Understanding accounting jargon is important to avoid misunderstandings and costly mistakes. We provide 10 examples of accounting jargon business owners and executives need to succeed.
10 Accounting Terms Explained
Not everyone “speaks accounting” — and that’s fine. You don’t need to be an accounting expert (that’s why you hire people who are). But to succeed in business today, you do need at least a high-level understanding of accounting terms in order to avoid misunderstandings and oversights that could lead to penalties and other costly mistakes.
Here are 10 common accounting terms that can be confusing and are definitely worth understanding.
If you have a loan on a company car, is it still considered an asset? Yes. Contrary to what many people think, assets are items your business controls, not necessarily items you’ve completely paid off.
- Current assets
You may know that a fixed asset is an asset your company can’t easily sell within a year, such as a building. Less known is the term “current assets,” which refers to assets you expect to sell or use within the year, like cash, accounts receivable and inventory.
- Accrued expense
These are expenses that have been incurred but have yet to be paid or invoiced, like payroll or your year end pension contribution — it’s incurred in one period, and recognized in your books, but it’s paid in a later period.
- Prepaid Expenses
Just like the accrued expenses above expenses are recorded in the period they relate to (accrual accounting) rather than the month they are paid (cash accounting). If you pay an expense before the period it relates to, it will be categorized as a prepaid expense.
- Book value (BV)
As your assets are depreciated, they lose value. The BV shows the original value of each asset, less any accumulated depreciation. This is different from the Fair Market Value.
- Chart of accounts
Bookkeepers often refer to the chart of accounts, which is an organizational tool that breaks down all the financial transactions your company has conducted during a given accounting period. Your chart of accounts will include all of the accounts in the general ledger, including balance sheet accounts and income statement accounts.
- Gross Profit
Are the total sales of a company’s products or services less the cost to make those items. This is calculated as Revenues minus Cost of Goods Sold. It represents the amount of income generated to help cover operating costs.
- Working Capital
This is a measure of the company’s liquidity. It is all the current assets (above) less all the current liabilities. This is a common measurement of a company’s short term health.
- Generally Accepted Accounting Principles (GAAP)
GAAP are the general rules accountants follow in creating financial reports. They were established to ensure consistency and apples-to-apples comparisons between the reports from different businesses.
Overhead expenses are those that relate to running your business, including fixed expenses like rent, variable expenses like supplies and shipping, and semi-variable expenses like commissions. They do not include expenses necessary to make or deliver goods or services. They would be included in the cost of good sold section.
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