By Brian Ravencraft
Some of the most basic terms you will hear while interacting with an accountant may sound confusing to you. Not to worry, I understand. I thought I would use this month’s article to review some of the most commonly used accounting terms. Here it goes:
Accounting — the process of recording, assessing, and communicating financial transactions that helps individuals and organizations understand their financial health. Accountants do this work by keeping track of expenses, profits and losses, making use of this accounting formula: Assets = Liability+Equity.
Assets — Assets help communicate how much your business is worth and are made up of items your business owns, as shown on your balance sheet. For example, land, buildings, cash in bank accounts are all assets. They are broadly two types of assets: current asset and fixed asset.
Liabilities — A liability is when someone owes someone else money. Types of liabilities can include loans, mortgages, accounts payable, and accrued expenses. For example, loans, taxes, long-term debt from a bond issue, amounts owed to a vendor for supplies or services incurred but has not yet paid.
Equity — (Assets-Liabilities = Equity) is the amount of money left over and returned to shareholders after a business sells all assets and pays off all debt. It exists as a record on a company’s balance sheet.
Balance sheet — Balance sheets are financial statements providing snapshots of organizations’ liabilities, assets, and shareholders’ equity at specific moments in time. Balance sheets represent one type of financial statement used to evaluate companies’ financial health and worth. Accountants use the accounting equation, also known as the balance sheet equation, to create balance sheets. This is Assets=Liabilities + Equity.
Account balance —It is of two types: first a debit balance and second a credit balance. When the sum of debit entries are more than the sum of credits than it is a debit balance and if the sum of debit entries is less than the sum of credits than it is a credit balance.
Accounts payable — These are the liabilities in a business or an organization that shows the money owed to others. For example, money spent on pending bills and taxes.
Accounts receivable — This is an asset that represents the money owed by the other to the business and the organization. Includes all of the revenue (sales) that a company has provided but has not yet collected payment on. For example, money the debtors owe the organization or credit sales made by the organization.
Income statement — The Income Statement (often referred to as a Profit and Loss, or P&L) is the financial statement that shows the revenues, expenses, and profits over a given time period. Revenue earned is shown at the top of the report and various costs (expenses) are subtracted from it until all costs are accounted for. The result here is the Net Income.
Revenue (Sales) – Revenue is any money earned by the business.
Expense (Cost)- An Expense is any cost incurred by the business.
Net Income (NI)- Net Income is the dollar amount that is earned in profits. It is calculated by taking revenue and subtracting all of the expenses in a given period, including overhead, depreciation and taxes.
This is just the tip of the iceberg really when it comes to terms that are used in the accounting industry. Don’t be afraid to ask your accountant to explain different terms to you. The more informed you are, the better. If I can be of any help to you at all, as always, please reach out.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.agribusinessaccounting.com or www.HolbrookManter.com.