Your Guide for Confusing Accounting Terminology…
Accounts receivable (A/R)
The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used.
A systematic way of recording and reporting financial transactions for a business or organization.
Accrual accounting measures the performance and position of a company by recognizing economic events regardless of when cash is received or dispersed.
Accounts payable (A/P)
The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered.
Assets are those that will be converted to cash within one year. Typically, this could be cash, inventory or accounts receivable. Fixed assets are long-term and will likely provide benefits to a company for more than one year, such as a real estate, land or major machinery.
A financial report that summarizes a company’s assets (what it owns), liabilities (what it owes) and owner or shareholder equity at a given time.
A financial asset or the value of a financial asset, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities—basically the money or assets an organization can put to work.
Cash basis refers to a major accounting method that recognizes revenues and expenses at the time cash is received or paid out.
The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time.
Cost of Goods Sold (COGS)
The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example this may include the cost of the raw materials (parts) and the amount of employee labor used in production.
Expenses (fixed, variable, accrued, operation)
The fixed, variable, accrued or day-to-day costs that a business may incur through its operations.
- Fixed expenses: payments like rent that will happen in a regularly scheduled cadence.
- Variable expenses: expenses, like labor costs, that may change in a given time period.
- Accrued expense: an incurred expense that hasn’t been paid yet.
- Operation expenses: business expenditures not directly associated with the production of goods or services—for example, advertising costs, property taxes or insurance expenditures.
Equity and owner’s equity
In the most general sense, equity is assets minus liabilities. An owner’s equity is typically explained in terms of the percentage of stock a person has ownership interest in the company. The owners of the stock are known as shareholders.
A complete record of the financial transactions over the life of a company.
A business document in which all ledgers are compiled into debit and credit columns to ensure a company’s bookkeeping system is mathematically correct.
Liabilities (current and long-term)
A company’s debts or financial obligations incurred during business operations. Current liabilities are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities are typically payable over a period greater than one year. An example of a long-term liability would be a multi-year mortgage for office space.
Limited liability company (LLC)
An LLC is a corporate structure where members cannot be held accountable for the company’s debts or liabilities. This can shield business owners from losing their entire life savings if, for example, someone were to sue the company.
A company’s total earnings, also called net profit. Net income is calculated by subtracting total expenses from total revenues.
Profit and loss statement (P&L)
A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time, such as quarterly or annually.
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