Accounting is an integral part of everyday life as we manage our personal and professional finances. But let’s be honest, there are many accounting terms that people who work outside of financial industries may not be aware of.
This can make operating a business or even dealing with day-to-day money issues difficult. If you want a better grasp of financial jargon, we’re here to help. This is a list of accounting terms we think everyone should know:
Accounts Payable
Accounts payable (AP) is the amount of money that a business owes to its vendors or suppliers for goods or services purchased on credit. Essentially, it’s money you owe.
Accounts Receivable
Accounts receivable (AR) is an accounting term representing the money owed to a business by its customers or clients. If you have allowed your products or services to be purchased on credit, and the product/service has been delivered, then you have accounts receivable. It’s money that’s owed to you.
Asset
Assets are resources owned by individuals, businesses, or organizations. They have an economic value and may retain or even gain value in the future. They come in many different forms, including cash, physical property, investments, accounts receivable, and intellectual property.
Costs Of Goods Sold
This is how much it costs to sell your product or service. This includes expenses like materials, packaging, duties, distribution, and even labour. Knowing this cost is important in determining how to price your product or service.
Chartered Professional Accountant
In Canada, chartered professional accountants (CPAs) are highly qualified professionals who provide a wide range of accounting, auditing, tax, and financial advisory services to businesses and individuals. They go through rigorous education and training processes. They are also subject to a code of ethics and professional standards, ensuring the highest level of integrity and competence in their work.
Equity
Equity refers to the ownership interest or residual interest in an entity’s assets after deducting its liabilities. It represents the portion of a company’s assets that belongs to its owners, also known as shareholders or stockholders. It reflects the company’s net worth and is an important measure of its financial health and the value attributable to its owners.
Fixed Cost
Fixed costs are expenses that do not vary. Examples of fixed costs include rent, insurance premiums, salaries of permanent staff, and depreciation on fixed assets (for example, most cars lose value over time). It’s a cost you can’t eliminate without changing how you operate.
General Ledger
A general ledger is an accounting record businesses use to track all financial transactions. It’s typically the primary record of financial transactions a business uses. It is an organized record of a company’s financial activities, including revenues, expenses, assets, liabilities, and equity.
Gross Margin
Gross Margin illustrates the profitability of a company’s business operations. The gross margin is found by subtracting operating, production, and delivery costs from a business’s overall revenue. It’s a critical number for analyzing success.
Interest
In accounting, interest refers to the cost of borrowing money or the income earned from lending money. It is a financial charge that accrues over time. Sometimes, interest rates are predetermined, like those applied to credit card purchases. Other times, they can vary, like interest on mortgages and some student loans. You can also be taxed on interest income in Canada.
Journal Entry
A journal entry in accounting is a formal record of a financial transaction made by a business or organization. Journal entries are typically recorded in chronological order. Journal entries make up a large portion of the general ledger.
Liability
Liabilities are financial obligations like loans, accounts payable to suppliers, salaries and wages payable to employees, and accrued expenses.
Net Income
Net income represents the amount of money a company has earned after deducting all of its expenses from its total revenue. It is calculated by subtracting operating expenses, interest, taxes, and more from the total revenue. Net income is typically calculated quarterly or yearly.
Return on Investment
Return on Investment (ROI) measures the profitability of an investment. It calculates the gain or loss generated from an investment relative to the initial amount invested. ROI is calculated by dividing the net gain from the investment by the initial cost. It is then represented by a percentage. The higher the ROI, the better.
Revenue
Revenue is the total amount of income made. It is most often used to express how much a business has made from selling its product or service. Revenue can also be what was made from royalties and interest. Revenue describes how much money was generated before subtracting expenses.
Variable Cost
Variable costs are costs that change. Examples of variable costs are raw materials, distribution, utilities, and some kinds of labour. These are costs that can, and typically will, change over time.
Navigating the accounting world can be challenging, but the more you know, the better prepared you will be to effectively manage your money. Even once you understand these terms, many accounting principles can still be complex or confusing. At MMT Chartered Professional Accountants, we’re here to help you manage your finances and set the foundation for your success. We look forward to serving you!
