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Common Accounting Terms Explained

Common-Accounting-Terms-Explained

Having a job in Accounting is excellent for combining your social skills with technology and picking the specific industry you’re interested in! If you’ve got brilliant concentration levels, critical thinking and organisational skills then Accounting provides a strong option if you’re currently rethinking your career. 

It’s important to learn the lingo, study its usage and know how to apply Accounting terms when needed to communicate the state of a business's financial standings. When overtaking a position in Accounting, there are quite a few key terms that you’ll quickly come to terms with!

Want to know the good news? They’re all really easy to learn, implement on the job and all will make perfect sense whether you’re interested in starting an Accounting course, starting off in an Accounting or Financial position...or just for your own reference!

Here are some common Accounting terms you’re bound to encounter on the job:
 

Cash Flow 

Depicting the inflow and outflow of money within a business, Cash Flow shows the trajectory of a business - for positive or negative.

Positive Cash Flow represents that more money is coming into a business that is being sucked out. It’s the quantity of all revenue and expenses inside of a given Accounting period.
 

Overhead

This can be termed as the cost of doing business minus the cost of goods or providing a service. The overhead focuses on other ongoing business expenses.

Calculating a business's overhead is vital for an Accountant for budgeting alongside figuring out a price-point for a product or service provided.
 

Accounting Period

An Accounting Period is a determined period of time covering all financial statements. Depending on the business that could be quarterly, every 6 months - but usually yearly. An Accounting Period includes: income sheets, balance sheets and statements of cash flows.
 

Balance Sheet

A Balance Sheet created by an Accountant acts as a financial statement which covers elements like shareholder equity, assets and liabilities. It provides a snapshot of what a business owes as well as owns - it gives an insight to the businesses overall worth and financial position.

It also gives further clarity to understand the relationship between all relevant accounts when comparing a Balance Sheet with other financial statements.
 

Accounts Payable (AP)

AP is a widely used term to describe all unpaid expenses that your business incurred from a third party. Whether it’s from a bank, another company or even from an individual. They’re deemed a liability and are recorded so as on the Balance Sheet as they count as debts the company needs to pay-off.

These amounts typically are due to be taken care of within a short matter of time, usually under 30 days. Examples of AP would be anything from food and beverage, office supplies or buying new computer software.
 

Accounts Receivable (AR)

An easy way to describe AR is that it’s the inverse of AP - just think of them as opposites! AR is money owed to the company that has yet to be received or collected payment on.

When an Accountant writes up an invoice, it becomes a part of their AR balance. Knowing and keeping an eye on these figures is important for then calculating the accounts receivable turnover.
 

Assets

Essentially, an Asset is anything owned solely by the company (without any loans attached) that’s of monetary value that can be used to make money when needed. This goes from actual cash, investments, inventory, buildings, vehicles and land.

Even trademarks and copyrights. Assets then become internally categoried depending on their liquidity and how they can be used.
 

Liquidity

Liquidity is a term to depict how quickly an asset can be turned into cash.

For instance assets that are more liquid are stocks, mutual funds, cash and currency. Assets with low rates of liquidity would be land, buildings and collectible items.
 

Gross Profit

It’s the total profit made by the business after deducting costs involved with making and selling a product (cost of goods) or alternatively costs of supplying a service, all without taking overhead expenses into account.  In order for an Accountant to find out their businesses gross profit, they’ll subtract the following costs from revenue over a particular period.

It’s an ideal indicator for finding out how orderly and productive business’ is with it’s labour and services. It’s also a deciding factor when arranging business loans as well as pitching to investors.
 

Depreciation

The term Depreciation in Accounting refers to how much a particular asset loses its monetary value over a period of time. Unfortunately, products and services can fluctuate or only descend in price, sometimes market value will go down.

For example, an asset like a car cannot always stay in stellar quality...they eventually get worn out over time! So assets like tools, equipment and transportation all eventually depreciate in value.
 

Looking to learn even more? Why not sign up to our Accounting course!

If you’re excellent with numbers, a career in Accounting provides a whole range of opportunities. It’s an excellent way to pick a sector you’re passionate about and directly impact and organise the financial standings of your particular business.

The Training Room offers an online Accounting course with outstanding tutor support and opportunities for progression. Units include:

  • Level 2 Foundation Certificate in Accounting
  • Level 3 Advanced Diploma in Accounting
  • Cash Flow Management (Professional Only)
  • Budgeting (Professional Only)

Find out more here


The Training Room | 05/08/2021 10:00:00

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