Starting a Small Business

17 Basic Accounting Terms, Acronyms And Abbreviations Business Owners Should Know

by
Julie Farless
on
4/17/2016
17 Basic Accounting Terms, Acronyms And Abbreviations Business Owners Should Know

As the owner of your own business, you’ve had to acquire and use a wide range of information and experience. Though what is most important to your business is undoubtedly the industry-specific information that you use every day, it is still valuable to have an understanding of the most rudimentary accounting terms and strategies in order to ensure that you are headed in a sound financial direction and with a minimal level of awareness of your business’ financial health. Familiarity with the vocabulary and terminology of business is essential to your financial literacy.

 While there is no need for you to take an accounting course, or even to take on responsibility for keeping your books or doing your own taxes, it is still advantageous for you to know the lingo, abbreviations and terminology of accounting so that you can feel confident while discussing your business’ financial health.

Here are 17 basic accounting terms that you should strive to add to your vocabulary:

  1. Accounts Payable, or AP – This term refers to your liability to suppliers, service providers and other creditors. It is the amount of money that you owe them for what they have provided.
  1. Accounts Receivable, or AR – This term refers to the liability that your clients and customers have to you as a result of you having provided them with goods or services.
  1. Balance Sheet – This term refers to a document that provides a snapshot of your business’ health and financial conditions. The information that it contains includes what is owed to the company (assets), what the company owes (liabilities), and overall value (equity).
  1. Credit (CR) - Credit is an item that is listed on a company’s balance sheet, and that reflects either an increase of liabilities or a decrease in assets. Businesses whose balance sheets employ the double-entry method of accounting will show both a credit and a debit for each and every transaction.
  1. Debit (DR) – A debit is an item that is listed on a company’s balance sheet that is the opposite of a credit. It represents either a decrease of liabilities or an increase in assets.
  1. Assets: Fixed (FA) or Current (CA) – This term refers to items that owned by the company. They may be categorized as either fixed or current, with fixed assets defined as those that will have long-term value and current assets being defined as those that are likely to be used within the year. Current assets generally include accounts receivable, cash, and inventory.
  1. Liabilities: Current (CL) or Long Term (LTL) – Every business incurs debt as part of its daily operations, but there are different types of debts and they have different impacts on the bottom line. Long term liabilities such as bank loans are paid out over an extended period of time, while current debts such as those paid to suppliers and service providers generally need to be paid much more quickly depending upon the payment terms that are negotiated.
  1. Capital: From a mathematical standpoint, a business’ working capital is calculated by subtracting its current liabilities from its current assets.
  1. Expenses: Fixed (FE), Variable (VE), Accrued (AE) and Operational (OE) – All of these varying types of expenses represent the outflow of cash that a business must experience as part of its operations. Expenses can include payroll, the costs of equipment, monies owed to suppliers and service providers, and the payment of loans to financial institutions.
  1. Cost of Goods Sold (COGS) – Calculating the cost of goods sold is very important to being able to determine the amount of profit that is being made on an item. The COGS can include labor costs, raw material costs, and even the costs of marketing an item for sale.
  1. Cash Flow (CF) – Cash flow is a term that represents the money that flows in and out of an organization as a result of its business operations. In order for a business to operate successfully and efficiently, it is essential that it finds an equilibrium and has a positive cash flow 
  1. Net Income (NI) – Net income is commonly referred to as a business’ bottom line, and it is calculated by subtracting the amount of expenses that a business incurs from its total revenues.
  1. Generally Accepted Accounting Principles (GAAP) – This term refers to standard practices that have been established for their financial reporting. Though all companies are expected to adhere to these rules, for publicly traded companies it is particularly important to do so.
  1. Owner’s Equity (OE) – When a company issues stock, the term owner’s equity refers to the portion of that stock that is held by the owner.
  2. Profit and Loss Statement (P&L) – A profit and loss statement provides a summary of a company’s finances during a specific period of time. It is usually dedicated to a full year or a quarter, and generally includes information on costs and expenses as well as total revenues.
  1. General Ledger (GL) – All of a company’s financial transactions are recorded in what is referred to as the general ledger
  2. Return on Investment (ROI) – Return on Investment has become a popular phrase in industry, and refers to the financial effect of money that has been invested in a project, or in the company itself. To determine a specific return on investment, the net profit that has been realized is divided by the investment itself, and then the result.
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Julie Farless

Julie Farless

Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services, but we specialize in tax preparation. We work with you to ensure that your personal or business processes are conducted in a manner that ensures ongoing integrity in your financial transactions. We are available to answer your questions and help with your ongoing tax planning and changing business needs.

Deborah Martinez & Earl Shanken
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Arizona

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