| Bling Lingo made simple | | | | claims on the assets, it is called a liability. |
| Today...again...I was scratching my head over an | | | | Total Assets - Total Liabilities = Net Equity |
| accounting mess, for which the owner had paid a | | | | This is another way of stating the basic |
| bookkeeper many dollars over many years. How | | | | accounting equation that emphasizes how much |
| did it happen? If you don't know the basics, you | | | | of the assets you own. Net equity is also called |
| are a sitting duck, my friend. You know, | | | | net worth. |
| accountants do it on purpose. They use weird | | | | EXPENSE: Also called costs. Expenses are |
| words to make you think that they are smarter | | | | decreases in equity. These are dollars paid out to |
| than you are. To keep you in the dark. Or, the | | | | suppliers, vendors, Uncle Sam, employees, |
| less nasty ones just don't know better. | | | | charities, etc. Remember to pay bills thankfully, |
| Good accountants and bookkeepers want you to | | | | because it takes money to make money. |
| learn the lingo. They want to help you make the | | | | Expenses are listed on the Income Statement. |
| bling, baby! So, read and learn. Keep this glossary | | | | They should be split into two categories, direct |
| handy as you work with your professional money | | | | costs and indirect costs. The basic equation for |
| managers. Use it to begin your journey to financial | | | | the Income Statement is: |
| literacy! | | | | Revenues - Expenses = Profit |
| Bling Lingo - Glossary of common Accounting | | | | (You'll see a profit if there are more revenues |
| Terms... | | | | than expenses!...or a loss, if expenses are more |
| ACCOUNTING EQUATION: The Balance Sheet is | | | | than revenues.) |
| based on the basic accounting equation. That is: | | | | Remember, all costs need to be included in your |
| Assets = Equities. | | | | selling price. The customer pays for everything. In |
| Equity of the company can be held by someone | | | | exchange, you give the customer your services. |
| other than the owner. That is called a liability. | | | | What a deal! |
| Because we usually have some liabilities, the | | | | FINANCIAL STATEMENTS: refer to the Balance |
| accounting equation is usually written... | | | | Sheet and the Income Statement. The Balance |
| Assets = Liabilities + Owner's Equity. | | | | Sheet is a report that shows the financial |
| ACCOUNTS: Business activities cause increases | | | | condition of the company. The Income Statement |
| and decreases in your assets, liabilities and equity. | | | | (also called the Profit and Loss statement or the |
| Your accounting system records these activities in | | | | 'P&L') is the profit performance summary. |
| accounts. A number of accounts are needed to | | | | Financial Statements can include the supporting |
| summarize the increases and decreases in each | | | | documents like cash flow reports, accounts |
| asset, liability and owner's equity account on the | | | | receivable reports, transaction register, etc. Any |
| Balance Sheet and of each revenue and expense | | | | report that measures the movement of money in |
| that appears on the Income Statement. You can | | | | your company. |
| have a few accounts or hundreds, depending on | | | | Financial Statements are what the bank wants to |
| the kind of detailed information you need to run | | | | see before it loans you money. The IRS insists |
| your business. | | | | that you share the score with them, and asks for |
| ACCOUNTS PAYABLE: Also called A/P. These are | | | | your Financial Statements every year. |
| bills that your business owes to the government | | | | GENERAL LEDGER: Once upon a time, accounting |
| or your suppliers. If you have 'bought' it, but | | | | systems were kept in a book that listed the |
| haven't paid for it yet (like when you buy 'on | | | | increases and decreases in all the accounts of the |
| account') you create an account payable. These | | | | company. That book was called the general ledger. |
| are found in the liability section of the Balance | | | | Today, you probably have a computerized |
| Sheet. | | | | accounting system. Still, the general ledger is a |
| ACCOUNTS RECEIVABLE: Also called A/R. When | | | | collection of all Balance Sheet and Income |
| you sell something to someone, and they don't | | | | Statement accounts...all the assets, liabilities and |
| pay you that minute, you create an account | | | | equity. It is the report that shows ALL the |
| receivable. This is the amount of money your | | | | activity in the company. Often this listing is called a |
| customers owe you for products and services | | | | detail trial balance on the report menu of your |
| that they bought from you...but haven't paid for | | | | accounting program. The detail trial balance is my |
| yet. Accounts receivable are found in the current | | | | favorite report when I am trying to find a |
| assets section of the Balance Sheet. | | | | mistake, or make sure that we have entered |
| ACCRUAL BASIS ACCOUNTING: With accrual | | | | information in the right accounts. |
| basis accounting, you 'account for' expenses and | | | | GROSS PROFIT: This is how much money you |
| sales at the time the transaction occurs. This is | | | | have left after you have subtracted the direct |
| the most accurate way of accounting for your | | | | costs from the selling price. |
| business activities. If you sell something to Mrs. | | | | Income - Direct Costs = Gross Profit. When this |
| Fernwicky today, you would record the sale as of | | | | is expressed as a percentage, it is call Gross |
| today, even if she plans on paying you in two | | | | Margin. |
| months. If you buy some paint today, you | | | | This is a good number to scrutinize each month, |
| account for it today, even if you will pay for it | | | | and to track in terms of percentage to total sales |
| next month when the supply house statement | | | | over the course of time. The higher the better |
| comes. Cash basis accounting records the sale | | | | with gross margin! You need to have enough |
| when the cash is received and the expense when | | | | money left at this point to pay all your indirect |
| the check goes out. Not as accurate a picture of | | | | costs and still end up with a profit. |
| what is happening at you company. | | | | INCOME STATEMENT: also called the Profit and |
| ASSETS: The 'stuff' the company owns. Anything | | | | Loss Statement, or P&L, or Statement of |
| of value - cash, accounts receivable, trucks, | | | | Operations. This is a report that shows the |
| inventory, land. Current assets are those that | | | | changes in the equity of the company as a result |
| could be converted into cash easily. (Officially, | | | | of business operations. It lists the income (or |
| within a year's time.) The most current of current | | | | revenues, or sales), subtracts the expenses and |
| assets is cash, of course. Accounts receivable will | | | | shows you the profit J! (Or loss L.) This report |
| be converted to cash as soon as the customer | | | | covers a period of time and summarizes the |
| pays, hopefully within a month. So, accounts | | | | money in and the money out. |
| receivable are current assets. So is inventory. | | | | The Income Statement is like a magnifying glass |
| Fixed assets are those things that you wouldn't | | | | that shows the detail of activities that cause |
| want to convert into cash for operating money. | | | | changes in the equity section of the Balance |
| For instance, you don't want to sell your building | | | | Sheet. |
| to cover the supply house bill. Assets are listed, in | | | | INDIRECT COST: Also called overhead or |
| order of liquidity (how close it is to cash) on the | | | | operating expenses. These expenses are indirectly |
| Balance Sheet. | | | | related to the services you provide to customers. |
| BALANCE SHEET: The Balance Sheet reflects the | | | | Indirect costs include office salaries, rent, |
| financial condition of the company on a specific | | | | advertising, telephone, utilities...costs to keep a |
| date. The basic accounting formula is the basis for | | | | 'roof overhead'. Every cost that is not a direct |
| the Balance Sheet: | | | | cost is an indirect cost. Indirect costs do not go |
| Assets = Liabilities + Owner's Equity | | | | away when sales drop off. |
| The Balance Sheet doesn't start over. It is the | | | | INVENTORY: Also called stock. These are |
| cumulative score from day one of the business to | | | | materials that you purchase with the intent to sell, |
| the time the report is created. | | | | but you haven't sold them yet. Inventory is found |
| CASH FLOW: The movement and timing of | | | | on the balance sheet under assets. It is |
| money, in and out of the business. In addition to | | | | considered a current asset because you will |
| the Balance Sheet and the Income Statement, | | | | convert it into cash as soon as you sell it. Beware |
| you may want to report the flow of cash | | | | of turning cash into inventory. You may run out |
| through your business. Your company could be | | | | of cash. Work with your suppliers to keep |
| profitable but 'cash poor' and unable to pay your | | | | inventory SMALL. |
| bills. Not good! | | | | JOURNAL: This is the diary of your business. It |
| A cash flow statement helps keep you aware of | | | | keeps track of business activities chronologically. |
| how much cash came and went for any period of | | | | Each business activity is recorded as a journal |
| time. A cash flow projection would be an | | | | entry. The Double-Entry will list the debit account |
| educated guess at what the cash flow situation | | | | and the credit account for each transaction on |
| will be for the future. | | | | the day that it occurred. In your reports menu in |
| Suppose you want to buy a new truck with cash. | | | | your accounting system, the journal entries are |
| But that purchase will empty the bank account | | | | listed in the transaction register. |
| and leave you without any cash for payroll! For | | | | LIABILITIES: Like equities, these are sources of |
| cash flow reasons, you might choose to buy a | | | | assets - how you got the 'stuff'. These are claims |
| truck on payments instead. | | | | against assets by someone other than the owner. |
| CHART OF ACCOUNTS: A complete listing of | | | | This is what the company owes! Notes payable, |
| every account in your accounting system. Every | | | | taxes payable and loans are liabilities. Liabilities are |
| transaction in your business needs to be | | | | categorized as current liabilities (need to pay off |
| recorded, so that you can keep track of things. | | | | within a year's time, like payroll taxes) or long |
| Think of the chart of accounts as the peg board | | | | term liabilities (pay-back time is more than a year, |
| on which you hang the business activities. | | | | like your building mortgage). |
| CREDIT: A credit is used in Double-Entry | | | | MONEY: Also called moola, scratch, gold, coins, |
| accounting to increase a liability or an equity | | | | cash, change, chicken feed, green stuff, BLING, |
| account. A credit will decrease an asset account. | | | | etc. Money is the form we use to exchange |
| For every credit there is a debit. These are the | | | | energy, goods and services for other energy, |
| two balancing components of every journal entry. | | | | goods and services. Used to buy things that you |
| Credits and debits keep the basic accounting | | | | need or want. Beats trading for chickens in the |
| equation (Assets = Liabilities + Owner's Equity) in | | | | global marketplace. |
| balance as you record business activities. | | | | Money in and of itself is neither good or bad. I |
| DEBIT: A debit is used in Double-Entry accounting | | | | want you to make lots of it, and do great things |
| to increase an asset account. A debit will decrease | | | | with it! |
| a liability or an equity account. For every debit | | | | NET INCOME: Also called net profit, net earnings, |
| there is a credit. | | | | current earnings or bottom line. (No wonder |
| DIRECT COSTS: Also called cost of goods sold, | | | | accounting is confusing - look at all those words |
| cost of sales or job site expenses. These are | | | | that mean the same thing!) |
| expenses that include labor costs and materials. | | | | After you have subtracted ALL expenses |
| These expenses can be directly tracked to a | | | | (including taxes) from revenues, you are left with |
| specific job. If the job didn't happen, the direct | | | | net income. The word net means basic, |
| costs wouldn't have been incurred. (Compare | | | | fundamental. This is a very important item on the |
| direct cost with indirect costs to get a better | | | | income statement because it tells you how much |
| understanding of the term.) Direct costs are | | | | money is left after business operations. Think of |
| found on the Income Statement, right below the | | | | net income like the score of a single basketball |
| income accounts. | | | | game in a series. Net income tells you if you won |
| Income - Direct Costs = Gross Margin. | | | | or lost, and by how much, for a given period of |
| DOUBLE-ENTRY ACCOUNTING: An accounting | | | | time. |
| system used to keep track of business activities. | | | | By the way, if net income is a negative number, |
| Double-Entry accounting maintains the Balance | | | | it's called a loss. You want to avoid those. The net |
| Sheet: Assets = Liabilities + Owner's Equity. When | | | | income is reflected on the Balance Sheet in the |
| dollars are recorded in one account, they must be | | | | equity section, under current earnings (or net |
| accounted for in another account in such a way | | | | profit). Net income results in an increase in |
| that the activity is well documented and the | | | | owner's equity. A loss results in a decrease in |
| Balance Sheet stays in balance. | | | | owner's equity. |
| You may not need to be an expert in | | | | RETAINED EARNINGS: The amount of net |
| Double-Entry accounting, but the person who is | | | | income earned and retained by the business. If |
| responsible for creating the financial statements | | | | net income is like the score after a single |
| better get pretty good at it. If that is you, go | | | | basketball game, retained earnings is the lifetime |
| back through the book and focus on the 'gray' | | | | statistic. Retained earnings is found in the equity |
| sheets. Study the examples and see how the | | | | section of the Balance Sheet. It keeps track of |
| Double-Entry method acts as a check and balance | | | | how much of the total owner's equity was earned |
| of your books. | | | | and retained by the business versus how much |
| Remember the law of the universe...what goes | | | | capital has been invested from the owners (paid-in |
| around, comes around. This is the essence of | | | | capital). |
| Double-Entry accounting. | | | | Each month, the net profits are reflected in the |
| EQUITY: Funds that have been supplied to the | | | | Balance Sheet as current earnings. At the end of |
| company to get the 'stuff'. Equities show | | | | the year, current earnings are added to the |
| ownership of the assets or claims against the | | | | retained earnings account. |
| assets. If someone other than the owner has | | | | |