A big reason why accounting seems arcane is the language it uses – special vocabulary to describe accounting methods, processes and theories. Below is my quick first draft of definitions for common accounting vocabulary. First I will work on lengthening this entry. Eventually these will slowly be fleshed out with their own blog entries.
Asset – What you *own*. Assets are usually money, physical things and software.
Liability – What you *owe*. These are your debts.
Equity – What’s left over that is really yours, after you subtract what you owe from what you own. Note that Equity is a concept. It does not directly correlate to specific assets.
Balance Sheet – The financial statement where these three things – assets, liabilities and equity – are listed. This statement is a snapshot of a single day, usually at the end of a financial period like a month or a year.
Income – Surprisingly this is not a well-defined term in accounting. Income is different from Revenue (see below). Income can be a general term for “cash walking in the door”. The word Income usually has a modifier to give it a specific meaning, such as Net Income, which is your leftover money after costs are subtracted from Revenue.
Expenditure – Cash payments walking (or running!) out the door, like when you write a check. This is different from an Expense (see below).
Cash Flow Statement – A major financial statement that is often ignored. It shows the actual Income and Expenditures over a period of time. This is the story of your money walking in and out the door.
Revenue – The *recognition* of money being *earned*. Many times the actual cash has already been received (parked in Prepaid Revenue or Deferred Revenue), or is still awaiting payment (recorded in Accounts Receivable, or AR). This is *very* different from cash coming in!
Expense – *Creating* the *obligation* to pay something. If not paid immediately, the amount is parked in Accounts Payable (called AP) until it is actually paid. If you pay it early, like a down-payment, then it is temporarily recorded in Prepaid Expense.
Profit and Loss Statement (P&L) – The financial statement that shows revenue and expenses over a period of time (usually a month, a quarter, or a year). NOTE – this shows Revenue and Expenses! Not actual cash walking in and out the door. This is a key difference. A small organization may run out of cash, but their P&L is showing a profit!
Debits and Credits – Yin and Yang. The two halves making up the whole of the Accounting Tao. What – you thought they had something to do with math?
All Debit means is “the number on the left-hand side of the double-entry bookkeeping entry”.
And all Credit means is “the number on the right-hand side of the double-entry bookkeeping entry”.
A detailed description of the Tao of Accounting is a much longer entry to come…
Business Model – This is a short description of your basic business premise. What do you offer in exchange for people giving you money? If you are a nonprofit, how do you generate revenue?
Overhead – The day to day expenses you have regardless of how business is doing – rent, internet, and administration salaries like the CEO, finance department and HR.
Depreciation – A 500-year old accounting reminder system. Depreciation is the method used to split the cost of a large purchase (an Asset) over several years or more. See my entry What is Depreciation? for more details.