If you aren’t familiar with basic accounting terms, your accountant and financial advisors may seem like they’re talking a foreign language at times. However, it is critical for business owners and managers to understand the terms associated with accounting if they are going to gain the full value that these professionals can provide.
Assets vs liabilities: Assets can be considered anything you own versus a liability is anything that you owe.
Current assets vs long-term assets: Current Assets are considered “liquid”, meaning anything that can be easily turned into cash, i.e. bank accounts, petty cash, inventory, accounts receivable versus long-term assets which are things you can own that you can “touch” such as equipment, buildings, furniture, land, etc.
Current liabilities vs long-term liabilities: Current liabilities are short term, such as accounts payable to your vendors and monies owed to the government versus long-term liabilities which are paid over an extended period of time, usually more than a year, such as a mortgage.
Capital: Money used to invest in a business or to make money in some manner.
Gross profit vs net profit: Gross profit is the revenue minus the cost to make a product versus net profit, which is the revenue minus any and all costs to do business.
Balance Sheet vs Income Statement: A balance sheet is made of three sections, assets, liabilities, & equity and carries the balances of its accounts over to each accounting period versus an income statement, which holds two types of accounts, revenue and expenses. The balances of the accounts on the income statement are reset to zero at the beginning of each accounting period.
If you’re ever uncertain of the meaning of accounting terms, don’t hesitate to ask for the terms to be explained. These terms need to become a part of the vocabulary of any business person.