Your guide to basic accounting jargon (and why it's important to know)!


It might seem like a waste of time (after all, you hired an accountant to deal with the technicalities, right?) but it's important for you to be familiar with the basics. Knowing the key terms will keep you on the same page as your financial adviser and make the entire collaboration run much more smoothly. 

It means you can sit down in a meeting with your accountant and truly understand the advice being given without needing a glossary on-hand.

You can then engage in a two-way conversation about your finances, rather than feeling bombarded by a bunch of dry, technical jargon that turns into white noise.


We always like to keep clients up to speed on the basics, so that they understand the reasons behind our processes, recommendations and advice. So we've put together a list of key accounting terms that business owners should know:

1. Assets - Fixed Assets (FA) and Current (CA)

Assets are the wealth that has been accumulated by the business. It may be items that depreciate over time, or goods that are sold to customers.

Current Assets are those that will be converted into cash within one year. Typically, Current Assets are cash, inventory or accounts receivable.

Fixed Assets are long-term and will likely provide benefits to a company for more than one year, such as real estates, land or plant and equipment.

 

2. Revenue

Income and revenue are interchangeable, comprising the total amount of all income collected at one point in time. It may include cash sales, credit purchases, subscription fees and interest income. It differs from receipts, as it can include monies that are not collected at the delivery time.

 

3. Equity

The value of the shares issued by a company.

 

4. Gross Profit or Gross Margin

Gross Profit or Gross margin is the total number of sales that have been made, subtracted by the associated direct costs, such as manufacturing costs, wholesales costs, material, and supplies.

 

5. Working Capital

Working capital is calculated by taking your current assets and subtracting current liabilities – basically the money or assets an organisation can put to work in the short term.

 

6. Liability

The future sacrifices of economic benefits that the organisation is obliged to make to other entities as a result of past transactions or other past events.

7. Cash Flow

The revenue and expense expected to be generated through business activities (sales, manufacturing etc.) over a period of time.

 

8. Balance sheet

The balance sheet records the basic accounting formula of:

assets = liabilities + equity

It can be calculated monthly, quarterly or yearly. From the balance sheet the financial health of the business can be ascertained.

 

9. Trial balance

The trial balance is a summary of the general ledger, and includes both debits and credits for one particular account. The sheet must balance, with debits equalling credits.

 

10. Profit and Loss Statement (P&L)

A financial statement that is used to summarise a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time, such as quarterly or annually.

 

11. Present Value (PV)

The current value of a future sum of money based on a specific rate of return. Present value helps us understand how receiving $100 now is worth more than receiving $100 a year from now, as money in hand now has the ability to be invested for a return.

 

12. Return on Investment (ROI)

A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage.

 

13. Accounts receivable (AR)

The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used.

 

14. Accounts payable (AP)

The amount of money a company owes creditors in return for goods or services they have delivered.

 

15. Diversification

The process of allocating or spreading capital investments into varied assets to avoid over-exposure to risk.

 

If you're ever unsure about what your accountant is talking about, you should always ask them to clarify. There is no shame in not knowing an obscure accounting reference, and any good adviser will be more than happy to explain. 




Need to talk to someone who knows accounting jargon? Get in touch with us!