Common Accounting Terms

“Assets are recorded on the balance sheet with depreciation calculated using the straight-line computational method.” For a layperson and most business owners, this statement seems gibberish. Unfortunately, most accounting reports are full of such sentences that are almost impossible to understand. Still, business owners need to be aware of some of the common accounting terms, as these are vital to their success.

Here are some of the most frequently used accounting terminologies that every business person should know:

Accounts Payable and Receivable

Accounts payable is a term used to define costs that a business has incurred, but the payment for them has not been made yet. These can include but are not limited to the purchase of raw materials or inventory and payments for services received. This is recorded in the books of a business as a debt or liability. On the other hand, accounts receivable are payments that a business has to receive for sales that it has made.

Accrued Expense

This is an expense that has been incurred, but the payment for it has not been made yet.

Balance Sheet

There are three main types of financial statements. First, balance sheets are reports that list all the assets, liabilities, and equity that a business has. It is a summary of what a business is worth by following the equation: liabilities + equity = assets.

Depreciation

Depreciation is a terminology used to describe how an asset loses value over time. An asset often needs to have a high value in order to be depreciated. Automobiles and equipment are common assets that must be depreciated. Depreciation is a cost item that appears on the income statement and is frequently referred to as a "Non-Cash Expense" because it doesn't directly affect a company's cash situation.

Book Value

Every asset that a company owns will depreciate over time. Depreciation means a loss in value. The book value of any asset means the original value minus depreciation.

Conclusion

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