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10 Common Accounting Terms Explained

Posted on February 14th, 2019

Whether you’re a business owner looking to improve your accounting/bookkeeping, or simply someone wanting to better organize and understand your finances, we’ve put together a list of 10 key accounting terms you should know. Becoming familiar with these basic terms can lead to more effective tracking of financial transactions, more organized records of your most important purchases, as well as a general understanding of buzz words you may hear from your accountant when tax season arrives.

1. Assets – All resources owned by a company that are necessary for daily operations. This can include, but is not limited to, cash and investments, inventory, buildings, vehicles, FF&E (Furniture, Fixtures & Equipment), etc. Accounts receivable is also considered an asset (viewed as cash earned but not yet received).

2. Liabilities – All of the amounts owed by a company. These include amounts owed to credit cards, vendors/suppliers (i.e. accounts payable), payroll tax liabilities, business loans, etc.

3. Equity – The amount of money invested in a business by the owners plus/minus accumulated earnings/losses. In mathematical terms, it’s your total assets minus your total liabilities. You want this amount to be positive.

4. Balance Sheet – The financial statement used to report business assets, liabilities and equity that must be in “balance” with this simple equation: Assets = Liabilities + Equity.

5. Debits vs Credits – By far the most confusing concept to understand. In general terms, accounting entries (aka journal entries) must be entered using “double-entry” accounting. This means that every journal entry must have, at a minimum, 2 lines in the following format… a debit amount on the left as a positive number, and a credit amount on the right as a negative number… AND they must sum to zero.  Assets, COGS/COS and Expenses carry a debit balance (i.e. positive numbers are looked at as positive numbers), while Liabilities, Equity and Revenues carry a credit balance (i.e. negative numbers are looked at as positive numbers). Did we confuse you yet? Here are some examples of journal entries that will (hopefully!) help you understand these concepts:

Accounts Receivable                                       $1,000

Sales                                                                              ($1,000)
An invoice is entered, and a sale is recognized

Cash                                                                $1,000

Accounts Receivable                                                 ($1,000)
Money is received for the sale above

Telephone Expense                                         $200

Accounts Payable                                                        ($200)
A bill is entered, and an expense is recognized

Accounts Payable                                            $200

Cash                                                                                  ($200)
Money is paid for the expense above

6. Cost of Goods Sold/Cost of Sales (COGS/COS) – The costs directly associated with the production of goods (manufacturer) or the purchase of goods (retailer) that were sold. Costs associated with the production of goods generally include materials and direct labor used to make/assemble them. Costs associated with the retail sale of goods generally include the wholesale purchase price plus costs to receive it (e.g., shipping).  COGS/COS are also known as variable costs, since they are directly related to and tend to fluctuate with revenue.

7. Gross Margin – Sales revenue less Cost of Goods Sold/Cost of Sales. For example, if a Retailer sells a product for $1,000, with a wholesale cost of $600 plus $25 shipping, the gross margin would be $375 ($1,000 – $625).

8. Overhead Expenses – The costs necessary to run your business that are not directly associated with generating revenue (aka the “cost of doing business”). Office personnel, copiers, insurance, telephone, etc. are among some examples. Overhead expenses are also known as fixed costs, since they generally stay the same no matter how the business is performing.

9. Accrual vs Cash Method – The accrual method of accounting recognizes revenue when “earned” and expenses when “incurred”, while the cash method recognizes revenue when “received” and expenses when “paid”. If you invoice your customers through your accounting software, an accounts receivable is created and the sale is recognized as of the invoice date. This means that you are using the accrual basis of accounting, at least for “book” purposes (see next).

10. Book vs Tax – “Book” refers to how you view your financial results internally for management purposes, while “Tax” refers to how you view your financial results in your Federal income tax return. A lot of companies will prepare financial results throughout the year under the accrual basis of accounting for book purposes, then converting to the cash basis of accounting for income tax purposes (usually done by stripping out accounts receivable, accounts payable and other accruals).

While you might have heard these words before, we hope you take away a further and more in-depth understanding of what they mean for yourself and your business. If you have further questions about accounting terms or how these concepts relate to you, visit us at cpasforhire.com or call 314.381.2200.

 

 


Welcome

Posted on January 2nd, 2019

We’re excited to announce the official launch of our blog.

We’ll be posting helpful news from the financial industry, updates from our practice, and more about the latest in keeping your personal and business finances in the best shape possible. We built our practice on the notion that we’re there for our clients when they need us and we want our online presence to be a reflection of that principle.

We hope this blog provides an extra level of service to our current and future guests. If you would like to stay up to date, simply click the RSS “Subscribe to feed” link located on our website and subscribe. Our subscribers will be updated when we make a new blog post.

Here’s to your best financial future ever!


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