Your Guide to Understanding Business Accounting Terms

At your latest budget meeting, did you get lost in the maze of terminology? Or worse, did the alphabet fly at you in a flurry of acronyms? P&L, ROI, COGS, and GAAP. Luckily, a basic understanding of accounting doesn’t require mastery of a foreign language. Knowing a few key terms can bring you up to speed so you don’t miss out on vital information.

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Accounts Receivable

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These accounts are open invoices for which you are awaiting payment. They fall under the category of assets since you will likely receive payment on them in the near future.

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Accounts Payable

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These accounts are bills that have not yet been paid. They are listed as a debt within the company’s credit report.

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Accrued Expense

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Expenses the company has incurred but not yet paid. While similar to accounts payable, the primary difference is that accrued expenses incur over time. Prime examples of this are employee salaries that are incurred during one period but paid over another period, and interest payments that are accumulated over time.

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Asset

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Anything owned by the company including intellectual property, patents, machinery, property, inventory, and cash

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Balance Sheet

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A financial statement that lists the company’s assets, liabilities, and equity

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Book Value

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This is the value of an asset reflecting depreciation. Most people use cars as a frame of reference for book value. After you purchase a new car it begins to depreciate over time and the book value is lower than the purchase price. The same happens with other assets like equipment that becomes dated or inventory that has a shelf life.

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Cash Flow

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The income and expenses of a business over a period of time is known as cash flow. The balance between the two is known as the net cash flow and can be viewed on the cash flow statement.

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Certified Public Accountant (CPA)

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A CPA is an accountant who has studied accounting in college, passed the CPA exam, and fulfilled the requirements for their state.

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Cost of Goods Sold (COGS)

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COGS are the direct cost of producing goods including labor and materials. Business operating expenses are not included in the cost of goods sold.

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Depreciation

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The decrease in value of goods or property over time is known as depreciation. This can actually work to your benefit on your taxes as a write-off.

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Equity

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The amount of the company owned by the investors and business owner after liabilities are deducted is called equity.

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Generally Accepted Accounting Principles (GAAP)

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GAAP practices are set by policy boards and all accountants must follow them when performing accounting services. GAAP standardizes accounting rules to make it easier for businesses to compare figures.

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Income Statement

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Also known as Profit and Loss (P&L) Statement, this measures your revenue less expenses. The result is the net income.

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Inventory

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The goods you have on hand and available to sell are your inventory. Having too much inventory can create problems of storage, spoilage, or overstock. Too little inventory can create delivery delays and customer discontent.

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Invoice

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A bill of sale with a statement of money owed, invoices can be given to customers by a business or can be due to your business by vendors.

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Liability

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Money due to another party is your liability. Examples include employees’ wages, loans, and mortgages.

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Overhead

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The cost of operating a business beyond the cost of goods sold, overhead expenses are often forgotten but need to be accounted for when determining product and service prices. The money for the water bill and the landscaper has to come from somewhere.

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Revenue

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The money coming into the business from goods or services sold without taking expenses into account is called revenue.

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Valuation

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The calculation of a business or product’s monetary worth, proper valuation is critical when trying to secure business investments or when determining product retail price point.