Common Accounting Terms Explained

Morgan Blogs Part 2

There are many accounting terms that seem easy to understand when you read them. But when you find out the actual definition, you might be confused.

You are not alone.

Common accounting terms aren’t used very frequently in everyday speech, so the general public has a hard time understanding their meaning.

Here are the most common accounting terms we see used improperly.

Accounting terms that are easily confused

It’s often the case that when you’re in your own industry field, the jargon that you commonly use is easy for you to understand.

But for others who aren’t in the accounting field, it can be harder to grasp concepts that you don’t use in everyday life. Here are some terms that are easy to use incorrectly.

Automated accounting is the process of using software to automate common accounting processes. Typically what used to be done manually is now digitally done by computers and software, like drawing in receipts and invoices, bank transitions and payments posted.

Accounts receivable/payable are really easy to confuse. Receivable means the money that you are owed by customers, where payable is the money you owe your vendors and suppliers.

Accruals are transactions that haven’t posted yet and therefore accrue, or add up. Accruals can be in either accounts receivable or payable.

Assets are any sort of item of value that your company owns. In the future, you would be able to use it for financial leverage or to show net worth.

Balance sheet is a statement of assets, liabilities, capital, income and expenses over the last reporting period.

Capital is typically cash or liquid assets that can be used for expenses.

Cash flow is the total amount of cash that an entity receives and disperses during a period of time.

Depreciation is the gradual reduction in value of an asset over time. For example, as time passes, the value of your factory equipment drops as it becomes less valuable the longer it is used.

Equity is an investor’s share in a company. It factors in the current value of the company, minus any expenses, assets and outstanding loans.

Gross margin/profit is the basis of your actual money earned, once you take out the cost of your goods.

Liabilities are the negatives in your balance sheet, or sums of money that you owe. It can be either monthly money you owe to vendors, or loans.

Overhead is all of the business costs other than the product sold. Some examples are advertising, insurance, interest, legal fees, repairs, supplies and taxes.

Variable costs are those that change when production costs go up or down.

Accounting terms explained

One of the most valuable things you can do whenever you’re discussing business is to always use a full term, instead of an acronym. Especially the first time you use a word.

Many business industries assume that everyone understands their terms.

That’s simply not the case.

You understand them because you work with them every single day. And you likely get tired of typing them out in emails.

But it’s not helpful to anyone outside of your workplace if they have to take the time to go hunt down a definition before they can reply to you.

Be courteous in your communication and don’t assume that everyone has the same head knowledge as you.

If you need help sorting through accounting language for your business, give the experts at Morgan & Associates a call or fill out the contact form below. We’d be happy to sit down and work through it together.

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