Basic Accounting Terms and Acronyms Explained
Updated: Nov 5, 2020
It is important that business owners speak and understand the language of accounting in order to communicate at all levels of the organization; whether that is with potential investors, shareholders, the team, and/or clients. Being able to effectively speak about the business finances builds a business owner’s credibility. At CPA by Choice we want to share the meaning of some of the most common accounting terms and acronyms.
Accounts Receivable includes money owed by customers as payment for goods or services. A company’s balance sheet will reflect accounts receivable as a creditable asset because there is an understanding that the clients are legally obligated to pay this amount.
For example, if you sell $5,000 of goods to a company and provide them with a line of credit, and the company promises to repay you in 30 days, you’ll credit your accounts receivable $5,000. Upon receiving payment, you’ll debit $5,000 from accounts receivable and credit $5,000 to your cash accounts.
Accruals refers to adjustments that must be made before a company's financial statements are issued. Accruals involve expenses, losses, and liabilities that have been incurred but are not yet recorded in the accounts. Accruals also include revenues and assets that have been earned but not yet recorded in the accounts.
For example, a services business has a number of employees working on a major project for a community, which it will bill when the project has been completed. In the meantime, the company can accrue revenue for the amount of work completed to date, even though it has not yet been billed.
Accrual-Basis Accounting Method is an accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made. The method follows the matching principle, which says that revenues and expenses should be recognized in the same period.
For example, if a company has a $15,000 repair done on February 15 and the vendor allows for payment on March 15, the company will report a repair expense and a liability of $15,000 as of February 15. (On March 15 the company will credit Cash and will debit the liability account.)
Cash-basis accounting is a straightforward accounting method. Under the cash-basis accounting system, you record payments when they’re received or processed. Accounts receivable do not come into play under the cash-basis system.
For example, if a dentist performs a job on a patient at the end of March and extends 15-day payment terms, the dentist may not receive payment until April. The dentist paid for the material used, the labor and other business expenses related to the dental work during March. On the dentist’s income statement, the expenses are recorded during March, but the income relating to the expenses are recorded during April.
Assets are everything that a company owns. In most cases, the company’s assets from an accounting perspective are tangible. Tangible assets include things like property, cash, and tools. Intangible assets, such as stock, copyrights, and trademarks can also fall under this category.
Liabilities are debts that a company is responsible for paying in the short or long term. Things like mortgages and credit card balances are liabilities.
Balance Sheet is an overview of a company’s financial status, including assets, liabilities, and equity. The accounting equation that you’ll want to keep in mind when it comes to your balance sheet is Assets = Equity + Liabilities
Profit and Loss Statement commonly referred to as “P&L,” or the “income statement” is a report that lists earnings, expenses and net profits for a given period.
Expenses are the costs of acquiring something. You can expense everything from raw materials to services. There are typically four types of costs: fixed, variable, accrued, and operational.
GAAP (Generally Accepted Accounting Principles) are the rules, standards, and principles that certified public accountants and businesses use when accounting. These principles are a combination of authoritative standards and accepted practices. Failing to follow GAAP could prove troublesome for businesses because it can make it harder to secure funds from investors and potentially expose owners to federal fines.
CPA (Certified Public Accountant) designation given by the American Institute of Certified Public Accountants (AICPA) to individuals that pass the Uniform CPA Examination and meet the education and experience requirements. The CPA designation helps enforce professional standards in the accounting industry.
At CPA By Choice we don’t expect you to know all these terms, while working with our clients we like to educate them and help them become stronger business owners. We also understand that accounting can take you away from your day-to-day activities in your business and we would love to help you have more time for the things that matter to you.We are available to answer your questions, feel free to call us or send us a message.