Accounting decoded

 

Editor’s note: Michelle Stockman is an independent consultant with her company, Fort Smith-based Msaada Group. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

Welcome to Accounting 101, where we will begin with looking at basic accounting terms. The more you know about accounting for your business, the more you will be able to arm yourself with tangible information to steer your company in the direction it needs to go.

Before beginning to read a spreadsheet or budget, understanding the basic accounting terms is the first place to start. The following accounting definitions are brought to you by A-systems:

Accounting – process of identifying, measuring, and reporting the financial information of an entity

Accounting Equation – assets = liabilities + equity

Accounts Payable – money owed to creditors, vendors, etc.

Accounts Receivable – money owed to a business, i.e. credit sales

Accruals – a list of expenses that have been incurred and expensed but not paid; or a list of sales that have been completed but not yet billed

Amortization – gradual reduction of amounts in an account over time, either assets or liabilities

Asset – property with a cash value that is owned by a business or individual
Audit Trail – a record of every transaction, when it was done, by whom and where, used by auditors when validating the financial statement

Balance Sheet – summary of a company’s financial status, including assets, liabilities, and equity

Capital Stock – found in the equity portion of the balance sheet describing the number of shares sold to shareholders at a predetermined value per share, also called “common stock” or “preferred stock”

Capitalized Expense – expenses that are accumulated, not expensed as incurred, to be amortized over a period of time; i.e. the development cost of a new product

Cash Flow – a summary of cash received and disbursed showing the beginning and ending amounts

Closing the Books/Year End Closing – the process of reversing the income and expense for a fiscal or calendar year and netting the amount into “retained earnings”

Cost Accounting – a type of accounting that focuses on recording, defining, and reporting costs associated with specific operating functions

Credit – an account entry with a negative value for assets, and positive value for liabilities and equity.

Debit – an account entry with a positive value for assets, and negative value for liabilities and equity.

Depreciation – recognizing the decrease in the value of an asset due to age and use

EBITDA – earnings before interest, taxes, depreciation, and amortization

Equity – money owed to the owner or owners of a company, also known as "owner’s equity"

Financial Statement – a record containing the balance sheet and the income statement

Fixed Asset – long-term tangible property; building, land, computers, etc.

General Ledger – a record of all financial transactions within an entity

Goodwill – an intangible asset reflecting the value of an entity in excess of its tangible assets

Income Statement – a summary of income and expenses

Inventory Valuation – the method to set the book value of unsold inventory: i.e. “LIFO,” last in, first out; “FIFO,” first in, first out; “average,” an average cost over a given period, “last cost,” the cost based on the last purchase; “standard,” a “deemed” amount related to but not tied to a specific purchase, “serialized,” based on a uniquely identifiable serial number or character of each inventory item

Job Costing – system of tracking costs associated with a job or project (labor, equipment, etc) and comparing with forecasted costs

Liability – money owed to creditors, vendors, etc.

Liquid Asset – cash or other property that can be easily converted to cash

Master Account – an account on the general ledger that subtotals the “subsidiary accounts” assigned to it; i.e. Cash might be the master account for a list of depository accounts at banks

Net Income – money remaining after all expenses and taxes have been paid

Operating Income – income generated from regular business operations

Other Income – income generated from other than regular business operations, i.e. interest, rents, etc.

Reconciliation – the process of matching one set of data to another; i.e. the bank statement to the check register, the accounts payable journal to the general ledger, etc.

Retained Earnings – the amount of net profit retained and not paid out to shareholders over the life of the business

Revenue – total income before expenses.

Statement of Account – a summary of amounts owed to a vendor, lender, etc.

Subsidiary Accounts – the subaccounts that are totaled on the financial statement under “master accounts;” i.e. “Cash-ABC Bank” might be one of several subsidiary accounts that are subtotaled under “Cash”

Write-down/Write-off – an accounting entry that reduces the value of an asset due to an impairment of that asset; i.e. the account receivable from the bankrupt customer

Feedback
Stockman can be reached at [email protected]