Having general accounting knowledge is crucial for any business owner, especially during tax season. Understanding common accounting terms is highly beneficial, as you will identify how they relate to your business and how it is performing.
To help, we have compiled a list of 10 common accounting terms, their definitions and any abbreviations you may need.
Gross Profit (GP)
Gross profit is the profit a business makes after subtracting the costs of making products, or the costs related to providing services, from your sales figure.
Gross Margin (GM)
Gross margin refers to a measure looking at a company’s gross profit when compared to its revenue or sales figure. Gross margin is expressed in the form of a percentage.
Capital (CAP)
A broad term used to describe anything that gives a business owner value or an advantage – an asset. Assets help increase your ability to generate value. This includes cash or goods, such as factory space or industry equipment.
Accounts Payable (AP)
Accounts payable includes all the expenses that a company has acquired but is yet to be paid. An example would be money owed to vendors or suppliers.
Accounts Receivable (AR)
The sum of money owed by clients or customers to a company, after receiving their goods or services.
Revenue (REV)
Revenue is any money generated by the company, which is earned from normal business operations, selling goods and/or services.
Asset (A)
Assets are anything a company owns which has monetary value, such as land, cash or physical goods. These assets are listed in order of liquidity, from cash to land.
Liquidity
Describes the relative ease to how quickly something can be converted into money.
Expense
An expense is any cost incurred by a business to generate revenue.
Balance Sheet (BS)
A common financial statement produced by accountants. The report summarises a company’s assets (what it owns), liabilities (what it owes) and owner equity, at any given time.
Recognising these key accounting terms will benefit any business owner. However, if you need any further clarification, please don’t hesitate to speak to your accountant.
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