By Brian Ravencraft
Some of the most basic terms you’ll hear when interacting with an accountant may seem confusing. Don’t worry, I understand. I thought I’d use this month’s article to go over some of the more commonly used accounting terms. Here it goes:
Accounting — the process of recording, evaluating and reporting financial transactions that helps individuals and organizations understand their financial health. Accountants do this job by keeping track of expenses, profits and losses, using this accounting formula: Assets = Liabilities + Equity.
Assets – Assets help communicate the value of your business and are made up of things your business owns, as shown on your balance sheet. For example, land, buildings, cash in bank accounts are all assets. There are basically two types of assets: current assets and fixed assets.
Liabilities – A liability is when someone owes someone else money. Types of liabilities can include loans, mortgages, accounts payable, and accrued liabilities. For example, loans, taxes, long-term debt from a bond issue, amounts due to a supplier for supplies or services incurred but not yet paid.
Equity — (Assets-Liabilities = Equity) is the amount of money left over and returned to shareholders after a company has sold all of its assets and paid off all of its debts. It exists as a record in a company’s balance sheet.
Balance sheet – Balance sheets are financial statements that provide snapshots of organizations’ liabilities, assets, and equity at specific points in time. Balance sheets are a type of financial statements used to assess the financial health and value of businesses. Accountants use the accounting equation, also known as the balance sheet equation, to create balance sheets. It’s Active = Passive + Equity.
Account balance –It is of two types: on the one hand a debit balance and on the other hand a credit balance. When the sum of the debit entries is greater than the sum of the credits, it is a debit balance and if the sum of the debit entries is less than the sum of the credits, it is a credit balance.
Accounts payable – These are the liabilities of a business or organization that show the money owed to others. For example, money spent on pending bills and taxes.
Accounts Receivable – It is an asset that represents the money owed by the other to the business and organization. Includes all revenue (sales) that a business has provided but has not yet received payment. For example, money debtors owe the organization or credit sales made by the organization.
Income statement – The income statement (often referred to as the income statement or P&L) is the financial statement that shows income, expenses, and profit over a period of time. Earned revenue is shown at the top of the report and various costs (expenses) are subtracted from it until all costs are accounted for. The result here is net income.
Revenue (sales) – Income is the money earned by the business.
Expense (Cost)- An expense is any cost incurred by the business.
Net income (NR)- Net income is the dollar amount that is earned in profits. It is calculated by taking income and subtracting all expenses for a given period, including overhead, depreciation, and taxes.
This is just the tip of the iceberg when it comes to terms used in the accounting industry. Don’t be afraid to ask your accountant to explain different terms to you. The more informed you are, the better. If I can be of any assistance to you, as always, please do not hesitate to contact me.
Brian E. Ravencraft, CPA, CGMA is a Principal at Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, focusing primarily on the areas of tax advisory and management consulting services in several areas of corporate services, with a focus on agribusiness and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention each client deserves. You can reach Brian by www.agribusinessaccounting.com Where www.HolbrookManter.com.