EA - Clearing Up Confusion about Common Jargon in the Bookkeeping and Accounting Industry

Clearing Up Confusion about Common Jargon in the Bookkeeping and Accounting Industry

Hiring bookkeeping and accounting services might be one of the best decisions you will make for the financial success of your company. It is essential that you have an experienced team to guide your financial tracking and decisions that will affect the well-being of your business. But, do you feel like you are in over your head trying to understand the jargon in the financial industry?

It can be confusing for a new business owner to decipher terms that are standard in the bookkeeping and accounting world. Instead of bringing in a translator to explain these things in layman terms, you can use this guide to break down some of the common topics of conversation that come up with your bookkeeper or accountant.

At Easier Accounting, our name says it all: we are striving to make accounting as easy and as simple as possible. We are proud of the quality services and simplicity offered to our clients. Our expert team can help with the financial tasks that need to be handled. At the same time, we want you to understand what is going on with your business accounts so that you are clear about the benefits your business is receiving from these services.

Common Terms and Jargon in the Bookkeeping and Accounting Industry

These are some of the common terms that you might hear as you are working to gain a greater understanding of your business finances and reports:

  • Accounting Method: Your accountant might talk to you about the accounting method that is used. This process is the strategy that is implemented in reporting expenses and income. Two methods can be used for proper reporting to the IRS: either accrual accounting or cash accounting.
  • Accounts Payable: These numbers can be accessed in a report that shows the total amount of money the business needs to pay in bills. When your vendors submit invoices or payment requests, then they are categorized as Accounts Payable. These amounts are liabilities since you need to have the cash to pay for the products or services.
  • Accounts Receivable: On the other hand, the money that is collected from your customers or clients falls into the Accounts Receivable category. If a customer owes money but hasn’t paid yet, then it is an asset that will hopefully be collected in the future.
  • Accrual Accounting: This form of accounting maintains reports based on when expenses are incurred, and income is earned. Businesses have a bit of flexibility in determining when the expenses and income are recognized, as long as the management of these numbers matches IRS regulations.
  • Assets: Does your company own anything that has value? A variety of things can fall in your assets category, such as inventory, real estate owned by the business, vehicles, equipment, and more. Even your outstanding Accounts Receivable falls into the category of business assets.
  • Balance Sheet: One important financial report is called your business balance sheet. This statement shows the changes in your liabilities and assets in a given accounting period. Understanding the difference between these two numbers is critical to determining the current success and trajectory of your business.
  • Cash Basis Accounting: An alternative to Accrual Accounting, this method records the expenses and revenues when the payments are sent or received. It is a straightforward method of accounting that is often used for small businesses or new startups, especially when the company is running on a cash basis or doesn’t have an inventory to manage.
  • Cash Flow: The order in which money flows in and out is critical so that you can manage your expenses and profits. Revenue and expenses should be coming in regularly, but it doesn’t always mean that there is money in the bank to meet your Accounts Payable needs. Even if your business is profitable in a given accounting period, you will face cash flow issues if the expenses need to be paid before receipt of the revenues. For example, some companies need to pay suppliers upfront before the customers send payment for products or services.
  • Depreciation: Some assets are purchased, and they lose their value over time. For example, equipment or vehicles can wear out due to regular use. Your accountant might recommend that depreciation is used to reduce the listed value of the asset each year on the balance statement. This strategy spreads out the loss over multiple years, which helps to manage taxable income in some cases.
  • Double Entry Bookkeeping: It is common for businesses to use a double entry system for bookkeeping. This process requires each transaction to be listed twice in the accounts since two effects are happening. If you buy $10,000 in inventory, then an entry needs to show a reduction of cash reserves. At the same time, a second entry shows that assets are increased by $10,000.
  • Expenses: Your business will require a variety of costs to keep the company running. Any time these costs are accrued, they fall into the expense category. Expenses that result from revenue-generating activities might include business development, marketing campaigns, inventory purchasing, payroll, and more.
  • Financial Statements: This broad term can cover a variety of reports that might be run through your bookkeeping system. These documents show the activities of your business in a given period. Common reports that fall in the Financial Statements category include Profit and Loss Reports, Balance Sheets, General Ledger, Equity Statements, and Income Statements.
  • Financial Year: Depending on the way your business is structured; your financial year might not run according to the calendar year. There are times when reports are run from January to December, but there are many instances where the 12-month period for a company doesn’t align with the calendar year. These dates need to be recorded and tracked for reporting and tax purposes.
  • General Ledger: The master sheet that shows every transaction is known as your General Ledger. Data for all other reports are pulled from this ledger.
  • Income Statement: Commonly known as a “Profit and Loss Report,” an income statement shows the profits for your business in a specific timeframe. Both revenue and expenses need to be calculated to determine the profitability of your company.
  • Liabilities: Money that your business owes to another company or vendor falls in the liability category. These balances need to be tracked so that you have the cash flow necessary to pay the expenses.
  • Revenue: A revenue report shows the amount of money your business receives for products or services sold in a given time frame. This total might include the exchange of assets, net sales, interest received, and any other transaction that brings money or value into the business. Revenue is usually calculated before expenses are factored in to determine profitability.

If you encounter any other terms that you don’t understand, then your bookkeeper or accountant can help with a definition of the jargon. It is helpful to ensure that you understand these concepts so that you know what your financial team is talking about in conversations about the financial reports and tracking for your company.

Enlisting the Services of an Experienced Accounting Pro

Business owners have a lot of stress and responsibility in keeping the company running. Are you feeling overwhelmed trying to keep up with everything that needs to be addressed? Not only do you need to oversee product development, employee management, marketing campaigns, overhead expenses, and more… but you also need to consider the financial health of your company.

The most important thing that you can remember is that you don’t have to do it all by yourself. If you don’t have training or experience with bookkeeping and accounting, then it makes sense that you should hire an experienced team to assist with these tasks. Ongoing services can go a long way to improving the financial health of your company and ensuring success in the future.

Choosing a Bookkeeping and Accounting Service

Understanding the jargon is just the first step in determining the right financial plan for your company. It is also essential that you hire an accounting and bookkeeping team that you can trust. A little bit of research in the beginning can go a long way to ensuring the financial success that you desire.

It is smart to hire an outsourced accounting service instead of attempting a DIY approach. The best solution is to choose a team that specializes in small business services. You need to work with an accounting pro that will understand unique challenges and situations that might apply to your business.

Also, consider the reputation of the company. As you look online, you can find information about the accounting service to determine whether the company is reliable and reputable. Make sure that the team holds the right accounting certifications.

Take time to learn about the services that are offered to ensure that these services are a good fit for your business needs. If you need guidance or assistance in choosing the right accounting services, then Easier Accounting is here to help. We’re here to assist with everything from explaining industry jargon to providing the ongoing financial support required for your business efforts: (888) 620-0770.

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