September 20th 2023.
What is Accounting?
Accounting is a system used to record a business' financial transactions. It helps business owners calculate their costs and profits. Through accounting, companies can better understand their financial position and make important financial decisions. It is also used to help set operational processes, prepare taxes, and more.
What Accounting Terms Should Business Owners Know?
Business owners should be familiar with basic accounting terms. A few of the core terms include accounting period, accounts receivable, accounts payable, accrual basis accounting, and allocation.
Accounting period refers to a set time during which accounts measure the accounting cycle. Generally, this is fiscal years, calendar years, or quarters, but can also be monthly. Accounts receivable is the money owed to the business from customers, clients, or vendors. Accounts payable on the other hand is the money a business owes to other parties.
Accrual basis accounting is a method where income and expenses are recorded when they occur instead of when the money is exchanged. Allocation is assigning funds to a particular period or account. Amortization is a technique used to lower the book value of an asset or loan over a set period.
Assets are items of value owned by a business, such as cash, inventory, or accounts receivable. There are various asset classes, such as equities, fixed income, and cash equivalents. Asset types can be liquid, physical or tangible, or intangible.
A balance sheet, or statement of financial position, summarizes a company's assets, liabilities, and owner's equity. A bookkeeper logs day-to-day transactions and financial activity. Bookkeeping is the process of recording accounts, transactions, and other business financial information.
Book value is the original value of an asset minus its depreciation or liability. Capital is a financial asset or the value of a financial asset. Cash basis accounting records financial transactions when the money actually changes hands.
Cash flow is the money that moves in and out of a company during a given accounting period. A cash flow statement summarizes this money. Certified Public Accountants are professionals who provide auditing, taxation, accounting, and financial consulting services.
The chart of accounts is the master list of all accounts in a company's ledger. Closing the books is when an accountant finalizes and approves bookkeeping data for a given accounting period. Cost of goods sold is the direct expenses of producing the goods a business sells.
Depreciation tracks the decreasing value of an asset over time. Diversification is the process of allocating or investing capital in various asset classes and types. Dividends are company profits paid out to shareholders.
Double-entry accounting records all financial transactions twice, as both credit and debit. An Enrolled Agent is an accounting professional who represents taxpayers in dealings with the Internal Revenue Service. Equity and owner's equity refer to the stake in the company held by the business owner.
Expenses are expenditures for business operations. Examples include fixed costs, variable expenses, accrued expenses, and operational expense. The general ledger is the master ledger that contains all individual ledgers and account types.
Generally Accepted Accounting Principles are a set of accounting standards endorsed by various financial groups and organizations. Gross income, or gross profit, is the value of products sold before factoring in cost of goods sold. This differs from net profit.
What is Accounting?
Accounting is a systematic process of recording business financial transactions to help business owners understand their costs and profits. It is a way to define and understand a company’s financial position and can help small business owners make important financial decisions, define operational processes, prepare taxes, and more.
When it comes to accounting terms, there are many that business owners should know. Accounting Period is the defined amount of time during which accounts measure the accounting cycle. Accounting periods are often fiscal years, calendar years, or quarters, and can be monthly. Accounts Receivable tracks the money owed to a business from customers, clients, and vendors and is considered an asset. Accounts Payable tracks the money a business owes to other parties and is considered a liability.
Accrual Basis Accounting is a method where income and expenses are recorded at the time they occur instead of when money is exchanged. Allocation is the assigning of funds to a particular period or account. Amortization is an accounting technique used to lower the book value of an intangible asset or loan over a set period.
Assets are anything a business owns with a monetary value. These are commonly organized into various classes, such as Equities or stocks, Fixed income or bonds, and Cash equivalents or money market instruments. Asset types include Liquid (cash or anything that can be easily converted into cash), Physical or Tangible (assets that physically exist and typically have to be sold to become cash), and Intangible (nonphysical entities of value).
The Balance Sheet is a financial report that summarizes a company’s assets, liabilities, and owner’s equity. A Bookkeeper logs a business’s day-to-day transactions and financial activity and sends the books to an accountant for review and approval each accounting period. Bookkeeping is the process of recording accounts, transactions, and other business financial information. Book Value is the original value of an asset minus its depreciation or liability. Capital is a financial asset or the value of a financial asset.
Cash Basis Accounting records financial transactions when the money changes hands, whereas Accrual Basis Accounting records them at the time of occurrence. Cash Flow is the money that moves in and out of a company during a given accounting period. The Cash Flow Statement is a financial statement that summarizes the money flowing in and out of the business in a given accounting period.
A Certified Public Accountant (CPA) is a professional accountant that has obtained licensure to provide auditing, taxation, accounting, and financial consulting services. The Chart of Accounts is a master list of all accounts in a company’s ledger. Closing the Books refers to when an accountant finalizes and approves bookkeeping data for a given accounting period. Cost of Goods Sold (COGS) refers to the direct expenses of producing the goods a business sells.
Depreciation tracks the decreasing value of an asset over time and is recorded as an expense on the Income Statement. Diversification is the process of allocating or investing capital in various asset classes and types to avoid over-exposure in any given sector. Dividends are company profits paid out to the corporation’s shareholders. Double-entry Accounting records all financial transactions twice, as both credit and debit, and is the most accurate way for businesses to register their finances. An Enrolled Agent is an accounting professional who represents taxpayers in dealings with the Internal Revenue Service.
Equity and Owner’s Equity refer to what is left over when subtracting liabilities from assets. Expenses refer to expenditures for business operations, such as Fixed costs, Variable expenses, Accrued expenses, and Operational expense. The General Ledger is the master ledger that contains all individual ledgers and account types. Generally Accepted Accounting Principles (GAAP) is a standard set of accounting principles endorsed by various financial groups and organizations.
Gross Income or Gross Profit is the value of products sold before factoring in COGS and differs from net profit. All of these terms are important for business owners to know in order to understand their business’s finances.
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