Useful Accounting Terms to Know
It is never too early, or too late to become more knowledgeable about useful accounting terms. With such a large amount of jargon to learn, this blog should act as a quick guide so you can be prepared for the next tax season or to better manage your business/personal finances in general. Here are a few finance tips and accounting terms to know in 2022:
At its core, accounting is the practice of keeping track of money. Naturally, there are lots of terms to discern what type of money we are talking about and what the context is. Here are some terms to help explain what we mean:
You may have heard this one before, accounts payable. Accounts payable is the specific amount of money you currently owe to other entities. These could be people, companies, banks, etc. Comparatively, accounts receivable is the amount of money currently owed to you as a result of doing business with your company. Your company’s cash flow is the movement of money in and out of the business. Monitoring cash flow is a good benchmark to use for evaluating the financial health of the company. A company in a sound financial position will generally have more money flowing in than out. Your revenue is the income the company has acquired through the sale of goods or services or both. Your expenses are the costs incurred by the business, or by you. Net profit or net loss is subsequently determined by subtracting expenses from revenue. If you are left with a positive number this means you have a net profit for the period – and that’s a great feeling.
Let us take a deeper dive into some accounting terms. Most of these terms define specific streams of money. For example, overhead is the total of all the expenses required to keep the business running that are not associated with the actual products or services you provide – overhead keeps the doors open. This includes employee salaries, rent, property tax, mortgage payments, utilities, equipment, etc. Liabilities are outstanding debts that need to be made to other individuals or entities. Assets are any receivables or property your business owns that hold value. This can be land, equipment, inventory, stocks and other financial instruments, and any loans or accounts receivable. You can calculate your company’s working capital, or short-term cash flow, by subtracting current liabilities from current assets.
Having a good accountant can make the process of coming up with these figures a much less time-consuming and stressful process, as it takes time and knowledge to come up with and track the values of every asset and liability your company has. Similar to working capital, the equity of the company is also determined by subtracting liabilities from assets. Rather than an indicator of current cash flow and operations, equity is more of an indicator of the net worth and overall health of the company. Your accountant can create a balance sheet, where they will keep track of the assets, liabilities, and equity. In order to make informed decisions about the future of the company, having an accurate, up-to-date balance sheet is key. Finding the right accountant can take the weight of the books off your shoulders, as well as provide you with valuable, timely insight into your company and its finances.
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