Automating Financial Operations
1/24/22
Eliana Drescher

Accounting Lingo You Need To Know - For Entrepreneurs and Operators (Volume 1)

The kind of clean compliance, swift productivity, efficient costs and accurate data delivery that top tier companies expect to unlock massive growth used to only be possible by hiring teams of dozens of bookkeepers and accountants - making starting and scaling a new company successfully incredibly risky and challenging. 

We thought it would be helpful to put together a list of common lingo that goes into accounting and financial operations, that would be helpful for you as you try to scale up your business.

These terms are what we call Financial Operations - or FinOps - 101. 

What is the “Accounting Cycle”?

Every company has accounting periods (which are usually monthly) in which they want to see how they're performing financially.For a company to prepare their books to look at their performance (on a monthly basis) they need to perform a sequenced series of events which is called the accounting cycle. The accounting cycle consists of general ledger cleanup (including bank reconciliations), monthly closes, updating the chart of accounts, and trial balances; these steps are necessary for a company to be able to have clean books.

What is “Closing the Books”? 

Once your bank accounts have been reconciled to your general ledger and a controller has gone through and made sure that everything is accurate, Your books are closed for that month like this. 

What is a “general ledger”? 

The general ledger is the total record of all your businesses financial transactions, including both credits and debits. The general ledger is required to prepare every financial statement. 

What is my “chart of accounts''?

The chart of accounts is a list of all the accounts in the general ledger. 

What are “accounts receivable”? 

Accounts receivable is the amount of money your customers or clients owe you for goods or services you’ve provided—but that they have not yet paid. They are legally enforceable and appear as assets on your balance sheet.

After you request payment for work that you’ve done (by sending an invoice) that money becomes due under accounts receivable until the invoice is paid. After that, it is classified as cash. 

What are “Accounts Payable (A/P)”?  

The money your business owes to suppliers or creditors is called “Accounts Payable, or AP, and is considered a liability, which is recorded on the company balance sheet. 

The Difference between Cash Accounting and Accrual Accounting, and the terms you need to know:

What is “Cash Basis Accounting” 

Cash accounting is the simple accounting method where revenues and expenses are recorded in the period in which they are received and paid. Cash accounting makes it very difficult to see how your business is performing because you are unable to line up expenses and revenues to the correct time period. Any business with complexity should move past cash accounting to accrual accounting.

What is “Accrual Basis Accounting”?

For more complex businesses, accrual accounting is key. Accrual accounting is the only accounting method that allows you to see how you are performing by lining up expenses and revenue to the period in which the work was performed or the goods where sold (instead of when the cash changed hands).

All about Bookkeeping

Bookkeeping is the method of recording transactions to their proper accounts on the general ledger, so that they are posted correctly in a business accounting file. Bookkeeping and accounting are NOT the same thing, and bookkeeping is handled by a bookkeeper, while accounting is handled by a CPA - described below. 

What does CPA stand for?

A CPA is a Certified Public Accountant.  This abbreviation means that someone has passed rigorous testing to become a trained and certified accountant. 

What does GAAP mean? 

GAAP, or generally accepted accounting principles, are a set of rules and guidelines that dictate how businesses need to handle accounting. The United States, among a few other countries, follows GAAP. Most countries follow IFRS or the International Financial Reporting Standards.

What is a “Trial Balance?”

When an accounting “closes the books” they will create a trial balance as a means to check their work. It helps them make sure that all debits equal all credits. This will likely catch any mistakes made, and will allow the accounting to remedy those mistakes by adjusting journal entries. 

What is a “Journal entry”

Journal entries are made for every transaction in the general ledger and corresponding accounts. They each have two components: debit and credit. 

What is a “Debit”?

 When an amount in an account increases, it’s called a “debit”. 

What is a “Credit”? 

When an amount in an account decreases, we call that a “credit”. 

What is “Unearned Revenue”?

Unearned revenue is money that your business has received, even though you haven’t done the work for it yet. When customers pay you in advance for work, that revenue is still “unearned” and is shown as a liability until the work is performed. 

What is a “Fixed Cost”?

There are two types of costs: fixed and variable. A fixed cost is a cost that does not change regardless of how many sales your business generates. This includes things like salaries or rent. 

What is a “Variable Cost”?

A variable cost is a cost that does change depending on the volume of your sales. For instance, when the demand for your product increases, the cost of materials to meet that demand will go up, too. 

FINANCIAL TIMES IS SO YESTERDAY

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