It is important in any business to be familiar with some accounting terms even though you might not even work with it. Having and understanding can help you in many instances even in your personal life.
Account:This will a location where all items related to a specific company/supplier/group are recorded. An example all cash items are recorded in the cash account.
Accounts Receivable:These are accounts for customers that you have allowed to purchase from you on credit (they have the goods in advance before payment). They will owe the business money and this will be receivable by the business.
Aged Receivables: This is like a summary showing all the outstanding amounts of money owed to you by your credit customers divided by how many days, to give you clear indication of how overdue the amounts are.
Assets: These are things like cash, accounts receivables, inventory, property, equipment and prepaid expenses. An item of property/ resource owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.
Bank Reconciliation: This the process of matching and comparing figures from your accounting records compared to these on your bank statement. Double checking any discrepancies if any.
Batch Posting: Collecting transactions or tasks together to process in a group or batch.
Capital: Capital is the owner’s interest in the business. It is made up from cash or assets introduced to business by the owner, the profits generated less any amounts the owner has withdrawn from the business.
Chart of accounts: This is a listing of names of the accounts that the company has identified and made available for recording in its general ledger. The chart of accounts consists of balance sheet accounts (assets, liabilities, stockholders’ equity) and income statement accounts (revenues, expenses, gains, losses). The chart of accounts can be expanded and tailored to reflect the operations of the company.
Close off: This means work out the difference between the money received and money paid out. The balance is then carried down to the next month or accounting period.
Control account: This is a general ledger account that records the total entries made to the individual ledger, as the payable or receivable ledger. This is like a summary to cross check info.
Credit check: This is normally done with customers that would like to purchase goods from you on credit. This check is to make sure they are able to pay their debts, this will also check for outstanding legal proceedings and a history of bad payments etc.
Credit Rating: Once credit checks are done this will be the rating the customer is given and will determine how much credit they will be allowed. It will be based on references from their bank and other suppliers. If they have a good credit rating and record they will be given a large credit.
Current account: This is the bank account used on a daily basis for the running of the business.
Deposit account: This is where money is kept that is not needed immediately and can attract interest payments from the bank.
Depreciation: This is to explain a reduction in value of an asset over time due in particular from wear and tear. A motor vehicle is a good example of this. The depreciation of the vehicle is an expense charged to the profit and loss in each accounting period, to spread out the cost.
Drawings: This is cash or assets withdrawn from a business by the owner for their own personal use.
Error of omission: This is to explain when something was ‘omitted’ or left out, not posted in the accounts
Error of principle: These are errors when an equal debit or credit is posted but the transaction has been posted to account of a different type. Like an expense posted to an asset.
We will look at more accounting terms in my next post. Are there any you would have added to these listed or maybe would have explained in a different way?