Balance Sheet Terms

The Balance Sheet is one of the two most common financial statements
produced by accountants. This section pertains to potentially confusing
basic accounting terms that relate to the balance sheet.

1. Accounts Payable (AP)

Accounts Payable include all of the expenses that a business has incurred
but has not yet paid. This account is recorded as a liability on the Balance
Sheet as it is a debt owed by the company.

2. Accounts Receivable (AR)

Accounts Receivable include all of the revenue (sales) that a company has
provided but has not yet collected payment on. This account is on the
Balance Sheet, recorded as an asset that will likely convert to cash in the
short-term.

3. Accrued Expense
An expense that been incurred but hasn’t been paid is described by the
term Accrued Expense.

Accrued income

Accrued income is referred to as the income that is earned but not yet
received.

4. Asset (A)
Anything the company owns that has monetary value. These are listed in
order of liquidity, from cash (the most liquid) to land (least liquid).

5. Balance Sheet (BS)

A financial statement that reports on all of a company’s assets, liabilities,
and equity. As suggested by its name, a balance sheet abides by the
equation <Assets = Liabilities + Equity>.

6. Book Value (BV)

As an asset is depreciated, it loses value. The Book Value shows the
original value of an Asset, less any accumulated Depreciation.

7. Equity (E)
Equity denotes the value left over after liabilities have been removed.
Recall the equation Assets = Liabilities + Equity. If you take your Assets
and subtract your Liabilities, you are left with Equity, which is the portion of
the company that is owned by the investors and owners.

8. Inventory

Inventory is the term used to classify the assets that a company has
purchased to sell to its customers that remain unsold. As these items are
sold to customers, the inventory account will lower.

9. Liability (L)
All debts that a company has yet to pay are referred to as Liabilities.
Common liabilities include Accounts Payable, Payroll, and Loans.

Income Statement Terms

The Income Statement AKA Profit and Loss Statement is the second of the
two common financial statements. These are the most common basic
accounting terms used in reference with this reporting tool.

10. Cost of Goods Sold (COGS)

Cost of Goods Sold are the expenses that directly relate to the creation of a
product or service. Not included in this category are those costs that are
needed to run the business. An example of COGS would be the cost of
Materials, or the Direct Labor to provide a service.

11. Depreciation (Dep)

Depreciation is the term that accounts for the loss of value in an asset over
time. Generally, an asset has to have substantial value in order to warrant
depreciating it. Common assets to be depreciated are automobiles and
equipment. Depreciation appears on the Income Statement as an expense
and is often categorized as a “Non-Cash Expense” since it doesn’t have a
direct impact on a company’s cash position.

12. Expense (Cost)

An Expense is any cost incurred by the business.

13. Gross Margin (GM)

Gross Margin is a percentage calculated by taking Gross Profit and dividing
by Revenue for the same period. It represents the profitability of a company
after deducting the Cost of Goods Sold.

14. Gross Profit (GP)

Gross Profit indicates the profitability of a company in dollars, without
taking overhead expenses into account. It is calculated by subtracting the
Cost of Goods Sold from Revenue for the same period.

15. Income Statement (Profit and Loss) (IS or P&L)

The Income Statement (often referred to as a Profit and Loss, or P&L) is
the financial statement that shows the revenues, expenses, and profits over
a given time period. Revenue earned is shown at the top of the report and
various costs (expenses) are subtracted from it until all costs are accounted
for; the result being Net Income.

16. Net Income (NI)

Net Income is the dollar amount that is earned in profits. It is calculated by
taking Revenue and subtracting all of the Expenses in a given period,
including COGS, Overhead, Depreciation, and Taxes.

17. Net Margin

Net Margin is the percent amount that illustrates the profit of a company in
relation to its Revenue. It is calculated by taking Net Income and dividing it
by Revenue for a given period.

18. Revenue (Sales) (Rev)

Revenue is any money earned by the business.

General Terms
Of course, there are those basic accounting terms that don’t pertain to a
particular financial statement. For those, we’ve reserved the “general”
category.

19. Accounting Period

An Accounting Period is designated in all Financial Statements (Income
Statement, Balance Sheet, and Statement of Cash Flows). The period
communicates the span of time that is reported in the statements.

20. Allocation
The term Allocation describes the procedure of assigning funds to various
accounts or periods. For example, a cost can be Allocated over multiple
months (like in the case of insurance) or Allocated over multiple
departments (as is often done with administrative costs for companies with
multiple divisions).

21. Business (or Legal) Entity

This is the legal structure, or type, of a business. Common company
formations include Sole Proprietor, Partnership, Limited Liability Corp
(LLC), S-Corp and C-Corp. Each entity has a unique set of requirements,
laws, and tax implications.

22. Cash Flow (CF)

Cash Flow is the term that describes the inflow and outflow of cash in a
business. The Net Cash Flow for a period of time is found by taking the
Beginning Cash Balance and subtracting the Ending Cash Balance. A
positive number indicates that more cash flowed into the business than out,
where a negative number indicates the opposite.

23. Certified Public Accountant (CPA)

CPA is a professional designation that an accountant can earn by passing
the CPA exam and fulfilling the requirements for both education and work
experience, which vary by state.

24. Credit
A credit is an increase in a liability or equity account, or a decrease in an
asset or expense account.

25. Debit
A debit is an increase in an asset or expense account, or a decrease in a
liability or equity account.

26. Diversification
Diversification is a method of reducing risk. The goal is to allocate capital
across a multitude of assets so that the performance of any one asset
doesn’t dictate the performance of the total.

27. Enrolled Agent (EA)

An Enrolled Agent is a professional accounting designation assigned to
professionals who have successfully passed tests showcasing expertise in
business and personal taxes. Enrolled Agents are generally sought out to
complete business tax filings to ensure compliance with the IRS.

28. Fixed Cost (FC)

A Fixed Cost is one that does not change with the volume of sales. For
example, rent and salaries won’t change if a company sells more. The
opposite of a Fixed Cost is a Variable Cost.

29. General Ledger (GL)

A General Ledger is the complete record of a company’s financial
transactions. The GL is used in order to prepare all of the Financial
Statements.

30. Generally Accepted Accounting Principles (GAAP)

These are the rules that all accountants abide by when performing the act
of accounting. These general rules were established so that it is easier to
compare ‘apples to apples’ when looking at a business’s financial reports.

31. Interest
Interest is the amount paid on a loan or line of credit that exceeds the
repayment of the principal balance.

32. Journal Entry (JE)

Journal Entries are how updates and changes are made to a company’s
books. Every Journal Entry must consist of a unique identifier (to record the
entry), a date, a debit/credit, an amount, and an account code (that
determines which account is altered).

33. Liquidity
A term referencing how quickly something can be converted into cash. For
example, stocks are more liquid than a house since you can sell stocks
(turning it into cash) more quickly than real estate.

34. Material
Material is the term that refers whether information influences decisions.
For example, if a company has revenue in the millions of dollars, an
amount of $0.50 is hardly material. GAAP requires that all Material
considerations must be disclosed.

35. On Credit/On Account

A purchase that happens On Credit or On Account is a purchase that will
be paid at a future time, but the buyer gets to enjoy the benefit of that
purchase immediately.
36. Overhead
Overhead are those Expenses that relate to running the business. They do
not include Expenses that make the product or deliver the service. For
example, Overhead often includes Rent, and Executive Salaries.

37. Payroll
Payroll is the account that shows payments to employee salaries, wages,
bonuses, and deductions. Often this will appear on the Balance Sheet as a
Liability that the company owes if there is accrued vacation pay or any
unpaid wages.

38. Present Value (PV)

Present Value is a term that refers to the value of an Asset today, as
opposed to a different point in time. It is based on the theory that cash
today is more valuable than cash tomorrow, due to the concept of inflation.

39. Receipts
A Receipt is a document that proves payment was made. A business
produces receipts when it provides its product or service and it receives
receipts when it pays for goods and services from other businesses.
Received receipts should be saved according to IRS receipts requirements,
and catalogued so that a company can prove that its incurred expenses are
accurate.

40. Return on Investment (ROI)

Originally, this term referred to the profit that a company was making
(Return), divided by the Investment required. Today, the term is used more
loosely to include returns on various projects and objectives. For example,
if a company spent $1,000 on marketing, which produced $2,000 in profit,
the company could state that it’s ROI on marketing spend is 50%.

41. Trial Balance (TB)

Trial Balance is a listing of all accounts in the General Ledger with their
balance amount (either debit or credit). The total debits must equal the total
credits, hence the balance.

42. Variable Cost (VC)

These are costs that change with the volume of sales and are the opposite
of Fixed Costs. Variable costs increase with more sales because they are
an expense that is incurred in order to deliver the sale. For example, if a
company produces a product and sells more of that product, they will
require more raw materials in order to meet the increase in demand.