Technical jargon, even if its spoken in your native language, can easily fly over our heads. It’s almost as if we are in a foreign country. Many of us know that immediately ‘Googling’ things after a doctor’s appointment usually is a mistake, but the internet isn’t always a dangerous place for vocabulary.
Like the doctor’s office, in the business world, many accounting terms can also leave us scratching our heads. Most business owners, when meeting with their accountant or CFO, want to do more than just smile and nod as unfamiliar terms are tossed about. In this earlier post, we tackled nine basic accounting terms for the non-accountant. We are here to give you a crash course in nine more basic accounting terms to help you have a better understanding of how your business is operating.
9 more basic accounting terms for the non-accountant
1. Accrued Expense
An accrued expense occurs when a company owes money for a good or service that has already been delivered to the company. This may seem similar to an account payable, but there are some subtle differences. Basically an account payable is when the company has received a good or service AND a bill or invoice for that good or service. An account payable is typically an exact number. Accrued expenses, on the other hand, are when the company has received a good or service, knows it owes money for it, but it has not yet received a bill or invoice.
Equity refers to ownership. As Investopedia points out, “Equity can have somewhat different meanings, depending on the context and the asset type.” However, for the purposes of a simple definition, just know that equity is simply the value of the assets of a company once all liabilities have been subtracted.
Have you ever heard that a car loses its value as soon as you drive it off the lot? That’s depreciation. Depreciation deals with the loss of value of something. In business, this is the loss of value of any of your business assets. Typically, you should only worry about depreciation, and how to expense it, if the asset has a fairly significant financial value, i.e. a piece of machinery or a vehicle.
CPA is an acronym for a certified public accountant. In order to become a CPA, one has to pass the rigorous CPA exam. Unlike regular accountants, CPAs have the ability to file audit reports, issue audits, sign tax returns, and represent you in front of the IRS. These are things to keep in mind when deciding how you want your business’s accounting to be accomplished.
When you spill a cup of water it moves pretty fast, right? You only have a matter of seconds to get to the paper towel. Liquids, thanks to their moving molecules, can move about quickly and freely. Keep that in mind when thinking about financial liquidity.
In business, liquidity refers to how quickly your assets can be converted to cash. For example, stocks you hold can be converted fairly quickly, but selling a company car will take a little longer. Cash is the most free flowing, liquid, asset you can have as a business. Having ample cash on hand, or the ability to convert something quickly to cash, makes it easier to invest in new assets or pay for expenses.
ROI stands for Return on Investment. It is a number, often represented as a percentage, that can be calculated with the following formula: x 100= ( / Cost of )
Companies can calculate the ROI of the entire business by plugging in their net profit divided by the cost of all of their investments, or they can figure out the ROI on specific projects. For example, if you are trying out a new email marketing campaign you can determine its efficacy by calculating the ROI for that project.
7. Debits and Credits
Money Instructor points out, “Every single transaction recorded in the accounting process falls into one of two categories: it is either a debit or a credit.”
Thankfully, despite it being a big overarching concept in the accounting world, it is a fairly simple one to explain. Debits are money that is removed from your account, credits are money that is added. Write a check to the electric company? Debit. Deposit a payment from a customer? Credit.
Liabilities are any debts that a business owes. This can included accounts payable as well as accrued expenses.
9. In the red/In the black,
These common phrases have their roots in the early twentieth century. When accountants were handwriting ledgers, red ink was used for recording losses while black ink was used for gains.
Today, these phrases refer to how a company is performing after all expenses have been accounted for. The business is considered to be ‘in the red’ if they are operating at a loss–their profit is not covering all of their expenses. Businesses ‘in the black’ are operating for a profit. Often, new businesses find themselves ‘in the red’ for a while before things really pick up.
Looking for more accounting advice for your business? Contact us at Lucid Advisory and Finance!