Understanding the Language of Business: 30 Accounting Jargons Defined
As a business owner, it’s essential that you understand the language of business and accounting because you are interacting with different stakeholders all the time.
One hour, you might be speaking with your accounting staff discussing what additional information need to be pulled up. The next hour, you might find yourself in a phone call with an investor who is keen to know the financial position of your company and the hour after, you might be dealing with the tax authorities who are requiring that reports follow a certain accounting standard. To effectively communicate, you should be able to speak the languages of those you are interacting with.
The Language of Business and Accounting
To help you get acquainted with the language of business and accounting, we have prepared a list of terminologies commonly used in the world of accounting. With this list, we also hope to break down any barriers arising from the usage of long technical terms.
Accounting is the systematic process of recording, classifying, summarizing, and interpreting financial information, and communicating the results to relevant stakeholders through preparation and issuance of periodic financial statements.
Method of recording accounting transactions for revenues when earned and expenses when incurred instead of accounting for when the actual cash exchange takes place.
Allowance for Doubtful Accounts
A contra-asset account that estimates the amount of accounts receivable that are expected to be non-collectible. This is deducted from the total receivables balance to get the net realizable value of the accounts receivable.
An auditor’s report is a formal opinion issued by an independent external auditor or an internal auditor to provide reasonable assurance that a company’s financial statements comply with the accounting standards and generally accepted accounting principles. There are four types of audit reports namely the unqualified opinion, qualified opinion, adverse opinion, and a disclaimer of opinion.
This is the process of matching the balances in an entity’s accounting records for a cash account to the entity’s bank accounts. The statement outlines the activities affecting the bank account for a specific time frame such as deposits, withdrawals, and interest charges.
The value of an asset according to the company’s books. Book value can also refer to how much the company is worth if all its assets were liquidated and all liabilities were settled.
The point or state at which total costs equal total revenue. This is a helpful managerial tool in determining how much revenues are necessary to cover all the expenses incurred or that will be incurred by the company.
Cash flow is the movement of cash in a business. A positive level of cash flow will indicate that an entity received more cash than disbursements during the period and vice versa.
A contra-account is a general ledger account used to reduce the value of a related account. Some examples will be accumulated depreciation which decreases the balance of a fixed asset and allowance for doubtful accounts which reduces the value of accounts receivables.
A credit is an entry made in the right side of an account. A credit can mean a decrease in assets, drawings, and expenses. Meanwhile, it can also entail an increase in liabilities, income, and capital.
A debit is an entry made in the left side of an account. A debit can mean an increase in assets, drawings, and expenses. Meanwhile, it can also entail a decrease in liabilities, income, and capital.
Depreciation refers to the decrease in the value of a fixed asset as a result of wear and tear over time. In accounting, depreciation is also a systematic process of allocating the cost of a tangible or physical asset over its useful or expected life until the value of the asset reaches its salvage value or zero, whichever is applicable.
Equity refers to the remaining value of an owner’s interest after all liabilities have been deducted. Based on the accounting equation, equity can be derived by getting the difference between the assets and liabilities of the company.
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial statements are formal records of the financial performance and activities of an entity. The four main financial statements will include the statement of financial position, income statement, statement of cash flows, and the statement of shareholders’ equity. This is commonly released together with the notes to the financial statements.
Generally Accepted Accounting Principles (GAAP)
A collection of commonly followed accounting rules and standards for financial reporting.
A general journal refers to the book of original entry used by accountants to record day-to-day transactions sequentially according to the date the events occur.
A general ledger is a useful tool for the business to track the different accounting items such as assets, liabilities, owner’s equity, income, and expenditures.
An assumption accountant makes while preparing the financial statements of an entity that indicates that an entity will continue in operation for the foreseeable future and that it neither has the intention nor the need to liquidate or curtail materially the scale of its operations.
Goodwill is a long-term intangible asset that a company acquires or that associated with the purchase of one company by another. Goodwill normally arises from good reputation or branding, intellectual property rights, among others.
Incorporation is the legal process by which businesses become a legal entity separate from the owners. It refers to a series of steps involved in forming a business entity.
Liquidity describes the degree to which cash or cash equivalents are available and readily convertible to meet a company’s short-term operating needs.
Overhead pertains to the expenses incurred by a company in the production or delivery of products or services that are not directly attributable to a specific business activity, product or service. This normally includes costs associated with indirect labor, electricity, and rent.
Time Value of Money
Time value of money is a basic financial concept that explains that the money you have now will have a smaller value in the future because of its potential earning capacity.
A trial balance is a tool used by bookkeepers and accountants to compile all the debits and credits of an entity’s general ledger accounts.
The present value is the current value of an expected income stream given a specified rate of return determined as of a specific point in time.
Share premium is the difference between the selling price of the shares and their par values.
Solvency refers to an entity’s ability to meet its long-term obligations.
Vesting is the process used to grant employees their rights to pension or retirement funds that are contributed by the employer. Vesting normally occurs after employees have worked a certain number of years for the company or after an agreement which was stipulated has been met.
Working capital refers to the capital of a business that is used in the daily operations. This is computed as the difference between the current assets and current liabilities.
Embracing the Language of Business and Accounting
Regardless of the size of your company’s operations, having a good understanding of business terms can help you develop better strategies and make better business decisions moving forward. We can assure you that you will be encountering even more jargons over time but don’t fret. What you’ve learned so far will give you a good head start. Once you’ve processed this information, take time to understand the importance of bookkeeping in businesses (Related: bookkeeping is essential for your business to thrive).