Accounting Jargon to English: 10 Terms Small Business Owners Should Know
Maybe you’ve had a lifelong interest in making jewelry and decided to turn your passion project into a profession. Maybe you’ve been working for the same real estate company for ten years and decided to go off on your own. You’ve been busy advertising, building a client base, and offering high quality service-but in addition to those things you're up to your ears in receipts and don’t know where to start when it comes to balancing the books. This can become a lot to manage, but knowing a little lingo can be a good place to start. Here are a few terms translated from accounting speak into everyday English to help your business:
1. Accounts payable: The amount the company owes its service providers. This could mean the company that supplies the gems and necklace chains for your jewelry business or the rent you’re paying at your new office space.
2. Accounts receivable: The amount your customers owe your business. This includes general fees, monthly dues, and payment from various services you offer clients.
3. Accounting period: The time period in which profits are calculated. Most companies use months, quarters, and years. Some companies will use a typical calendar year for their accounting, starting in January and ending in December. Others will use a fiscal year, which is a 365 day period after January and ending one year later. For example, school districts often use July 1 until June 30 as their fiscal year.
4. Asset: Assets encompass everything your company owns. This means everything from building from which your office operates, to computers, printers, and other technology your business owns. Assets can also be intangible, for example patents, trademarks, and brand.
5. Capital: Money invested into a business. Capital often refers to the amount of money used to start a business. It can also refer to stock and ownership within a company. Capital can also refer to “things” such as equipment, buildings and other assets a business owns that add long term value and allow it to generate more income.
6. Depreciation: Refers to the lost value of an asset over time. For example, if you buy a new car, drive it 30,000 miles, and then hope to sell it, it will be worth less than you paid for it because it has been used. Therefore, its value has been depreciated. In accounting, depreciation is used to allocate the value of something over its lifespan. For example, if you make jewelry and you buy a new machine, it will benefit your company for many years to come-so your accounting can reflect that it costs you $1,000 each year for several years rather than $5,000 at once. Depreciation can be calculated in two ways: straight line and accelerated. Straight line deprecation means deprecating equal value over a machine’s entire lifespan. Accelerated depreciation would subtract more initially and then less later.
7. Equity: Means what owners and stockholders have invested in a business or enterprise. It reflects your company’s assets after liabilities have been subtracted. In other words, it's the value of your company after expenses and other liabilities have been resolved.
8. Liabilities: Liabilities are what your company owes. This includes everything from salaries paid to employees, renting office space, and loans. They can be current liabilities, meaning they must be paid in a shorter term time frame or long term, meaning they will be paid over a longer time period.
9. Revenue: How much money comes in to your business, or the amount a company receives during a period. Costs and various expenses are then subtracted from revenue to determine net income, or the amount of earnings after all expenses have been deducted.
10. 80/20 rule: This rule says that “80 percent of effects come from 20 percent of causes.” This idea comes from an Italian economist who noted 80 percent of Italy’s income was received by 20 percent of Italians. In terms of business, this often means that 80 percent of revenue can come from 20 percent of your clients. Taking this rule into account in your business can help better allocate your time and resources.
Accounting can be complicated, but knowing some basic terms can help you understand accounting jargon and improve your business. If you think COGS are something that go in a wheel and can never remember if debits go on the left or the right, our team can help. If you’d like to focus on running your business rather than balancing the budget, let us know. Contact us today to find out more about our services.
Featured photo courtesy of Pixabay.com