Client Advisory Services

12 Accounting Terms You Should Understand

January 11, 2018

You didn’t launch your company to spend hours every week on accounting. You’re a small businessperson, not a CPA. But if you have a small operation, you may be managing the finances yourself. Even if you’re not, it’s good to understand what certain words and phrases mean. Here are a dozen terms that should be in your vocabulary:

#1 - Accrual Basis Accounting

This refers to the practice of recording income and expenses. Using the accrual basis method, you recognize revenue when it is earned and expenses when they've been incurred. Cash Basis Accounting can be the best approach for small businesses that don’t carry inventory; you record revenue and expenses when cash is actually received or spent.

#2 - Assets

What does your company own? Cash? Property? Equipment? These types of assets are considered tangible. But you may also own intangible assets, like copyrights and trademarks.

#3 - Balance Sheet

This is a detailed summary of your company’s finances that includes equity, assets, and liabilities.

#4 - Chart of Accounts

This is the backbone of your financial records. It consists of all the accounts you assign when you create transactions. To make it easier to use, accounts are grouped by type and numbered.

#5 - Depreciation

Depreciation involves a complex set of concepts that are used during tax preparation. If you own an item for more than a year, you’re able to write off some of the value that’s been lost. There are multiple types, including straight line and declining balance.

#6 - Equity

Did you invest your own money when you started your business? Equity is the amount you contributed. If there is more than one owner, it’s called Owner’s Equity.

#7 - Expense Types

There are four:

Operational. How much money is required to run your company?
Fixed. Which of your expenses never change?
Variable. What must you spend to create your products and/or services?
Accrued. Have some of your expenses been reported but not yet paid?

#8 - General Ledger

This is a master list that includes every transaction your company has ever recorded.

#9 - Generally Accepted Accounting Principles (GAAP)

These are rules created by the Financial Accounting Standards Board (FASB). They govern the way that accountants prepare financial statements and create transactions.

#10 - Liabilities

What do you owe individuals and other businesses? These can be either Long-Term or Short-Term.

#11 - Profit and Loss Statement

Often referred to as an Income Statement or P&L, this report does just what it says: reports your net profit (if there is one).

#12 - Trial Balance

Another standard financial report, this is a list of the balances of all accounts in your General Ledger. While we recommend you are acquainted with these terms, some (like the financial reports) define processes that would be difficult for you to complete -- unless you’re using accounting software. Lutz provides a variety of accounting services to countless small businesses. Contact us today!

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12 Accounting Terms You Should Understand

#1 - Accrual Basis Accounting

#2 - Assets

#3 - Balance Sheet

#4 - Chart of Accounts

#5 - Depreciation

#6 - Equity

#7 - Expense Types

#8 - General Ledger

#9 - Generally Accepted Accounting Principles (GAAP)

#10 - Liabilities

#11 - Profit and Loss Statement

#12 - Trial Balance

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