When I entered the accounting field seven years ago, it felt like I was learning a new language! Back then, I wouldn’t have been able to tell you the definition of reconciliation, let alone why it’s important. Below is a list of terms to be familiar with to get the most out of meeting with your Accountant or Bookkeeper. No fancy definitions, just plain English.
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Reconcile/Reconciliation – Making sure what cleared the business bank accounts/credit card accounts are recorded in the business books and vice versa. This is usually done monthly, when you receive your bank or credit card statements.
Accounting Period/Method – You will find these on the business financial reports. The Accounting period tells you the span of time the report is looking at it. It could be a month, a year, even a week. The Accounting Method tells you if the transactions are being shown on a Cash Basis or an Accrual Basis.
Journal Entry – These are adjustments made to the company books for accounting purposes. Typically, your Bookkeeper or Accountant will do these at the end of the year to agree the financial statements in the company books to business tax return.
General Ledger – This is a complete record of all business transactions. This information is used to create the Profit & Loss and Balance Sheet reports.
Profit and Loss – Also called Statement of Income and Expenses, Income Statement, and P&L. This is a report that shows you Income – Expenses = Net Income
Gross Profit – Profitability of a business without taking into account overhead expenses. It’s calculated by taking Revenue – Cost of Goods Sold.
Net Income – This is your profit. It is Revenue – Cost of Goods Sold – Expenses.
Cost of Goods Sold – or COGS. Expenses related directly to the creation of the product. Examples being materials or direct labor. The electric bill is NOT considered COGS.
Depreciation – You’ll find Depreciation listed as an expense account on your Profit and Loss. This figure accounts for the loss of value of an asset over time. Example – An automobile.
Balance Sheet – Also called Statement of Condition, Statement of Financial Position, and B.S. This is a report that shows you the Assets, Liabilities, and Owner Equity in the business. Assets = Liabilities + Owner Equity. The Balance Sheet must ALWAYS Balance. If it doesn’t, your books are wrong.
Assets – Anything of significant value that a business owns. Rule of thumb, if it cost over $1,000 it’s an asset. Other things that are assets; Equipment, Office Furniture, Computers, Inventory, and Accounts Receivable.
Accounts Receivable – A/R This is a short-term asset. It is revenue that is due to the business but has not yet been collected. Unpaid customer invoices are an example of accounts receivable.
Liabilities – Anything that the business owes. Loans, Accounts Payables, and Future Obligations.
Accounts Payable – A/P This is a short-term liability. These are expenses that the business has accrued but not yet paid. Example, you’ve received your water bill but it isn’t due until the following month. That water bill is an Account Payable
Owner’s Equity – This represents the owner’s investment and the owner’s withdrawals from the business plus the net income of the business. This is NOT the fair market value of the business.
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