Have you ever listened to a conversation between two accountants and wondered what in the world they were saying? Words like, “debit”, “credit”, “AR”, and “BS” are being thrown around left and right but the only BS thing you know is this ridiculous language. Who taught these people how to speak anyway?? Well, you’ve stumbled upon the right article. At Blue Peak Accounting we understand how invaluable it is to know the general terminology used in the accounting world. Here’s a list of five important terms to know and understand on the Balance Sheet and Income Statement.
Balance Sheet Terms
1. Balance Sheet (BS) – This is a financial statement that reports on all of the company’s assets, liabilities, and equity. It abides by the equation: Assets = Liabilities + Equity.
2. Asset (A) – Anything the company owns that has monetary value. They are listed in order of liquidity, from cash (most liquid) to land (least liquid).
3. Accounts Receivable (AR) – Accounts Receivable includes all of the revenue (sales) that a company has provided but hasn’t collected yet. This account is recorded on the Balance Sheet as an asset that is likely to convert to cash in the short term.
4. Accounts Payable (AP) – Accounts Payable includes short term debts owed to vendors or suppliers for goods or services that the company hasn’t paid yet. This is recorded on the Balance Sheet as a liability because it is a debt owed by the company.
5. Equity (E) – This refers to the value left over after liabilities have been removed. Recall the accounting equation: Assets = Liabilities + Equity. If you take your Assets and subtract your Liabilities you are left with Equity, or the portion of the company owned by investors and owners.
Income Statement Terms
1. Income Statement (Profit & Loss) (IS or P&L) – This is a financial statement used to show the company’s revenue, expenses, and net profits for a given period. Revenue is shown at the top and all expenses are subtracted from it until all costs are accounted for. The result, Net Income, is shown at the bottom.
2. Cost of Goods Sold (COGS) – Cost of Goods Sold are the expenses directly related to the creation of the product or service. Not included in this category are the costs of keeping the business running. Examples of COGS expenses are Materials or Direct Labor.
3. Gross Profit (GP) – This is the profitability, in dollar amount, of the company without taking overhead expenses into account. This is calculated by subtracting COGS expenses from Revenue.
4. Depreciation (D) – This is the loss of value in an asset over time. Generally, an asset must have substantial value to warrant being depreciated. Examples of depreciable assets include cars, equipment, and land. Depreciation is shown in the Non-Cash Expense section of the Income Statement because it doesn’t affect the cash position of the company.
5. Net Income (NI) – This is the dollar amount that is earned in profits. It is calculated by subtracting all expenses, including COGS, depreciation, and taxes, from Revenue.
We know that accounting terminology can be overwhelming but we hope this article was insightful. Here at Blue Peak Accounting we want to make sure that the communication we have with our clients is always informative and helpful. We’d love to work with you and who knows you may even learn some new terminology along the way!