Common Accounting & Business Loan Terms
We have compiled a list of common accounting and business terms and definitions that a small business owner should become familiar with in order to better understand how an accountant defines, categorizes and classifies the monetary outcome of your efforts.
Account – a record in the general ledger that is used to collect, classify and store similar information. For example, a company will have a Cash account in which every transaction involving cash is recorded.
Accounting Equation – a financial equation described as Assets = Liabilities + Owner’s Equity. For a corporation the equation is Assets = Liabilities + Stockholders’ Equity. For a nonprofit organization the accounting equation is Assets = Liabilities + Net Assets. Because of double-entry accounting this equation should be in balance at all times. The accounting equation is expressed in the financial statement known as the balance sheet or statement of financial position.
Accounts Payable – Accounts Payable (AP) are the bills that you need to paid. An example of an AP is the invoice you receive for buying supplies from the manufacturer. They are considered liabilities.
Accounts Receivable – Accounts Receivable (AR) are the debts owed to you. If you sell your product or service to your customer and they do not pay you at the time of sale, the money they owe you is considered an AR. They are considered assets.
Accrual – a basis in accounting that means income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when paid.
Additional Paid in Capital – the capital contributed by the stockholders in excess of the par or stated value of the stock subscribed and issued.
Assets – Assets are property that your business owns. This includes anything that has value, such as cash, AR’s, inventory, supplies, equipment, etc.
Assets – a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
Balance sheet (Statement of Financial Position) – is one of the major components of a complete set of financial statements. The balance sheet reports the assets, liabilities, and owner’s (stockholders’) equity at a specific point in time, such as December 31. The balance sheet is also referred to as the Statement of Financial Position.
Business Plan – A business plan is a document that details the specifics about how a business will run.
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Capital Stock – the portion of the paid in capital representing the total par or stated value of the shares of stock issued.
Cash Basis – an accounting method in which revenue is recognized when received regardless of when earned. All collections are treated as revenue and there are no accruals and deferrals.
Cash Flow – A business’s cash flow is the process of cash flowing into and out of the business within a set amount of time. For example, you might bring in $100 in sales, but spend $50 in supplies within a given month.
Cash Flow Statement – one of the main financial statements, the statement of cash flows analyses changes in cash and cash equivalents during a period. It reports the sources and uses of cash and cash equivalents by operating activities, investing activities, financing activities, and certain supplemental information for the period specified in the heading of the statement.
Cash and Cash Equivalents – comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value.
Contingency – a condition or situation involving gain or loss, the ultimate outcome of which will be confirmed only upon the occurrence or nonoccurrence of one or more future uncertain events.
Cost of Goods Sold (COGS) – COGS is the cost you pay for supplies, goods, labor, etc. in order to sell your product. For example, if you buy a bicycle at a yard sale and sell it on Ebay, the cost to buy the bicycle is your COGS.
Current Assets – are cash; cash equivalent; assets held for collection, sale, or consumption within the entity’s normal operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent.
Current Liabilities – are those to be settled within the entity’s normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent.
Doing Business As (DBA) – A DBA is a name a business operates under that is different from the legal name of the business. For example, the legal name for a home painting service might be Johnson Enterprises LLC, but the DBA might be Johnson’s Home Painting Services.
Earnings – Your earnings are your income or profit.
Equity – Equity in a business is the difference between your assets and liabilities. Simply, if the business has $1,000 in assets and $100 in liabilities, then the business has $900 in equity.
Equity – the owners’ interest on the assets of the enterprise after deducting all its liabilities
Expense– a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
Financial Statements – are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users. A complete set of financial statements include balance sheet (statement of financial position), income statement (statement of comprehensive income), statement of changes in equity and the notes accompanying the financial statements.
Fixed Costs – Fixed costs are the costs that do not change in relation how much you sell. Paying rent or salaries are examples of fixed costs. They do not change if your sales or income/profit increase or decrease.
General Journal – is where double entry bookkeeping entries are recorded by debiting one or more accounts and crediting another one or more accounts with the same total amount. The total amount debited and the total amount credited should always be equal, thereby ensuring the accounting equation is maintained.
General Ledger – also known as the nominal ledger, is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. Each General Ledger is divided into debits and credits sections.
Gross Margin – Your gross margin is the difference between the total amount of money you made from selling your product or service and the total amount of money your product or service cost you. For example, if it cost you $10 to make your widget, but you sold it for $30, your gross margin is the difference – $20.
Income – an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity participants.
Income Statement – One of the main financial statements (along with the balance sheet, the statement of cash flows, and the statement of stockholders’ equity). The income statement is also referred to as the profit and loss statement, P&L, statement of income, and the statement of operations. The income statement reports the revenues, gains, expenses, losses, net income and other totals for the period of time shown in the heading of the statement. If a company’s stock is publicly traded, earnings per share must appear on the face of the income statement.
Intangible Asset – an identifiable nonmonetary asset without physical substance. Examples of possible intangible assets include: computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, licenses, import quotas, franchises, customer and supplier relationships, and marketing rights.
Inventory – Your inventory are the goods you have on hand or in stock. Your inventory can also be the materials you have on hand that are used to manufacture your product.
Invoice – An invoice is the bill that is given to the purchaser of a product or service for money due.
Inventories – include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials).
Investments – an asset held by an enterprise for the accretion of wealth through capital distribution, such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise such as those obtained through trading relationships.
Investment Property – is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. A property interest that is held by a lessee under an operating lease may also be classified and accounted for as investment property under certain conditions.
Journal – the record of journal entries appearing in order by date. It also called as the book of original entry, since the entries are first recorded in a journal. From the journal the entries will be posted to the designated accounts in the general ledger. Journals may include sales journal, purchases journal, cash receipts journal, cash disbursements journal, and the general journal.
Journal Entry – it is the entry made in a journal. It contains the date, account name and amount to be debited, and the account name and amount to be credited. Each journal entry has the equal amounts of pesos or dollars of debits and credits.
Ledger – a book or computer file for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals. Ledgers include sales ledger, purchase ledger and general ledger.
Liabilities – Your liabilities are your debts. They are items in which you owe money. If the debt can be repaid in less than five years, it’s considered a short-term liability; longer than five years, it’s a long-term liability.
Liabilities – a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits
Liquidity – the availability of cash in the near future to cover currently maturing obligations (e.g., payroll liabilities, trade payables and short-term loan amortizations).
Loans and Receivables – are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than held for trading or designated on initial recognition as assets at fair value through profit or loss or as available-for-sale. Loans and receivables are measured at amortized cost.
Materiality – a practical rule in accounting which dictates that strict adherence to established accounting standards and principles is not required when the items are not significant enough to affect the evaluation, decision and fairness of the financial statements. This concept is also known as the doctrine of convenience.
Notes to the Financial Statements – one of the major components of a complete set of financial statements, this presents information about the basis of preparation of the financial statements and the specific accounting policies used, disclose any information required by IFRSs that is not presented elsewhere in the financial statements and provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them. Notes should be cross-referenced from the face of the financial statements to the relevant note.
Operating Activities – the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees
Operating Cycle – for trading enterprise, it is the average period of time that it takes for an enterprise to acquire the merchandise inventory, sell the inventory to customers and collect cash from the sale. For manufacturing firm, it is the period of time between acquisition of materials and their final conversion into cash.
Profit – Your profit is the money you made from the sale of your product or service minus your costs/expenses before tax. Your net profit is the money you made minus your costs/expenses AND tax.
Property, Plant and Equipment – tangible assets which are held by an enterprise for use in production or supply of goods and services or for administrative purposes, and are expected to be used during more than one year.
Revenue – the gross inflow of economic benefits during the period arising in the course of ordinary activities of an enterprise when those inflows result in increase in equity, other than those relating to contributions from owners.
Retained Earnings – Represents cumulative net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders’ equity on the balance sheet or statement of financial position. Retained earnings can be unappropriated (unrestricted) or appropriated (restricted) for a certain purpose and not available for any dividend declarations.
Return on Investment (ROI) – A ROI is your net profit divided by your total equity. For example, if cost you $100 to invest in a lawnmower and over six months, your net profit from mowing lawns with it was $1,000. Your ROI is 90 percent. To calculate: Equity ($1,000) – Cost ($100) / Cost ($100) = ROI
Solvency – the availability of cash over a long term to meet financial commitments when they fall due.
Statement of Changes in Equity – a major component of the financial statements, it shows the total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests; the effects of retrospective application, when applicable, for each component; reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing: (a) profit or loss, (b)each item of other comprehensive income, and (c) transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.
Stockholders’ Equity – the residual interest of owners in the assets of a corporation measured by the excess of assets over liabilities.
Variable Costs – Variable costs are costs that change in proportion to the number of units produced. For example, if you own a dog grooming business, dog shampoo is a variable cost. You only incur the cost based on the number of dogs you wash. Variable costs aren’t as risky as fixed costs because you only incur them when you sell your product or service.
Wholesaler – A wholesaler is a person who provides the distribution of inventory from the manufacturer to the retailer.