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Explanation of Accounting Terms
Non accounting people can get bamboozeled by the accounting terms used. Every trade has it's own jargon and accounting is no exception. Accountants need these terms to do their job correctly. For the lay person it can however be quite daunting. The common accounting terms are listed below, together with notes for Account Pro users in italics :- Accounts Payable: Also called A/P or Creditors. Accounts payable are the bills your business owes to suppliers. Accounts Receivable: Also called A/R or Debtors, accounts receivable are the amounts owed to you by your customers. Accrual Based Accounting: With the accrual method, you record income when the sale occurs, not necessarily when you receive payment. You record an expense when you receive goods or services, even though you may not pay for them until later. With Account Pro, you can use either method. Assets: Things of value held by the business. Assets are balance sheet accounts. Examples of assets are accounts receivable, furniture, fixtures and bank accounts. Balance Sheet: Also called a statement of financial position, it is a financial "snapshot" of your business at a given point in time. It lists your assets, your liabilities, and the difference between the two, which is your equity, or net worth. Capital: Money invested in the business by the owners. Also called equity. Cash Based Accounting: If you use the cash method, you record income only when you receive cash from your customers. You record an expense only when you write the cheque to the vendor. Chart of Accounts: The list of account titles you use to keep your accounting records. Cost of Goods Sold: (COGS) Cost of items or services sold to your customers. Creditor: A company or individual whom you owe money to. Credits: At least one component of every accounting transaction (journal entry) is a credit. Credits increase liabilities and equity and decrease assets. Current Assets: Assets that are in the form of cash or will generally be converted to cash or used up within one year. Examples are accounts receivable and inventory. Current Liabilities: Liabilities payable within one year. Examples are accounts payable and payroll taxes payable. Debits: At least one component of every accounting transaction (journal entry) is a debit. Debits increase assets and decrease liabilities and equity. Debtor: A company or individual who owes you money. Depreciation: An annual write-off of a portion of the cost of fixed assets, such as vehicles and equipment. Depreciation is listed among the expenses on the income statement. With Account Pro, this is normally done at the end of the year. Double Entry Accounting: In double-entry accounting, every transaction has two entries: a debit and a credit (called a journal entry). Debits must always equal credits. All General Ledger based accounting programs use double entry accounting. End of Year Rollover: With general ledger based accounting programs, the P & L accounts are zero'd and balance sheet accounts are carried forward. This is a term used in old accounting systems and not used much these days. Equity: The net worth of your company. Also called owner's equity or capital. Equity comes from investment in the business by the owners, plus accumulated net profits of the business that have not been paid out to the owners. Fixed Assets: Assets that are generally not converted to cash within one year. Examples are equipment and vehicles. General Ledger: A general ledger is the collection of all balance sheet, income, and expense accounts used to keep the accounting records of a business. A general ledger works with double entry accounting and journal entries for each transaction. Income Accounts: These are the accounts you use to keep track of your sources of income. Examples are merchandise sales, consulting revenue, and interest income. Income Statement: Also called a profit and loss statement or a "P&L." It lists your income, expenses, and net profit (or loss). The net profit (or loss) is equal to your income minus your expenses. Inventory: (Stock) Goods you hold for sale to customers. Inventory can be merchandise you buy for resale, or it can be merchandise you manufacture or process, selling the end product to the customer. Journal: The chronological, day-to-day transactions of a business are recorded in sales, cash receipts, and cash payment journals. A general journal is used to enter period end adjusting and closing entries and other special transactions not entered in the other journals. In a traditional, manual accounting system, each of these journals is a collection of multi-column spreadsheets. Liabilities: What your business owes creditors. Examples are accounts payable, payroll taxes payable, and loans payable. Long Term Liabilities: Liabilities that are not due within one year. An example would be a mortgage payable. Net Income: Also called profit or net profit, it is equal to income minus expenses. Net income is the bottom line of the income statement (also called the profit and loss statement). Profit and Loss Statement: Also called an "Income Statement" or "P&L." It lists your income, expenses, and net profit (or loss). The net profit (or loss) is equal to your income minus your expenses. Retained Earnings: Profits of the business that have not been paid to the owners; profits that have been "retained" in the business. Trial Balance: A list of the accounts (or general ledger accounts) and their totals. In the computer age this is obsolete.
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