Outsmart your accountant and other financial friends with these accounting-related definitions:

Fiscal Year

Most companies report their results on a calendar year, from January 1 through December 31. Some companies use a different year for reporting, and that’s called a fiscal year. For example, Intuit’s fiscal year runs from August 1 to July 31. A nonprofit commonly runs from July 1 to June 30.

The word fiscal alone refers to government or public revenues and expenditures. A fiscal year can also be considered the period where companies report their financial results to the public.

Budget

Most companies sit down once a year and plan what they intend to spend. This set of numbers is a budget. It is prepared in income statement format which includes planned revenue and expenses. It can be done for a year, monthly or both.

A common report that compares budget to actual figures is the Income Statement Comparison to Budget which includes columns for month and year-to-date actual, budget, and variance (the difference).

Forecast

While a budget is a longer term plan, a forecast is an attempt to predict the short-term future. Forecasts can be made for cash flow, predicting your bank account balance, or can be focused on potential profit for a period. A forecast is created by enumerating current and expected short-term cash commitments.

General Ledger

A general ledger is a fancy word for your accounting books. It’s also a very specific report that lists each account within the chart of accounts, beginning balances, the activity of each account for a particular period of time, and ending balances. It includes both balance sheet accounts, such as cash, accounts receivable, and accounts payable, and income statement accounts, such as revenue and expenses.

Fixed Asset

A fixed asset is a special type of asset that includes items such as land, vehicles, furniture, buildings, office equipment, plants, and machinery. Fixed assets cannot easily be converted into cash (cash equivalents are termed current assets) and they must last longer than one year. They are physical or tangible (as opposed to intangibles such as patents and trademarks).

Depreciation

Most fixed assets except land depreciate in value over time. For example, when you drive a new car out of the lot, no one will give you what you just paid for it. This reduction in value over time is recognized on accounting books by recording depreciation. Since assets need to be recognized at market value, depreciation is an estimate of this adjustment. Depreciation becomes an expense and reduces the value of the fixed asset. Unlike most other transactions, cash is not affected when recording depreciation.

Accrual

There are two ways to keep books when it comes to the timing of how items are recorded: the cash method and the accrual method. Let’s invoke Popeye the Sailor Man’s friend Wimpy who always says, “I’ll gladly pay you Tuesday for a hamburger today.” Let’s say today is the Friday before this famous Tuesday.

If you are using the cash basis method, you would record the entire transaction on Tuesday, when you get the cold hard cash. If you are using the accrual basis, you would have two entries: one on Friday to record the sale to accounts receivable and one on Tuesday to zero out the receivable and increase cash. It’s the same net, effect; the only difference is in the timing.

Most small businesses that extend credit keep their books on an accrual basis so they can keep track of everything. Most taxes are paid on cash-basis books, requiring adjusting entries at year end that reverse at the beginning of the year.

Balance Sheet

A balance sheet is a very common report of all of the business’s account balances as of a specific date, such as December 31. These accounts include cash, receivables, fixed assets, liabilities, equity and others.

Journal Entry

A journal entry is usually an adjustment that is made to the accounting books. The result is that some accounts increase and others decrease. In theory, every transaction made to a company’s books is a journal entry. When you write a check and it’s cashed, cash goes down and an expense is increased. When you receive a payment, cash goes up and revenue goes up. Each of these transactions is a journal entry.

Do you feel a bit smarter? I’m not sure how exciting this is for cocktail table talk, but hopefully you feel smarter when it comes you’re your business’s accounting function.

It’s good to know some basic accounting terms, and here are ten terms with friendly definitions for your review.

Asset:  Essentially, assets are what you own.   These include your bank accounts, business equipment, and even the amounts that customers owe you.

Revenue:  Revenue is what you make.  Another word for it is Sales.  You generate revenue in your business when you make a sale to a customer.  The amount of the sale is included in revenue.

Expense:  An expense is what you spend in your business on items that are not expected to benefit you in the long term.  Expenses include credit card fees, office supplies, insurance, rent, payroll expense, and similar items that you need to incur to keep your business running.

COGS:  COGS stands for Cost of Goods Sold.  It’s a form of expense that directly relates to the product or service being sold.  For example, if shoes are being sold, the cost of purchasing those shoes are consider COGS, while something like rent or insurance is simply an expense.  COGS is more important in manufacturing, retail, and distribution companies.

Net Income:  Another word for net income is profit.  It’s calculated by subtracting expenses from revenue.  If what’s left over is a positive number, it’s net income and if it’s negative, it’s a net loss.  Besides your salary, it’s the amount of money you can either keep or re-invest into your business.

Debit:  A debit is a term that tells you whether money is being increased or decreased.  The hard part is that it’s opposite depending on the account and the company.  Here are some examples:

• A debit to cash increases it, so that’s good.
• A debit to a loan you owe decreases it, so that’s good too because you are paying it off.
• When you talk to a bank teller and they want to debit your account, it means they are taking money away, because your account is a liability to them.  So it’s opposite.

Credit:  A credit is a term that tells you whether money is being increased or decreased.  The hard part is that it’s opposite depending on the account and the company.  Here are some examples:

• A credit to cash decreases it, as in writing a check to someone.
• A credit to a loan you owe increases it, so you owe more money.
• When you talk to a bank teller and they want to credit your account, it means they are putting money in, because your account is a liability to them.  So it’s opposite.

GAAP: GAAP stands for Generally Accepted Accounting Principles.  It refers to the set of standards that must be followed by accountants when creating accounting reports for people like bankers and investors who rely on them.

Liabilities:  Liabilities are what you owe.  If you have loans taken out for your business or owe vendors money for invoices of purchases they sent you, those are liabilities.  Common liabilities include sales tax that you’ve collected but not paid, unpaid vendors’ invoices, credit cards that are not paid off each month, mortgages on buildings, and any bank loans you’ve taken out.

Equity:  In mathematical terms, equity is the net of your assets less your liabilities.  In more philosophical terms, it’s the net amount you and your fellow business owners have invested in your business adjusted by the years of net income you’ve made less what you’ve taken out of the business.

How many terms did you already know?  Do you feel smarter already?  Knowing accounting terms will help you understand this aspect of your business a bit better.