Helping You Understand the Common Bookkeeping Terms
Every field or industry has its own set of jargons, like in accounting. You should be familiar with the different bookkeeping terms as a business owner. In this way, you can understand and understand the different financial statements of your company.
Remember that bookkeeping and accounting are important to keep your financial records accurate all the time. It can help you prepare your budget, business plans, and profit projections.
At the same time, accounting can help you know the financial health of your business. It is very important because this will dictate where your next path is. After all, you will not pursue a strategy without enough resources to back you or your business.
Fundamental Accounting Terms and Concepts
Let us learn some of the basic bookkeeping terms you should know.
Accounting
It is the systematic process of collecting, summarizing, reporting, and interpreting financial transactions of a business or an organization.
Accounts Receivable
This refers to the money you are entitled to receive from your customers or clients after delivering the goods and services.
Accounts Payable
On the contrary, accounts payable is the money your company owes from creditors after receiving goods and services.
Assets
Assets, one of the most used bookkeeping terms, are the resources of the company. They have two classifications: current and noncurrent or fixed.
Current assets refer to those which can be converted into cash within one accounting period. Examples of these are cash, inventory, accounts receivable, investment in securities, and office supplies, among others.
Fixed assets, meanwhile, are those that will be beneficial for the company for more than a year. These include buildings, land, equipment, and long-term accounts receivables, among others.
Balance Sheet
Balance sheet is a type of financial report that provides a snapshot of the business’ assets, liabilities, and equity at specific periods.
Capital
It refers to financial assets invested in the company, including cash, equipment, and goods. Working capital, meanwhile, refers to the amount of money the company is using for daily operations.
Cash Flow
Cash flow tells the story of how the cash goes in and goes out of the company. It refers to the revenues earned, and expenses incurred by the business from doing its business activities.
Cost of Goods Sold
This cost covers the direct spending to produce the company goods for sale. To compute this, you are considering the cost of raw materials and amount of labor fees, among others.
Book Value
It refers to the original value of an asset. It depreciates over time.
Inventory
It is an asset class referring to the goods—intended for sale—bought by the company that remains unsold. Inventory level decreases as the items are being sold.
Diversification
Smart investors are always finding ways to diversify to obtain optimal benefits. This process refers to spreading investments into different assets to have better control over risk.
Expenses
This is one of the bookkeeping terms that you should watch out for. It refers to the spending of the business or organization. It is classified into four categories.
- Fixed expenses refer to costs that do not change. Examples are rent, insurance, equipment lease, depreciation, and advertising.
- Variable expenses, meanwhile, are costs that change over time. An example is labor cost in producing goods.
- Accrued expenses are those that have not been paid yet but already incurred by the company. It is a type of payable.
- Operation expense refers to business spending like property taxes, which are not directly related to the nature of business.
Depreciation
It is one of the bookkeeping terms that you should be familiar with. It refers to the loss value of an asset over time. Depreciation is considered as a non-cash expense because it does not affect the cash position directly.
Owners’ equity
It refers to the percentage of ownership a person who holds a stake in the company has. These stock owners are called shareholders. Corporations are issuing stocks—which represent ownership to the firm—to raise capital.
Insolvency
Every business owner is watching out for this. They are doing their best not to reach this point. Insolvency refers to the inability of a company to settle their financial obligations when they become due and demandable already. It is usually because of insufficiency in funds.
General Ledger
It is the complete database of all the financial transactions that the company accomplished over its corporate life.
Liabilities
Liabilities are the company’s debts or financial obligations. Like assets, they are classified as current and noncurrent or long-term.
Current liabilities are financial obligations payable within a year. Examples are accounts payable, short-term debts, dividends, and income tax liabilities.
Noncurrent liabilities, meanwhile, are debts being paid over a period of more than a year. These include multi-year office mortgage payable, debentures, long-term loans, bonds payable, and pension benefit obligations.
Limited Liability Company
Limited liability company refers to a corporate structure that practices the concept of limited liability. This means that the owners are only liable up to the amount of their investments in the company. Their personal assets cannot be used to settle the financial obligations of the firm.
Net Income
It is the company’s net profits. Mathematically speaking, you can get this value by deducting the total expenses from total revenues. It basically tells you if your business is doing the right thing to remain operational.
Net loss
It is the opposite of net income. When your expenses exceed your revenues, you have a net loss. It means you did not earn money. It is common for startups in their early years.
Income statement
An income statement is a financial report summarizing the revenues and expenses of the company at a given period. It shows if your company is profitable already. It can also help your business better allocate its budget and set up income projection.
Return on Investment
Return on Investment, or ROI, is a profitability measure. It shows how much money has the company earned compared to the amount of funding it invested. It is calculated by dividing the net profits by the amount of investment.
Payroll
It is an account that summarizes the payments to salaries, wages, bonuses, and deductions. It is categorized as a liability under the balance sheet if there are unpaid salaries or vacation pays.
Choosing the Right Bookkeeper
Business owners are always choosing what is best for the company, including their bookkeepers.
Effective bookkeepers can organize financial transactions in an efficient and accurate manner. At the same time, they are showing proper working ethics by doing their job honestly.
Bookkeepers are keeping themselves updated with the most recent accounting technology. This is helping them to execute their tasks more efficiently and with less paperwork.
Ultimately, they should know how to properly communicate with the business owners.
Contact us today. Are you an entrepreneur searching for Indonesia bookkeeping services? Look no further. 3E Accounting is offering a wide range of cost-effective and efficient bookkeeping services that your company needs. Contact us today. Our team will help you in every step of the way.
