Accounting Terminology

One challenge people have when dealing with accountants, particularly for business purposes, is understanding some of the terminology that is being used. We know sometimes it is not comfortable to ask for information for fear of being considered uninformed so, we have put together a list of accounting terms that may use in discussing your company financial status.

Accelerated Depreciation — there may be benefits to claiming the depreciation of an asset faster than over the life of the asset. The method to do this is called accelerated and allows greater depreciation to be claimed in the years following the acquisition of an asset.

Accounts Payable — this term refers to the financial obligation you will have after you acquire goods or services from a vendor.

Accounts Receivable — once you have performed services or delivered goods to a customer, this is the amount that is reflected on your balance sheet after billing.

Appreciation — typically used in describing the increased value of real estate, stocks and bonds, or commodities.

Break-Even Point — once your paid sales of products or services equals your total costs.

Cash Flows — the net difference between the amount of receipts and the amount of cash output during any specific period is considered cash flow. Generally, a business may do this monthly or quarterly.

Company — this is a generic term for any business structure including partnerships, proprietorships, or corporations.

Encumbrance — when you have a long-term agreement to deliver products or services and a portion remains incomplete. Also used when there is a lien on an asset such real estate or equipment that is used for collateral against funds borrowed.

Factoring — when a business agrees to give up the right to collect on one, or more, outstanding invoices in return for an immediate inflow of cash. There are fees involved which means they are discounting the invoice or invoices.

First In First Out (FIFO) — inventory items which were acquired earliest are sold first.

Generally Accepted Accounting Principles (GAAP) — the rules that are used to define accounting practices which are generally set by the Financial Accounting Standards Board (FASB).

High-Low Method — businesses always have two sets of costs fixed and variable. Fixed includes costs such as a payment on a lease that does not change while variable costs include items like utilities. This is one method of how those costs are separated.

In Arrears — when a new invoice is sent out, any amounts overdue because they were not paid as agreed would be considered in arrears.

Income — there are two types of income, gross and net. Gross income refers to the amount of money brought in before expenses, and net is the amount after expenses.

Journals — daily financial transactions are typically entered in a journal. Keep in mind, this may be a general journal recording single transactions (journal entry) and may be electronic or hard copy.

Key Employee — typically an employee who has a say in ownership or decision-making. Often these employees are highly compensated, and their earnings may impact a company pension plan.

Last In, First Out (LIFO) — inventory items which were acquired most recently are sold first.

Margin of Profit — when net sales are calculated, the gross profits represent the profit margin.

Marginal Cost — we all know that lower output in production means less profit as well as lower costs. However, there is a total increase or decrease in the cost to the company when only one more, or one less item is produced. This is known as the marginal cost.

Net Assets — an accounting term that defines the value remaining in all assets after the amount owed to all creditors has been subtracted.

Net Income — the remaining balance in any accounting period after all expenses have been deducted from all revenues. May be a positive or negative number.

Notes Payable — a generic term for any written promise to pay which must be paid in one year or less.

Operating Expense — expenses which are necessary to continue operating a business such as rent, salaries, and utilities. Does not include the cost of materials to produce goods.

Quick Assets — a financial asset that will be used in a short period of time to pay an invoice or for products and services. Keep in mind, these assets may be converted to cash to pay obligations.

These are some of the terms you may hear your accountant referring to during reviews of your company’s financial transactions. Keep in mind, you should always feel confident about asking questions. Oftentimes, professionals in all fields develop a habit of “talking in shorthand” and assuming their audience understands what they mean.

At Rue & Associates we are proud of our more than two decades of providing accounting and business consulting services in Mechanicsville, Richmond, Hanover, Henrico and surrounding areas of Central Virginia. Contact us today if you need an accountant, tax preparation, business consulting or tax resolution help.