Basic Accounting Terms that Business Owners should be Aware of

Every industry has its own professional language and jargon, and learning the lingo gives you access to the inner circle and an indication to others that you truly belong here. Therefore, if you are planning to start your own business, the first thing you need to get out of the way is familiarizing yourself with some of the basic accounting terms and acronyms that are commonly used in the industry. 

Knowing how to talk the talk will allow you to concentrate more on on-the-job training than on accounting definitions. This will help you launch a successful business, especially if you want to handle financial matters successfully and want to stay away from complications in operations.

This article looks at an assortment of basic accounting terms for beginners to have their own accounting glossary. These can come in handy for new business owners in the industry. Many accounting firms out there to you help understand how accounting needs to be done for any business.

Transaction

A transaction is anything that measures the exchange of goods or money between two different parties. 

For example, a purchase of goods is a business transaction where one end receives material or goods while the other end receives payment or creates an obligation to pay at a future date. 

If the parties agree to settle the transaction without delay by paying in cash or by check, it is called a cash transaction. On the other hand, if the payment is settled on a future date by the agreement of both parties, it is known as a credit transaction.

Profit and Loss

Profit and loss are two different ends of the same process. Profits are achieved when the sales you make are greater than the expenses you have incurred. On the contrary, you make a loss when the expenses total more than the revenue. In both cases, you need to include all different heads and calculate through the income statements. 

Asset

Assets are all physical are intangible possessions currently held by a business. 

All physical assets are considered tangible due to their physical presence, including land, buildings and machinery. Intangible assets include assets like goodwill and others and cannot be felt physically. 

Liability

Liability is a financial obligation that has to be settled on a future date. It is the amount of money that a business owes to other parties. For example, if a business purchases goods from a supplier on credit, the firm is obligated to pay the price of goods to the supplier on a mutually agreed date in the future. Similarly, if a business takes a loan from a bank, an obligation to pay back the loan, including interest, is created. 

A liability is further classified into short-term or current liabilities and long-term or non-current liabilities. 

Current Liabilities

A liability is considered a current liability when any of the following is true for it:

  • It is expected to be settled in a business’s normal operating cycle.
  • It is held mainly with the intention of trading.
  • It has to be paid back within 12 months after the date it was reported on. 
  • The company cannot in any case defer the settlement of the liability for at least 12 months after the reporting date. 

Non-Current Liabilities

All other liabilities that are not current liabilities can be referred to as non-current liabilities. Examples of non-current liabilities include issued debentures, a loan taken for 4 years etc.

Accounts Receivable (AR)

The amount of money that a customer or client owes to a business after goods or services have been delivered or used is known as accounts receivable.

Accounts Payable (AP)

The amount of money that a business owes creditors like suppliers, etc. in return for goods or services that the supplier has delivered is known as accounts payable.

Balance Sheet (BS)

A balance sheet is a financial report that summarizes the total assets that a company owns, the total liabilities that a company owes to other parties, and owner and shareholder equity at a given time. 

Capital (CAP)

Capital, often denoted as CAP, is a financial asset or the value of a financial asset such as cash or goods. Working capital is the money or assets that a business can put to work. It is calculated by subtracting current liabilities from your current assets.

Creditor

A creditor is a person or party to whom the business owes money or anything of worth. 

For example, if your business has purchased goods from a supplier on credit, the amount you owe to the supplier is money payable and your supplier is your creditor as they have lent you goods on credit. Creditors are generally categorized as current liabilities.

Book Value (BV)

The book value or NBV of the asset is tracked over time after subtracting the total amount of depreciation from the total cost of the asset. 

Equity (E)

Equity is used to calculate the total current worth of an organization. Equity is found after subtracting all liabilities from the assets currently held by the organization.  

Capital Expenditure

A capital expenditure is a type of expense that is incurred when you acquire a fixed asset that is intended to be for long-term use and earning profits. For example, the amount paid to purchase a plant for production and manufacturing is capital expenditure. 

Sometimes, expenses are incurred to enhance or increase production capacity and efficiency. This will also be referred to as capital expenditure. Capital expenditure is part of the balance sheet. 

Revenue Expenditure

A type of expenditure that is incurred to earn revenue in the current period is known as revenue expenditure. The benefits that are gained from revenue expenditure are exhausted within the year of the incurrence. For example, expenses incurred for repairs, traveling, salary and insurance of employees, etc. The revenue expenditure causes a decrease in profit or surplus. Revenue expenditure is a part of the income statement. 

These terms are quite common in business circles today and are an absolute necessity for new business owner. You can acclimatize yourself with these terms and hire accountants for tradies to make sure that you have all ends covered and are prepared for the financial aspects of running a business. 

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