Accounting terminology - What does it all mean?

We know that modern business is packed full of confusing jargon and it seems like more words are being added to the lexicon every other day. But for business owners, when it comes to accounting terms there are certain concepts and pieces of jargon it really pays to understand.

These pieces of financial terminology are the kind of ‘keywords’ that leave countless business owners leaving every meeting with their accounting department feeling more confused than they were at the start of the conversation. But fear not, as we’re here to lend a hand and guide you through the definitions and abbreviations of some of the most commonly used basic accounting terms.

1. Assets, liabilities equity and inventory

An asset is anything belonging to the business that holds some form of monetary value, whereas a liability is any debt yet to be paid. Equity, meanwhile, is the value of your assets minus your liabilities, and it’s this portion of the company that’s owned by business owners and investors. Finally, inventory refers to any unsold assets that have been purchased specifically to sell on to the consumer.

2. Depreciation (Dep)

If an asset loses value over time, the amount of value it loses is known as depreciation. Generally speaking, it’s only depreciating assets of substantial value that are worth noting, such as company cars and expensive office equipment.

3. Accounts payable and receivable (AP and AR)

AP refers to expenses incurred but not yet paid whereas AR refers to all sales that have been made but have not had payments collected on. The former will be recorded as a liability on a balance sheet and the latter as an asset.

4. Balance sheets and book values (BS and BV)

A balance sheet is a financial statement that exists to visualise the total amount of assets, liabilities and equity in a company. The book value, meanwhile, refers to the original value of a given asset minus any depreciation that might have accumulated.

5. Cost of goods sold (COGS)

Here, rather than looking at every cost involved in running a business, we’re focusing only on the actual costs of creating a product or service. For example, the labour and materials would count towards COGS but the marketing budget would not.

6. Gross margin and gross profit (GM and GP)

GP and GM are perhaps the most accurate margins used to measure business profitability. The GP is reached by subtracting the COGS from your revenue and the GM is then found by dividing GP by revenue to give a percentage.

7. Income statement and net income

Often also referred to as profit and loss, this tracks revenues and expenses over a specific period, subtracting the latter from the former in order to produce a net income profit. Some accountants might also provide a net margin metric, which reveals company profit in relation to its revenue by dividing net income by any revenue over a specific period.

8. Return on investment (ROI)

A term that is most commonly used around investors, ROI is the amount that is made as a direct result of an investment. Traditionally, the ROI would be calculated by simply dividing overall company profits by its investments, but businesses today tend to measure ROI on a more granular level.

9. Generally accepted accounting principles (GAAP)

Accountants adhere to a set of rules and standards and those standards are outlined in the GAAP. Generally speaking, all publicly traded companies must use GAAP by law.

10. General ledger

When an accountant refers to “the books” this is what they’re talking about. The general ledger is where all transactions and financial data is stored to help accountants prepare financial reports and help businesses owners understand and appreciate their financial health. Today, most accountants will use accounting software to keep track of company finances.

We can help

If you’re interested in learning more about accounting then get in touch with the financial experts at GOCardless today. Visit our website to find out how GOCardless can help you with ad hoc payments or recurring payments.