Essential Accounting Terms For Business Owners
Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific sector, and the bookkeeping business is no exception.
So to help you understand the terms, acronyms, and phrases regularly used when working with a bookkeeper, Prosperity Bookkeeping LLC has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your bookkeeping needs effectively.
Accounts Receivable (A/R): The money owed to a business by customers for products/ services that have already been delivered.
Accounts Payable (A/P): It’s the amount of money owed to a supplier or creditor for products/services that have been received but not yet paid for.
Reconciliation: It compares one data set to another verifiable data set to ensure accuracy. An example would be matching transactions in your accounting software to your bank or credit card statement.
Asset: It’s a resource owned by a business that is cash or can get converted to money at some point in the future. Some examples of assets are cash on hand, money owed to the business by customers (accounts receivable), cash investments, or machinery and equipment.
Liability: It’s a financial obligation to pay creditors or suppliers at some point in the future. Some examples of liabilities include loans, credit card balances, or accounts payable.
Basis of Accounting: It defines when financial activities are recognized and reported. In cash basis accounting, revenue and expenses get identified and noted when money changes hands. For example, if I sell you a widget today but you pay me next month, I don’t report that income until next month when I get paid. In accrual basis accounting, revenue and expenses are recognized at the time of sale, regardless of when they get paid. Using the same example, if I sell you a widget today, but you pay me next month, I report that income today even though I have not received the money yet.
Income Statement (aka Profit & Loss Statement or P & L): A financial report that summarizes total income earned or received and expenses incurred or paid for a given period. It also reports the total net income for that period (Income less expenses).
Net income (aka Profit/Loss): Net Income is the amount of money a business makes after deducting costs. It gets calculated by taking total income (aka sales or revenue) less total costs. (Net Income = Income - Cost).
Balance Sheet: A balance sheet is a financial report that shows what a company owns (assets) and owes (liabilities) as well as its total equity at a given time. The formula is Total equity = Assets - Liabilities.
Equity: The funds invested into a business by its owner and any profits retained from previous periods. It gets calculated by taking total assets minus total liabilities. These numbers are found on a company’s balance sheet.
Nexus (aka Sufficient Physical Presence):
Nexus is a relationship or connection between two more entities. For accounting purposes, it usually refers to a tax law stating that if there is a sufficient physical presence of a business in a territory governed by a taxing authority, that business must collect and remit taxes to that taxing authority.
Owner’s Draw: The withdrawal of cash or other assets by a business owner(s) for personal use. An owner’s draw is not a payroll-related transaction.
Journal Entry: A journal entry is a process that uses debits and credits to record business transactions in accounting records or software. Journal entries can be done manually or in the background of accounting software. An example of a journal entry happening in the background would be entering a vendor bill into accounting software. The billing form asks you to enter details such as the vendor name, date, and amount. When you save the bill, the system records a journal entry in the background that increases an expense account (debit) and increases the accounts payable (credit).
Debit (DR): An accounting entry that increases expenses and assets and decreases income, liabilities, and equity.
Credit (CR): An accounting entry that decreases expenses and assets and increases income, liabilities, and equity.
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If you’re looking for a bookkeeping company, contact the experts at Prosperity Bookkeeping LLC. With many years of experience in the bookkeeping sector, we will help to improve cash flow by prudently managing the books.
We specialize in bookkeeping, accounting, payroll, advisory, forecasting, cloud migration, software setup, and discounts. We serve clients across Denmark, Green Bay, Appleton, Oshkosh, and the surrounding areas.