Do you understand the accounting terminologies used by your accountant?
Accounting Jargons Simplified
Not every business owner or entrepreneur is familiar with accounting terminologies used in day to day activity of the business. Everyone CEO may not have an accounting background but needs to gather knowledge of all aspects of the business to make it successful. Irrespective of scale and size of business understanding of Accounting terminologies is must for owners. Even outsourcing bookkeeping and accounting service can’t let you through it.
Some accounting terminologies definition to start effective communication with your virtual accounting service providers.
Assets: Assets are the economic resources of the business that have been acquired by a company from time to time. It is owned and managed by the owners without any lien or loan. Generally, an asset is classified into six categories:
Current Assets are those assets of the company that can easily be converted into cash within one accounting period. Example-short-term investments, inventory, accounts receivables, prepaid balance, marketable securities etc.
Fixed Assets are also known as long term assets or non- current assets. These assets are held for more than one accounting period and cannot be converted into cash quickly. Example-land and building, furniture Equipment etc.
This asset can be seen and touched. It may include a current or fixed asset. Example –land, machinery, furniture etc.
These assets don’t have physical existences. But has an economic value such as patents, goodwill and copyrights etc.
These assets may be fixed or current assets required for the day to day operation of the business. These are needed in the producing product or service. Example –inventory, cash and bank balance etc.
Those assets are held not for day to day operation of the business. But are essential to run a company. Some intangible assets fall in this category example-patents and goodwill etc.
Liabilities: are the financial obligation of the company. All the outstanding debts of the company are called as liabilities of the company. There are two types of liabilities-
Current liabilities- These are financial obligations or debt that must repay within one accounting year. For example- accounts payable, short term loans, accrued expenses etc.
Non-current liabilities: are also known as long-term liabilities. The repayments of the liabilities are not immediate but spread over the years. Examples of non- current assets are business loans, mortgages, deferred tax liabilities, lease etc.
Balance sheet: is a financial statement that represents the assets, equity and liabilities of the company as on a particular date. A balance sheet equates assets with equity and liabilities of the company.
Asset = Equity and liabilities.
Profit and loss statements: It is a financial statement that speaks of the financial health of the company. It tells whether a business is making profit or loss. It represents excess or deficit of sales over the cost of goods or service. For example, to make a product it costs $3, the company sells the product at $11, so the company’s profit is $ 8.
