Accounting terms can seem like a foreign language, but many of the concepts are actually quite simple. This article has run through a handful of common accounting terms you will come across and their meanings.
With this knowledge, you should be able to better understand your own financial statements, interactions with the IRS, and other important business documents.
Below are the type typical accounting roles you will come across:
- Enrolled agents (EA) – EAs are tax professionals who have demonstrated expertise in taxation and are licensed by the Treasury Department to represent taxpayers before all administrative levels of the Internal Revenue Service (IRS).
- Certified Public Accountant (CPA) – CPAs are accounting professionals who have passed a rigorous exam and met all other state requirements to earn this designation.
Most CPAs work in public accounting firms, but many also work in private industry, government, or education. EAs are also found in public accounting firms, but tend to be available for small business accounting and private practice more often.
Key Accounting Definitions
Accounts payable – This term refers to the money that a company owes to its creditors.
Accounts receivable – This term refers to the money that a company is owed by its customers.
Capital – This term refers to the funds that a business owner has invested in the company.
Equity – This term refers to the ownership interest that a business owner has in the company.
Expenses – This term refers to the money that a company spends in order to generate revenue.
Income – This term refers to the money that a company earns from its business activities.
Liabilities – This term refers to the money that a company owes to its creditors.
Revenue – This term refers to the money that a company earns from its business activities.
Profit – This term refers to the money that a company earns after all expenses have been paid.
Insolvency – This term refers to a company’s inability to pay its debts.
Budget – This term refers to a plan that outlines how a company intends to spend its money over a specific period of time.
Cash flow – This term refers to the movement of cash into and out of a company –
Profit and Loss Statement – This financial statement shows a company’s revenue, expenses, and net income for a specific period of time.
Balance sheet – This financial statement shows a company’s assets, liabilities, and equity at a
specific point in time.
Bad debt – This term refers to a debt that is not collectible and has been written off by the company.
Bankruptcy – This term refers to a legal proceeding in which a company’s assets are liquidated in order to repay its creditors.
Bond – This term refers to a debt instrument that is issued by a government or corporation in order to raise capital.
Audit – This term refers to the process of examining a company’s financial statements in order to ensure that they are accurate and compliant with Generally Accepted Accounting Principles (GAAP).
Generally Accepted Accounting Principles (GAAP) – GAAP is a set of standards and guidelines that companies must follow when preparing their financial statements.
More Relevant Accounting Definitions
Budget – This term refers to a plan that outlines how a company intends to spend its money over a specific period of time.
Cash flow – This term refers to the movement of cash into and out of a company –
Profit and Loss Statement – This financial statement shows a company’s revenue, expenses, and net income for a specific period of time.
Balance sheet – This financial statement shows a company’s assets, liabilities, and equity at a specific point in time
Bookkeeping – This term refers to the process of recording and maintaining financial transactions.
Cost of goods sold – This term refers to the cost of the inventory that a company has sold during a specific period of time.
Depreciation – This term refers to the allocation of the cost of an asset over its useful life.
Inventory – This term refers to the raw materials, finished goods, and work-in-progress that a company has on hand.
Accrual Based Accounting – This term refers to the accounting method that recognizes revenue when it is earned and expenses when they are incurred.
Cash Based Accounting – This term refers to the accounting method that recognizes revenue when it is received and expenses when they are paid.
These are just a handful of the most common accounting terms you will encounter, many of which we’ve been asked to define a handful of times when onboarding clients.
If you run a small business in the Clifton NJ area – visit our site or give us a call. We’d be happy to assess your current tax strategy and find where you can further reduce your tax liability.
