Whether you’re studying to become an accountant or just working with the accounting team, it helps to be familiar with some of the more popular accounting phrases. Accurately reading and understanding accounting documentation requires familiarity with these words. Also, it can help you when it comes time to present data about a company’s finances and when it comes time to make judgments based on the data you’ve gathered.
This page provides definitions for 15 accounting terminology used in various fields.
A certified public accountant (CPA) is a professional with expertise in accounting, recording, and reporting financial transactions. The organization’s need will determine whether or not the individual is exempt from having the necessary credentials. An accountant’s duties include auditing financial records and monitoring company cash flow.
2. Accountant’s Report
Financial statements, reviews, reports on agreed-upon procedures, compilations, and attestation reports are all examples of documents that an accountant can generate for you. An audit does not include a report from an accountant. This form might aid a company in keeping better financial records.
3. Accounts Payable
Unpaid business expenses are recorded in accounts payable. The company’s debt is the total of all its outstanding financial obligations. In accounting, this is classified as a liability.
4. Accounting Period
The time frame covered by the figures in a balance sheet is called the accounting period. This can change from one organization to the next and even from department to department within the same business. Most businesses use a monthly, semiannual, or annual accounting cycle.
5. Accounts Receivable
Money that customers owe the company is recorded as accounts receivable. Short-term cash is generated by this asset, which is classified as an asset on the company’s balance sheet. Accounts receivable may include money owed to a business for services rendered, such as for software it has developed.
Accruals refer to income or expenditures that the company has not yet reported but have already occurred. This is the case with costs that can’t be avoided immediately. Accruals are recorded in the corporate books over time.
7. Accrued Expenses
An accrued expense is a commercial outlay that has yet to be settled. When using the accrual method of accounting, costs are recorded as soon as they arise, regardless of when the money is spent. The company’s accountants will have more reliable and recent data to work with.
8. Balance Sheet
The assets, debts, and equity of a business are all listed and summarised in the balance sheet. It’s an accountant’s second most common financial statement. This is how the formula works:
Asset + liabilities + equity = balance sheet
Whether in the form of physical products or hard currency, capital refers to anything that has monetary value. Working capital, often known as a company’s liquid capital, is determined by reducing current assets by current liabilities. This is useful for calculating the maximum expenditures a business can make without negatively impacting its bottom line.
10. Cash Basis Accounting
One of the most frequent approaches to business accounting is the cash basis system. Accounts payable and receivable are ignored because the system only deals in cash. For businesses and their accountants, this might be a welcome simplification.
11. Cash Flow
A company’s cash flow is its income and expenditure forecast for a given period. The term “net cash flow” is used to describe all of a company’s financial gains. A company’s operating, investment, and financing cash is accounted for in its cash flow statement.
In accounting, the term “cost of goods sold” refers to the money spent creating a company’s wares or services. Direct expenses, to be precise. Gross profit is calculated by deducting the cost of goods sold from revenue. Values may incorporate the price of components and labor.
Investing in various assets spreads out a person’s or business’s risk and can increase return. Diversification reduces exposure to lose from fluctuations in the value of a particular investment or asset. Using this strategy, one investment’s value won’t affect another’s value.
Dividends are distributions of a company’s earnings to its stockholders. A portion of the company’s profits is given to its employees through cash, stock, or other prizes. This can entice new investors, boosting the firm’s capital base.
15 Double Entry Bookkeeping
To keep accurate financial records, businesses should use a double-entry accounting system. Every business transaction is recorded with two separate entries in the books, one to debit and one to credit. Your books are balanced when the total of all your debts plus all your credits is zero.