Personal Finance: 20 Accounting Terms You Should Know
by Jonyce Bullock, CPA
OK, admit it – you read “Accounting Terms” and thought “that does NOT apply to me!” Let me explain why this post applies to everyone. At some point in your life you are going to encounter an accounting term; if you know the basics terms you will handle these situations with confidence. Here are a few examples of reasons you need to become more accounting savvy:
- You have decided to invest in stock market: Understanding basic accounting terms helps you become an educated investor. All companies traded on the US stock exchanges are required to report annual financial statements. Your investment advisor will likely discuss with you the results from the financial statements of these companies as you assess your investment options
- You want to start a business: You have a great idea for your new business and you are starting to outline what you hope is an amazing business plan.
- Your spouse owns a business: I was asked recently to be an expert witness in a business case where the owners had recently divorced. Both spouses were asked under oath about the accounting policies and practices of the company. Unfortunately for the wife, she had signed on several joint obligations, but was only able to answer the accounting questions with “I wasn’t involved in the accounting” and “I rarely saw the financial statements”. You can and should be involved in the accounting of any business to which you are tied.
- You want to move up in your position at work: A solid understanding of the financial terms that affect your company is a way to help you earn a place in many business conversations.
These are just a few examples – there are many others that are just as important. In her book “New Rules of the Game”, Susan Packard states: “Finance is a business language. If you understand and can speak it, you will know how to communicate the financial health of your company to others…Getting to be comfortable with the language of numbers is a critical skill set for executive management.” Let’s jump in!
- Account: Most people think of financial accounts, like checking or savings account, when they hear the term account. However, in accounting terms, this refers to the accounts in your Chart of Accounts: asset, liability, owner’s equity, income, and expense.
- Accounts Payable (A/P): Everything that is owed to vendors, contractors, consultants, etc. is tracked in this account.
- Accounts Receivable (A/R): This account tracks income that hasn’t been realized yet, like outstanding invoices.
- Accrual Basis: This is one of two basic accounting methods. Using it, you record income as it is invoiced, not when it’s actually received, and you records expense like bills when you receive them.
- Cash Basis: The second basic method of accounting. Under this method you report income when you receive it and expenses when you pay the bills.
- Asset: All physical items you own that have value. This could be items such as cash, office equipment, and real estate.
- Liability: Amounts owed by the business. This could be items such as accounts payable, credit cards, and bank loans
- Equity: The owner’s interest in the business. Essentially, this is what is left after subtracting your liabilities from your assets.
- Cash Flow: This refers to the relationship between incoming and outgoing funds during a specific time period.
- Double-Entry Accounting: This is the basis for all accounting systems. Every transaction must show where the funds came from and where they went. Each has a Credit (decreases asset and expense accounts) and Debit (decreases liability and income accounts) which must balance out (other types of accounts can be affected).
- Balance Sheet: A financial statement that summarizes a company’s assets, liabilities, and equity.
- Income Statement (also referred to as a Profit and Loss): This is a financial statement that shows a company’s financial performance for a specific time period. Shows company revenues and expenses for the given time period.
- Net income: This is your revenue minus expenses.
- Payroll Liabilities: This account tracks obligations such as payroll taxes, garnishments, and other withholdings deducted from employees’ paychecks and will remit to the appropriate agencies.
- Post: This simply refers to recording a transaction within one of your accounts.
- Reconcile: This is the process of verifying that your records and those of your financial institutions agree.
- Trial Balance: This standard financial report indicates whether your debits and credits are in balance.
- Vendor: With the exception of employees, this term generally refers to anyone who you pay as a part of your business operations.
- Customer: This term generally refers to anyone you receive payments from as part of your business.
- Aging Report: A report that shows the length of time a company’s receivable or payable has been outstanding.
This list is by no means comprehensive, but it is a good starting place to understand the accounting lingo you will encounter in the business world. I am reminded of the public service announcements from NBC when I was growing up “The More You Know”. The more you know about accounting terms, the more you will be prepared to speak up when the opportunity arises.