This article is the third article in a series of blog posts talking about the various accounting terms. Part 1 was about terms found on a balance sheet, part 2 was about terms related to an income statement, and this one will be about general terms in accounting.
While it is fully possible to rely on business accounting firms to handle your finances, learning these terms is an essential part of running an enterprise. After all, accounting is considered to be the language of business, and it is important to be as familiar with its various concepts as much as possible. Financial illiteracy is often a path to grave financial losses and knowing where your business stands are key to maintaining profitability.
To grow comfortable navigating the financial world, make sure to familiarize yourself with the following terms:
The General Terms of Accounting
1. The Accounting Period
An accounting period is the span of time over which financial statements cover. It is most commonly a calendar or fiscal year, but it isn’t uncommon for it to be a week, a month, three months, or more. The Income Statement is an example of a document that makes use of specific accounting periods.
2. Business or Legal Entity
A business or legal entity refers to the legal structure or type of a business or company. Common structures include the Sole Proprietorship, Partnership, Limited Liability Corporation (LLC), S-Corp, and C-Corp, and so on. Each of these structures has its own unique set of requirements, applicable laws and regulations, and tax implications.
3. Cash Flow (CF)
The cash flow of an organization is the term that describes the general inflow and outflow of money. It can be taken further to a Net Cash Flow, which is computed by taking your beginning cash balance and subtracting the ending cash balance. If the number is positive, this means more money flowed into the business than flowed out. A negative number, conversely, means the opposite.
4. Certified Public Accountant (CPA)
A CPA is a professional designation that an accountant can earn by passing the CPA exam. This also means that they have to fulfill a certain set of requirements for both education and work experience. These requirements vary by state. If you prefer your finances to be handled by someone with more experience, you can ask your business accounting firm to assign a CPA to your account.
5. Credit
A credit is an increase in liability or equity account or a decrease in an asset or expense account.
6. Debit
A debit is an increase in an asset or expense account or a decrease in a liability or equity account.
7. Fixed Cost (FC)
A Fixed Cost is one that remains regardless of sales and profits. Rent, for example, is a cost that does not change month-to-month and can be anticipated.
8. Variable Cost (VC)
Variable costs are dependent on the volume of sales and considered the opposite of Fixed Costs. They are essentially a cost that is incurred in the delivery of the sale. The Cost of Goods Sold (COGS) falls under this category, as selling more products often means buying more raw materials.
9. Overhead
These are the expenses that relate to running a business excluding the costs of making products or delivering services. This includes rent, executive salaries, employee salaries, and so on. They are not directly associated with the costs of the products themselves, but they certainly contribute to the running of the company.
10. General Ledger (GL)
The General Ledger is the complete record of a company’s financial transactions used to prepare all of the Financial Statements.
11. Trial Balance (TB)
The Trial Balance is the listing of all accounts in the GL with their balance amount (listed as either debit or credit). As per the double-entry bookkeeping principle, it is important that the total debits equal the total credits.
12. Interest
Interest is the amount paid on a loan or line of credit that exceeds the repayment of the principal balance.
13. Liquidity
This is the term referring to an asset’s capacity to be converted into cash. For example, stocks are considered to have greater liquidity than a house, since these are sold more easily than real estate properties.
Final thoughts
As we’ve mentioned before, not every entrepreneur needs an accounting degree to run a business well. After all, there are plenty of business accounting firms out there that can handle this aspect of your business.
However, it is important to have this knowledge and have even some of these skills so that you may have a better understanding of your financial position at all times.
Should you need the services of a business accounting firm, send us a message at A4E. We offer expert bookkeeping, tax management, and CFO services to help grow your business. That’s more than the average accountant!