Accounting can be difficult to understand especially the terms that are often thrown around. Here are some of the ones we get the most questions about:
General Terms and Concepts
- Accounting- the process of recording, measuring, and communicating information about financial transactions.
- Accounting periods- regular periods where profits and losses are calculated. Typical periods are monthly, quarterly, and yearly.
- Business plan- a written document that lists a company's assets and liabilities and outlines a specific mission statement. It also includes a specific plan for the creation and growth of the business. It can be used to lure investors and lenders as well as a guide for the business owner as the company gets off the ground.
- Assets- things owned by a company that have future economic value that can be measured and expressed in dollars
- Examples: cash, inventory, supplies, land, equipment, vehicles
- Liabilities- obligations of a company or organization. Amounts owed to lenders and suppliers.
- Accounts payable, loans and debt
- Equity- the owner's share of a business
- Breakeven point- where revenues or sales exactly equals expenses. It is part of a business plan and tells the owner and prospective investors how many sales it will take to become profitable.
- Gross Profit- the profit a company makes after deducting the costs associated with making and selling its products. It can be calculated with the following formula:
Gross Profit = Revenue - Cost of Goods Sold
- Net Profit- the profit a company makes after all operating expenses, interest, and taxes have been deducted from revenue. It can be calculated in multiple ways:
Net Profit = Gross Profit - Operating Expenses
Net Profit = Revenue - All Expenses
- Forecasting- the use of a company's historic data to determine future trends. Businesses use forecasting to determine how to allocate their budgets or plan for expected expenses.
- Return on Investment (ROI)- used to evaluate and compare the efficiency of investments relative to other investments. This is helpful for business deciding how they want to invest their money.
- For example, a restaurant deciding whether they want to expand their menu of offer delivery
OI = (Gain From Investment - Cost of Investment) / Cost of Investment