
At Founderโs CPA, we pride ourselves on complete transparency with our customers. After all, they’re your accounts and ultimately your money, so you deserve to understand how it is being handled. Many bookkeepers use industry jargon that is useful shorthand between experts, but isnโt always so clear to everyone else. Hereโs a guide to some of the key terms you might see or hear a startup bookkeeper use.
Key Terms Every Startup Bookkeeper Should Know
Accelerated depreciation
A form ofย depreciationย where more of the total depreciation amount is applied to earlier years in theย assetโsย lifespan than to the later years. This could apply to a vehicle or a computer that quickly loses a lot of value.
Accounting period
Accounts are a list of transactions that take place during a specific timescale known as the accounting period. The most common accounting period is one year, though this period wonโt necessarily be a calendar year. (For example it could run from May 1 to April 30.) The accounting period for a particular set of accounts could be a different length, such as a quarter.
Accounts payable and receivable
Accounts payable is a figure (often detailed in a dedicated statement) for the total amount of money the business owes in unpaid bills, for example to suppliers or contractors. Accounts receivable is the money that customers owe to the business but have not yet paid. Accounts payable is aย liabilityย for the business while accounts receivable is anย asset.
Accrual accounting (or accrual basis)
A system by which startup bookkeepers list each transaction with the date the liability is created: in other words when somebody begins to owe the money, even if it hasnโt been paid yet. This applies both to your sales and spending. Deciding between accrual accounting and cash accountingย can significantly affect your profits and tax liability for a particular year.
Amortization
This means taking a one-off expense and splitting the cost over multipleย accounting periods. Because this affects tax liabilities it often has to be done following strict rules. Itโs similar toย depreciationย but is for intangible assets that have a fixed lifespan, such as a patent.
Assets
Something the business owns that has value. This can include money the company is owed which your startup bookkeeper records in your financials.
Balance sheet
This is one of the keyย financial statements. It shows the changes in the companyโsย assetsย andย liabilitiesย during theย accounting period, the final figures, and the all-important difference between the two.
Capital expenditure
Spending onย assetsย that will be useful for the company beyond the currentย accounting period, such as a factory or a machine. This is in contrast toย current expenditure.
Carryback or Carryforward
This is a process a startup bookkeeper carries out on a tax return rather than in the accounts themselves. In simple terms, it means asking the IRS to treat the annual profit or loss as if it had actually taken place in a previous or future year instead. This has to follow strict guidelines but can lower overall tax liabilities.
Cash accounting (or cash basis)
A system by which bookkeepers list each transaction for the date the money actually changes hands. This could be in a laterย accounting periodย than when the deal was made or the goods delivered. Deciding between cash accounting andย accrual accountingย can significantly affect your profits and tax liability for a particular year.
Cash flow
This is the order in which expenses and revenues actually happen. A business might be profitable across anย accounting periodย but still have cash flow problems if a lot of the expenses come before the revenues are received. This can often happen with small businesses that have to pay suppliers upfront for materials but have to offer customers long credit periods before they pay for goods.
Credit
This is a term used inย double entry bookkeepingย where every transaction is listed twice: as aย debit for one account and a credit for another account. Perhaps counterintuitively, the credit is the listing where an account is increased (such as a credit to the cash account when buying a machine.)
Current expenditure
Spending on assets that are only useful to the company during theย accounting period. Examples include wages and materials used up in manufacturing. This is in contrast toย capital expenditurewhich is for assets that will be useful beyond the accounting period.
Current asset
Anย assetย that could easily be turned into cash within the nextย accounting periodย (usually the next financial year.) It usually covers accounts receivable, stock and raw materials, but doesnโt usually cover assets such as land or equipment where itโs less certain a business could find a buyer at a fair price and complete a sale within the accounting period.
Current liability
Aย liabilityย that the business expects to pay off within the nextย accounting period. This most commonly means within the next financial year.
Debit
This is a term used inย double entry bookkeepingย where every transaction is listed twice: as a debit for one account and aย creditย for another account. Perhaps counterintuitively, the debit is the listing where an account is increased (such as a debit to the companyโsย assetsย when buying a machine.)
Depletion
A form ofย depreciationย that specifically applies to natural resources with a decliningย assetย value such as a mine or oil well that will become less valuable as the resource is depleted.
Depreciation
A way of accounting for the fact that someย assetsย become less valuable over time, such as a machine wearing out. Rather than always list the asset at its original value until it becomes worthless, depreciation means reducing the listed value of the asset on the balance statement by a certain proportion each year. This avoid the misleading situation of the company suddenly appearing to lose a large amount of value in one go. It can also spread out the loss over several years, reducing taxable income, though this must be done in line with tax laws.
Discounted cashflow
Discounted cash flow is a way of taking into account the way money received in the future will be โworthโ less than the same amount today because inflation diminishes its buying power. A bookkeeper will not use discounted cash flow when preparingย financial statements, particularly ones which determine tax liabilities. Instead of calculating discounted cash flow is more suited to a business carrying out an internal assessment of its plans for the future and working out if the potential revenue boost in the future is worth increasing spending on equipment or facilities now.
Double entry bookkeeping
A system by which every transaction is listed twice in a set of accounts, reflecting the fact that it has two different effects. For example, a company buying a new widget-making machine for $20,000 will reduce its cash reserves by $20,000 and increase itsย assets by $20,000. One listing is classed as a credit by the bookkeeper and the other as a debit. Across all transactions, the credit and debit totals should match. If they donโt, the bookkeepers know thereโs likely a typo or other error that needs fixing.
Draws
Money taken out of a business by one of the owners. Itโs listed separately to any salary payments, which are treated as an operating expense. Whether the payment is treated as drawings or salary can affect the profit figure for the business and in turn its tax liabilities.
Equity statement
The equity statement is one of theย financial statementsย and can be called a statement of ownerโs equity (for a sole proprietorship), partnerโs equity (for a partnership) or stockholderโs equity (for a corporation.) It shows the capital and equity in the business: in other words the value of the share that each owner or stockholder has in the business. It also shows how this has changed during theย accounting period. The idea is to take account of the fact that owners may put money into or take money out of the business: this isnโt part of the businessโs trading activities but still affects its capital.
Financial statements
A collection of documents covering a businessโs financial activities during theย accounting period. The most common documents are ย General Ledger, Balance Sheet, Income Statement and Equity Statement.
Financial year
A 12-month period that a company uses as itsย accounting period. It doesnโt necessarily run from January to December.
General ledger (Your Startup Bookkeeper’s Favorite Term!)
This is effectively the master record of every transaction. Once complete, the bookkeeper checks it with theย trial balance.ย If that checks out, the general ledger then provides the data for the otherย financial statements.
Going concern
Bookkeepers usually prepare financial statements on the basis that a business is a going concern: that is, it will continue trading in the future.
Income statement
This is one of theย financial statementsย and is what people who arenโt bookkeepers might call the โprofit and loss accountโ. It contains the figures for the companyโs revenue and expenditure for the year (often broken down by category or department) and in turn its overall profit or loss.
Key ratios
A quick comparison of two figures inย financial statementsย that can give insight into a particular aspect of a company. For example, the current ratio compares theย current assetsย to theย current liabilitiesย and is a rough guide to how likely a business is to be able to repay debts. Another example is the debt-to-equity ratio, which compares theย total liabilitiesย from theย balance sheetย to the equity figure on theย equity statement. This can show if a company is too reliant on debt to fund its activities.
Liabilities
This is money the business owes to someone else.
Limited liability
This refers to the individual owners rather than the business itself. Limited liability means that the owner can lose any money they put into the business but canโt be personally pursued beyond this to settle any company debts.
Limited liability company
This is a special type of business under US tax laws. Itโs treated similar to a partnership or sole proprietorship for tax purposes but similar to a corporation in the way owners haveย limited liability.
Net book value
This is the listed value of a particularย assetย on aย balance sheet. Itโs calculated as the original cost of the asset minus the totalย depreciationย that has been listed inย financial statementsย since the purchase.
Retained earnings
Retained earnings refers to whatever part of the business profits remain in the business itself rather than being paid to the owners as aย drawingย (for an unincorporated business) or dividends (for a corporation.)
Straight Line Depreciation
A form ofย depreciationย where the total depreciation is split evenly across the lifespan of the asset, in contrast toย accelerated depreciation.
Trial Balance
This is a process by which a bookkeeper checks the total of all credit entries matches the total of all debit entries. If it doesnโt, itโs a sign thereโs likely a mistake with an entry that needs finding and fixing before the rest of the financial statements are prepared.
Work In Progress
This is a category in financial statements that covers goods that are partway through the production process at the end of theย accounting period. Calculating the value of these goods can be difficult as they are theoretically more valuable than the raw materials (and some expense has gone into the production work) but are less valuable than finished products ready for sale. The most important thing is that the method used to value these goods as anย assetย is clear and consistent.
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