Knowing some the basics of accounting terms will help you understand basic accounting. It will not only enable you to communicate with your accountants in a better way but also help you gain deep insights into your financial reports.
Here is a compiled list of the most common accounting terms which every business owner must know.
1. Accounting Receivable (AR)
Accounts Receivable consists of all of the revenue or sales by a company that has provided but has not yet collected payment on it. AR has recorded in the balance sheets an asset that would likely to be converted to cash in a short period of time.
2. Accounting Payable (AP)
Accounts Payable consists of all the expenses incurred by business but it is not paid yet. AP is being recorded as a liability in the Balance Sheet as it is also considered as a kind of debt owed by the company.
3. Cash Flow
Cash Flow is a very important term for every business that describes the inflow and outflow of cash in a business. Net Cash Flow can be calculated by taking the beginning Cash Balance and then subtracting the Ending Cash Balance from it. A positive number of this indicates that more cash has flowed into the business than out, while a negative number indicates the opposite side of it.
4. Inventory
Inventory classifies the assets that a company has purchased to sell to its customers but it remains unsold. As these items are being sold to customers, the inventory account would be started decreasing.
5. Debits and Credits
Debits and Credits are entries used in the company’s bookkeeping process to record changes. A debit entry in the accounts is considered as an increase in assets or expense accounts and decreases revenue or equity accounts and liability. Credits are considered as an increase in liability and an increase in assets.
6. Financial reports
Financial reports are the periodic financial communications that are used to know about the financial position and performance of any entity. These financial reports include three primary financial statements which are the balance sheet, statement of cash flows and income statement along with footnotes and other important information relevant to the proprietors of the business. Public companies must file several types of financial reports and forms with the Securities and Exchange Commission (SEC), which are open to the public.
7. Financial statement
The financial statement refers to basically three primary accounting reports of an industry: the balance sheet, statement of cash flows, and income statement. Internal financial statements and other accounting reports usually contain more detail, which is used at the time of taking important decisions.
8. Assets and Liabilities
Assets and liabilities are very important aspects of business where assets give you future financial benefits and liabilities give you a glimpse of future obligations. The proportion of assets should always be higher than the liabilities. The difference between assets and liabilities refers to the equity of the company. This classification of assets and liabilities helps us in properly arranging assets and liabilities in the balance sheet.
9. Trial balance
The trial balance includes both debits and credits entries for one particular account and it is recorded in the general ledger. The sheet should have balance, with debits equaling credits.
10. Balance sheet
The balance sheet is the summary of statements of the business including assets, liabilities, and proprietor's equity at a certain time. In other words, the balance sheet also illustrates your business's net worth.
The balance sheet consists of all the details from previous years also so that you can get insights into a back-to-back comparison of two consecutive years. This data helps to track the business’s performance and identify ways to build up your finances and help you to see where you need to improve.
These are the most basic accounting terms which every businessman or entrepreneur should know. Accounting is broad that means there’s so much to know, but at least you can start with the basic terms to make better-informed decisions.
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