Whether you’re a student studying accounting or working alongside an accounting team, it’s important to know the industry terminology. It will help you read and interpret financial documents correctly. Quickly converting liquid assets into cash, equities, or a bank account is possible. They differ from fixed expenses, which remain consistent each period, such as rent or utility bills. This article lists and defines accounting terms to help you understand and interpret financial documents.
A company can be formed in many ways, including as a sole proprietorship, partnership, limited liability corporation (LLC) and a C-Corp. Each formation has its unique legal structure and implications for taxation. Overhead expenses don’t directly relate to producing a product or service. They can include things like rent and executive salaries. The amount of profits distributed to shareholders after taxes is called net income. The retained profits account, which shows the balance of retained earnings in a company’s books, is another business option. This account is not included in the balance sheet. A reputable bookkeeping service like myrqb.com/ could provide more clarification. It may be time for a new bookkeeper if a bookkeeping firm still needs to sit down to discuss the reporting.
Accounts Payable (AP) includes all expenses a company has incurred but has yet to pay. These expenses are recorded as a liability on the Balance Sheet and are due within a year. Revenue refers to the economic benefits a company earns through regular business activity, such as selling products or services. The income statement’s revenue component is the difference between total revenues and expenses. The term “Revenue” is often used interchangeably with the term “Income.” Both terms have distinct meanings in the world of accounting.
Whenever you write an invoice to a customer, that goes into your accounts receivable account. It is an asset on your balance sheet and counts as money you have earned but have yet to receive.
The cost of producing a product or service falls under this category as any direct labor costs involved with that process. Overhead includes other expenses necessary to run the company, such as rent or executive salaries. Instead of waiting until money enters or exits the system, accrual accounting keeps track of transactions as they happen. The accounts on your general ledger chart of accounts, which records debits on the left and credits on the right, reflect it.
Financial transactions are tracked and compiled into financial statements through the accounting process. These reports are shared with external stakeholders such as investors, donors and creditors. The two most common statements are the income statement and the balance sheet. An accounting period is a period reported on by financial statements. It can be one month, six months or even a year. An enrolled agent is an accountant who has passed the Internal Revenue Service exam and can help companies comply with tax codes in the United States. After each period, a set of actions are taken as part of the accounting cycle. It includes journalizing and posting in the general ledger and preparing a trial balance to ensure debits equal credits.
Accounting is a complex and sometimes confusing topic. If you’re collaborating with an accounting professional or simply analyzing financial statements, you need to know the terminology used in this industry. A financial statement that shows how much a company earned or lost in a given period. Every business and organization needs a profit and loss statement. Fixed costs are expenses that will stay the same if a company sells more or less of a product or service. Rent and salary are two instances of fixed expenses. Account reconciliation checks the accuracy of all transactions by comparing two sets of records. It is often done between a bank statement and a general ledger.
Having a grasp on basic accounting terms can help you talk to your accountant with confidence. The rules governed by GAAP allow you to compare ‘apples to apples’ when looking at your financial statements. (See investopedia.com/terms/g/gaap.asp) Expenses are fixed (FE) or variable (VE, AP, and AE). FE expenses occur regularly, while VE costs may change over time. This information is recorded in the General Ledger or GL.
Two of the most often employed financial statements in accounting are the balance sheet and the income statement. However, several general accounting terms are important for understanding the industry. They are listed below, along with their definitions.