Have your eyes ever glazed over when your accountant or CPA is explaining something to you, while you pretend to follow along? Some people may have difficulty admitting that they don’t know what someone is talking about. Often this is out of embarrassment and as a result, they might let their CPA ramble on without actively listening.
The accounting industry uses a lot of specialized terms that can make it difficult for people to follow along if they’re not familiar with the industry. We sometimes see clients struggling to understand some of the terms we use at Faber, and so we look for those glazed-over eyes to see if an understanding check is needed.
Familiarizing yourself with some basic accounting terms will go a long way in helping you follow along when your CPA or accountant is talking. So, here is some terminology, with descriptions, to help you out!
Accounting: The theory and system of setting up, maintaining, and also auditing the books of a firm; the art of analyzing the financial position and operating results of a business house from a study of its sales, purchases, overhead, etc.
Accounts Payable (AP): A liability to a creditor, carried on an account, usually for purchases of goods and services.
Accounts Receivable (AR): A claim against a debtor, carried on an open account. AR is usually debts due from the sale of goods and services.
Assets: Items of ownership convertible into cash; the items detailed on a balance sheet.
Cash Flow (CF): The sum of the after-tax profit of a business plus depreciation and other non-cash charges. Cash flow, as a result, is an indication of internal funds available for stock dividends, purchase of buildings and equipment, etc.
Chart of Accounts: An exhaustive list of all accounts used by an organization, used to organize and define entries. This list includes each type of record whether an asset, liability, equity, revenue or expense.
Credit (CR): An entry recording a sum received, traditionally listed on the right-hand side or column of an account.
Debit (DR): An entry recording of an amount owed, traditionally listed on the left-hand side or column of an account.
Dividends: A sum of money regularly paid (typically quarterly) by a company to its shareholders out of its profits (or reserves). A dividend is not an expense on the corporation’s income statement.
Expenses: The cost required for something; the money spent on something. As a result, expenses are costs that are matched with revenues on the income statement.
Liability: Being responsible for something, especially by law. In accounting, this is usually a debt or financial obligation. Liabilities also include amounts received in advance for a future sale or service.
Revenues: Income, especially with reference to a company or organization.
At Faber, we’re dedicated to helping you understand your numbers so that you can make the best choices for your company. We will be there every step of the way so we can ensure you’re getting the quality service that your business deserves. Call us today to book an appointment, our partners, Daniel W. Faber and Peter Johnson, and staff are excited to hear from you.
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