Have you ever left your bookkeeper or accountant’s office scratching your head because you didn’t understand a word he was saying? That’s:

Accounting Lingo

Your business finances are one of the most important pieces of your business. We make decisions daily based on our business’s finances. Shouldn’t we understand the lingo? I created this page to help you understand just some of the bookkeeping/accounting terms that may not be clear when you hear them used in your office or by your accountant. I’ll only cover the most common terms used on the Income Statement and the Balance Sheet. I am more than happy to explain to my clients, any terms that may not be covered here.

Accounts Receivable

When you create an invoice for a client, the invoice is put into an account called accounts receivable. This is money that is owed to you for your services or products. It stays in this account until you receive payment from your customer. At the end of the month, you will know exactly which clients have outstanding balances.

Accounts Payable

When a bill is entered into your bookkeeping system, the bill is put into an account called accounts payable. When you pay this bill, it is removed from accounts payable. At the end of the month, you will know exactly which bills are still outstanding.

Gross Income

Total amount of income.

Cost of Goods Sold or COGS

These are expenses directly related to the service you provide or the product you sell. In other words, if you didn’t have this expense, you wouldn’t be able to conduct your business. Example – If you own a restaurant, you must buy food to be in business. No food, no business. Also, if you have payroll at that restaurant, that is a direct expense related to your business. No cooks or waitresses, no business.

Gross Profit

This is your Gross income -COGS = Gross Profit

Expenses or Overhead Costs

Other costs NOT related to labor, direct materials, or production. They represent more static costs and pertain to general business functions. These are “fixed” costs. Ex Trash removal, insurance, advertising, rent. If you own a restaurant and rent/lease the building from someone, rent is due every month regardless of how much business you had that month.

Net Profit or Net Income

This is your Gross Profit – Expenses = Net Profit
Or
Gross Income – COGS – Expenses = Net Profit

Assets

An asset is anything that has current or future economic value to a business. Assets include everything controlled and owned by the company that’s currently valuable or could provide monetary benefit in the future. Examples include patents (intangible) machinery, and automobiles (tangible).

Liquid or Current Assets

These are assets that can be quickly converted to cash. Example – Accounts Receivable, Inventory, and of course Cash.

Non-Current or Long-Term Liabilities

This is money owed. There are many, but a loan is the most common, whether for equipment or vehicles, etc that is owed for more than 1 year. Example – You purchased restaurant equipment for 75,000.00 on credit. You will make monthly payments on the loan to pay it off.

Current or Short-Term Liabilities

This is a loan or money owed (CC) that will be paid back within 1 year.

Retained Earnings

Earnings of a company which are retained (reinvested) in the business. At the end of each accounting period, retained earnings is the amount of profit a company has left over after paying all its direct & indirect costs, income taxes and shareholder distributions.

Owner's or Shareholder's Equity

It’s what’s left over for the owner after they have subtracted all the liabilities from the assets.

Equation: Assets – Liabilities = Owner’s Equity OR Assets = Liabilities + Owner’s Equity (depending how you look at it.)
As a math problem: 4-2=2 OR 4=2+2

Looking for some Bookkeeping Answers?