You Should Know Basic Accounting Terminology

Technology is changing the way accounting and finance departments operate. They're automating routine tasks and focusing more than ever on strategy, which means less busy work and more opportunities to meaningfully impact the company.

We thought we'd take a minute to review the essentials and how they go together, whether you're an accountant thinking more strategically or a non-accountant working more closely with the accounting department. Here are 16 basic accounting phrases you should know, ranging from GAAP to the month-end close:

Generally Accepted Accounting Principles (GAAP) are a set of rules that govern how businesses are (GAAP)

Accountants adhere to a set of rules to guarantee that financial records are easily understood and compared between businesses. Following GAAP is essential for producing clear financial statements and is required in many situations, such as for publicly traded corporations. The GAAP approach to accounting is reflected in many of our other terminologies.

On a cash basis

Cash basis accounting records revenue as soon as it is received and expenses as soon as they are paid. It's the most straightforward approach, but it doesn't always work for larger businesses. In fact, many businesses are forced to employ the accrual approach. When it comes to the accrual basis,

Basis of Accrual

Income is recorded when it is earned (not received), and costs are recorded when they are incurred (not paid). Do you see the distinction? For example, even though you don't pay the electricity bill until September, the utility spend for August would be recorded in August. And, even though they aren't paid until the following month, the power company will record the income on its books in August. How do they manage to do it? With the help of AR and AP.

Accounts Receivable

Accounts payable are expenses that have been incurred but not yet paid. Accounts payable on that August utility bill we mentioned before. It's a liability account that appears on the balance sheet since it represents a debt owed to a third party.

Accounts Payable (A/R)

Earned money that hasn't been received yet becomes an account receivable. From the utility company's perspective, this is the August utility bill. For most businesses, this would be the accounts of customers who bought on credit and plan to pay off their debt later. AR is a balance sheet asset since it represents the future benefit of money owing to the company.

Ledger General

The general ledger keeps track of all of the company's financial transactions. It was once a large, dusty book. If it's still the case, there are better solutions. Your financial statements will be proudly parented by the general ledger, but wait...

Balance Test

Your trial balance checks that all of the accounts in the general ledger are in balance. To put it another way, the debits and credits must be equal. This is a quality check to ensure that everything was input correctly, because something isn't right if the debits and credits don't balance.

Statements of Financial Position

The Profit and Loss Statement, Balance Sheet, and Statement of Cash Flows are the three most frequent financial statements. They provide a comprehensive picture of the financial health and current position of your organisation. Let's take a look at each one.

Statement of Profit and Loss

Your income and expenses are shown on the profit and loss (or income) statement. You can determine how lucrative a company is over time by comparing money in and money out. Don't worry if it isn't; the P&L can help you figure out why and how to repair it.

Accounts Payable

What you own and what you owe are shown on your balance sheet. Your assets and liabilities are also listed here. Unlike the profit and loss statement, the balance sheet depicts the business at a single point in time rather than across a period of time.

Statement of Cash Flows (SCF) is a financial statement that shows how much

The statement of cash flows corrects the profit and loss statement to reflect just the real money that entered and exited the business during the period. Accounts receivable and payable changes are accounted for (pun intended) to indicate what actually changed hands. It's especially crucial if you keep track of your income on an accrual basis because you'll need cash to pay your bills. You could be in trouble if you don't gather it.

Period of Accountancy

It's not a new form of punctuation when we say "accounting period" in reference to assertions. Periods (usually months and years) are used to measure accounting information, and everything must be recorded in the relevant period. According to the Accounting Matching Principle, expenses must be accrued in the period in which the company profited from them.

Allocation

Accountants divide funds among various accounts or time periods. They may need to allocate an expense over various periods or budget things across multiple departments in some circumstances. Depreciation is the process of allocating expenditures across various periods to represent the long-term use of an asset (matching the expense to the benefit produced).

Depreciation

Depreciation is what your father meant when he said a car's value declines the moment it leaves the lot. However, it's a little different in accounting. Depreciation is a method of spreading an asset's useful life over multiple years. For example, if you acquire a costly piece of equipment that will last ten years, you can expense 10% of the cost each year using straight-line depreciation. This gives a much more accurate financial picture than having one large spend in the first year and none for the next nine years.

Reconciliation

Account reconciliations are akin to a mini-internal audit. You reconcile to ensure that all transactions have been recorded and that the amounts are accurate. This is accomplished by comparing the opening and closing balances in your accounts to an external source, such as a bank statement. If anything doesn't add up, it's time to investigate what's causing the math to be off.

Croydon Chartered Accountant provides accounting, bookkeeping and taxation services to a wide range of businesses in the area of Croydon.

Accountants in Croydon help small businesses and startups with their accounting and taxation matters, to keep their business running smoothly.