability until the product or service is delivered.
- Retained Earnings – Profits retained in the business to date.
- A Debit – Increases an Asset and Expense Account. Decreases a Liability, Equity or Revenue Account.
- A Credit – Increases a Liability, Equity or Revenue Account. Decreases an Asset or Expense Account.
- Bookkeeping Principle – For every debit, there must be a credit.