Accounting Terms Explained

Lately I have had some clients ask me what the meanings of certain accounting terms are.  I have compiled a few answers to common questions below…

What is an asset? Just like in ordinary language, an asset is something you own that adds value to your business. Fixed assets are things you wouldn’t normally sell, like buildings or equipment. Current assets include cash, accounts receivable and things you normally use up or sell.
What are Accounts Receivable? This is a list where you keep track of which customers owe you money, how much they owe, and how long since you earned the income. This is one of the most important assets of your business. It must be monitored regularly, to make sure you collect on what are really interest-free loans to your customers.
What are Accounts Payable? This is where you keep track of which suppliers you owe money to, how much you owe, and when they must be paid. This is one of the most important liabilities of your business. It must be monitored regularly also, with regard to being able to pay on time.
What is a Balance Sheet? The top of your balance sheet shows you the assets owned by your business. The lower portion shows (in broad terms) where the money came from to buy those assets: either from you (equity); or borrowed (liabilities). One reason it is called a balance sheet, is because the total value of the assets always equals the total of equity and liabilities.
What is a Business Plan? A business plan is a report that summarizes the research and planning you have done in order to answer this question: will you be able to sell your products and/or services, and make a living at it? Going through the process of preparing a business plan will make you face the hard questions every successful business deals with. They aren’t easy to do, but they are worth it. Existing businesses can benefit from a solid business plan, but an inexperienced manager of a new business really needs one.
There are many free internet resources to help you prepare a business plan, usually taking the form of questions that you answer one at a time. These questions include describing your cash flow requirements and your marketing strategy.
What is Double-Entry Bookkeeping? Unlike using a cheque-book to keep track of a single bank account, double-entry bookkeeping lets you keep track of many accounts, and maps the transactions between them almost effortlessly. If you have a business with more than one bank account, including a credit card or line of credit, double-entry bookkeeping is more efficient.
What is cash flow? Cash flow is the day to day ebb and flow of money in and out of your business. Even if orders are coming in fast, you may find you are short of cash to pay your bills. Up-to-date invoicing, and collecting on those invoices, are critical for a healthy cash flow.
What is a Cash Flow Projection? A cash flow projection, or cashflow analysis, is extremely useful on its own, or as part of a business plan. It is generally prepared using spreadsheet software. It will have columns of monthly (or weekly) estimates of income, investment and expense amounts, the more detailed the better. For example, if you know you will have to pay $2,000 in rent each month, there will be a row just for rent. It will also include large one-time costs, such as equipment purchases. The benefit of a cash flow projection is that it shows you when you will be short of cash, and gives you time to prepare. Even poor estimates are much better than none, and they can be improved as time goes by. One of the most common ways growing businesses run short of cash unexpectedly, is when they are waiting for previous customers to pay up while materials must be purchased for new orders.
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Posted on December 8, 2012, in Accounting. Bookmark the permalink. 2 Comments.

  1. Thanks for this great summary of key terms. It is pretty handy to refer clients and others needing to know.
    If you would like more information on Account Reconciliation and how it applies to AR, AP, cash book, payroll etc. then check out our blog at http://www.adramatch.com/blog/category/blog/

    Thanks again..

    Like

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