Everyone needs a little cheat sheet every so often to refresh the memory and ensure things are on the up-and-up. We’re providing key accounting terms that every business owner, CFO, and lead accountant needs to know from A to G.
Accounts Payable
Money owed by your business to vendors or other service providers. This appears as a liability on the balance sheet. (Source: Clark Simson Miller)
Accounts Receivable
Money owed by customers to another company or individual as payment for goods and/or services. It's considered an asset on a company’s balance sheet, because there's an understanding that the clients are legally obligated to pay this amount. (Source: Intuit Quickbooks)
Accrual Method of Accounting
An accounting approach where all financial activities get reported on HOA financial statements. Accrual accounting means revenue is recorded in the books when earned and expenses are recorded when incurred. This approach is seen as superior and more real time accurate than the cash and the modified accrual approaches. (Source: Echo)
Balance Sheet
A synopsis of a company's financials at a specific point in time; the balance sheet typically includes a summary of an organization’s assets, liabilities and net worth. (Source: InvestorGuide)
Burn Rate
A measure of how quickly your business spends money. You calculate burn rate by picking a period of time (say a quarter) and then subtracting the cash you have at the end of the quarter from what you had at the start. You then divide this number by the number of months in the period (in this case, three), and you have your burn rate. (Source: Fundera)
Cost of Goods Sold (or COGS)
The expenses directly related to the development of a product or a service. COGS includes direct labor costs for providing a service or the cost of materials. General operational costs are typically not included in the calculation of COGS. (Source: Paysimple)
Capital (or Working Capital)
Money that a business has in hand to pay bills or reinvest. Working capital is calculated by the value of all current assets minus liabilities. (Source: The Balance)
Cash Flow
The flow of cash through a business that traces how cash came into the company and how it was spent. A cash flow report is often used to forecast and plan for the next year’s budget projections. (Source: Beginner Bookkeeping)
Deductible
A purchase that can be claimed as a business expense on tax forms; it lowers business profit and reduces the level of taxable income owed to the government. (Source: Beginner Bookkeeping)
Depreciation
When a business’s assets--like vehicles and equipment--lose value over time due to use or becoming obsolete. Depreciation can be written off for tax purposes and is a useful tool for a business to reduce its tax burden. (Source: The Balance)
Equity
The value of an asset less the amount of all liabilities on that asset. Assets - Liabilities = Equity. (Source: Investopedia)
Estimated Tax
Investopedia said,“Estimated tax is a periodic advance payment of taxes based on the amount of income that is earned and the amount of estimated tax liability that will be incurred as a result.
Estimated taxes are assessed on income that is not subject to any type of withholding, which includes self-employment income, dividend income, rental income, interest income, and capital gains.”
Financial Accounting Standards Board (FASB)
An independent and private organization that sets the standards and principles for accounting in the United States.
Fiscal Year
A twelve-month period selected by a business to represent its accounting period. A business’s fiscal year doesn't have to be the calendar year.
Fixed Assets
The accounting education website My Accounting Course said, “Fixed assets are divided into tangible assets such as land, buildings, equipment, machinery, furniture, software, vehicles and intangible assets such patents, copyrights, and trademarks.
Long-term assets are important because they provide valuable information about a firm’s financial health and ability to generate earnings from effectively managing its assets.”
General Ledger
The final summary of a business’s accounting activities across a fiscal year; the general ledger should include all financial transactions of the business during a given accounting period. (Source: InvestorWords)
Gross Margin/Profit
An accounting measurement of how a company manages its costs. To calculate gross margin, you deduct cost of goods sold from the net sales across a given period of time. (Source: My Accounting Course)
We hope these terms were helpful in your efforts to improve your accounting knowledge or to refresh your memory. As all business owners know, strong accounting is a key to sustaining the health and growth of your business.