In the world of accounting & bookkeeping, understanding key terminologies is crucial for accountants and accounting companies to effectively manage financial records and provide accurate financial services. In this comprehensive blog, we will explore 21 essential terminologies that every accountant and accounting company should be familiar with.
By mastering these terminologies, you can enhance your financial expertise and provide exceptional services to your clients. Let’s dive in!
Assets:
Assets are resources owned by a company or individual. The assets may include items such as cash, inventory, property, or equipment. Your accountant can track and manage these assets for accurate financial reporting.
Liabilities:
Liabilities are financial obligations or debts owed by a company or individual, including loans, accounts payable, or accrued expenses. Accountants monitor these liabilities to ensure accurate financial statements.
Equity:
Equity represents the ownership interest in a company, calculated by subtracting liabilities from assets. You can analyze equity to determine your company’s net worth.
Revenue:
Revenue is the financial inflow generated by a company through its core business operations, encompassing the sale of goods or provision of services. Accountants meticulously record and analyze revenue to assess the company’s overall financial performance and success.
Expenses:
Expenses are the costs incurred by a company in the process of generating revenue, including salaries, rent, utilities, and supplies. A bookkeeper would track and categorize expenses for accurate financial reporting.
Profit:
Profit, also known as net income or earnings, is the positive financial outcome when revenue exceeds expenses. One of the primary jobs of an accountant is to calculate and analyze profit to assess a company’s financial success.
Loss:
Loss occurs when expenses exceed revenue, resulting in a negative financial outcome for a company. Businesses analyze and report losses to identify areas for improvement.
Balance Sheet:
Balance sheet offers a comprehensive snapshot of a company’s financial position for a specific timeframe. It usually outlines the company’s assets, liabilities, and equity, providing a clear overview of its financial status.
Income Statement:
The income statement, also known as the profit and loss statement, gives your accountant a complete overview of a company’s revenue, expenses, and the resulting profit or loss for a specific financial year.
Cash Flow Statement:
A cash flow statement presents the inflow and outflow of cash during a specific period, categorizing cash flows into operating, investing, and financing activities. Accounting companies and accountants use cash flow statements to assess a company’s liquidity.
Accrual Basis:
Accrual basis accounting recognizes revenue when earned and expenses when incurred, regardless of when cash is exchanged. The bookkeepers use accrual basis accounting to provide a more accurate representation of a company’s financial position.
Cash Basis:
Cash basis accounting records revenue and expenses when cash is received or paid. While simpler, it may not provide an accurate picture of a company’s financial position. Accountants consider cash basis accounting for specific reporting requirements.
Depreciation:
Depreciation involves allocating the cost of an asset over its estimated useful life in a systematic manner. The depreciation is used to accurately reflect the gradual wear and tear or obsolescence of assets in financial statements.
Amortization:
Amortization shares similarities with depreciation, but it pertains to intangible assets like patents, copyrights, or trademarks. Accountants diligently track and report amortization to ensure precise and transparent financial analysis.
Trial Balance:
A trial balance is a list of all accounts and their respective balances at a specific point in time. Accountants use trial balances to ensure debits and credits are equal and prepare accurate financial statements.
General Ledger:
The general ledger is a comprehensive record of all financial transactions of a company, organized by accounts. It’s one of the core tasks of a bookkeeper to maintain and update the general ledger to ensure accurate financial reporting.
Chart of Accounts:
A chart of accounts is a categorized list of all accounts used by a company, each assigned a unique code or number. Your accountant will develop and maintain the chart of accounts for the purpose of making an accurate financial reporting and analysis.
Journal Entry:
A journal entry is a record of a single financial transaction, including the accounts involved, debits or credits, and a brief description. Accountants use journal entries to track and document financial transactions.
Debits and Credits:
Debits and credits are the two sides of every accounting transaction. Debits increase assets and expenses but decrease liabilities and equity. Credits increase liabilities, equity, and revenue but decrease assets and expenses. Accountants & bookkeepers ensure accurate debits and credits for balanced financial statements.
Double-Entry Bookkeeping:
Double-entry bookkeeping is a system that ensures every financial transaction affects at least two accounts, maintaining the fundamental equation of debits equaling credits. Accountants use double-entry bookkeeping to maintain accurate financial records.
Accounts Payable:
Accounts payable represent the outstanding debts a company owes to its suppliers or vendors for goods or services received.
Accounts Receivable:
Accounts receivable represent the outstanding payments owed to a company by its customers for goods or services provided.
