Whether you’re an accounting novice or a seasoned entrepreneur, navigating the world of finance and accounts payable (AP) can be a daunting task. Understanding the essential terminology is the first step towards managing your organization’s finances effectively. Here’s a comprehensive glossary of 39 basic accounts payable terms to help demystify the jargon surrounding AP processes:
General Accounting Terms:
- Cash Flow: The total movement of cash and cash equivalents in and out of a business. It reflects a company’s ability to manage its cash and meet short-term financial obligations.
- Certified Public Accountant (CPA): Professionals who prepare financial statements, conduct audits, and provide financial advice. They must pass the CPA exam administered by state boards.
- Credit: An accounting entry that decreases asset and expense accounts while increasing liability, revenue, and equity accounts.
- Debit: An accounting entry that increases asset and expense accounts while decreasing liability, revenue, and equity accounts.
- Diversification: Expanding into new markets or industries to stabilize or increase revenue.
- ERP (Enterprise Resource Planning): A system that integrates accounting, inventory, order management, and sometimes customer relationship management (CRM) and human resources functions.
- GAAP (Generally Accepted Accounting Principles): Accounting rules and practices established by the Financial Accounting Standards Board (FASB) for producing financial statements.
- General Ledger (GL): A record of all financial transactions within an organization.
- Interest: The cost of borrowing money, usually paid in addition to the principal amount borrowed.
- Liquidity: How easily an asset or holding can be converted into cash.
- Present Value: The current value of a future sum based on a specific rate of return.
- Return on Investment (ROI): A metric used to evaluate investment value, calculated by subtracting the investment cost from its current value and expressing it as a percentage.
Balance Sheet Terms:
- Accounts Payable (AP): The money a business owes to creditors and suppliers as short-term obligations.
- Accounts Receivable (AR): Money owed to a company by customers for goods or services purchased on credit.
- Assets: All items or resources owned or controlled by an organization, categorized as short-term (e.g., cash) or long-term (e.g., real estate).
- Balance Sheet: A financial statement displaying a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
- Book Value: The recorded value of an asset, reflecting acquisition cost minus depreciation.
- Capital: Financial resources used for daily operations and supporting core business functions.
- Equity/Owner’s Equity: The residual value in a business after subtracting total liabilities from total assets.
- Liabilities: Monies owed by a business to other entities for debt, payroll, taxes, or financial obligations.
- Overhead: Indirect expenses, such as rent, insurance, and advertising, not directly tied to product or service costs.
- Payroll: A ledger account encompassing employee payments, including salaries, wages, deductions, and bonuses.
Income Statement Terms:
- Amortization: Spreading business expenses over time, often used for intangible assets or loans.
- Cost of Goods Sold (COGS): The cost directly tied to production or acquisition of goods or services.
- Depreciation: Allocating the purchase price of fixed assets over time, recognizing value decline due to wear and tear.
- Expenses: Money spent by an organization to generate revenue, including fixed, variable, and accrued expenses.
- Gross Margin: The percentage of revenue remaining after deducting direct costs from net sales.
- Gross Profit: The amount earned after subtracting manufacturing or acquisition costs from revenue.
- Net Income: Calculated by deducting total expenses from total revenue.
- Profit and Loss Statement (P&L): A financial report summarizing revenue, expenses, and profit/loss over a specified period.
- Revenue: Income generated by a business.
Understanding these fundamental accounting terms is essential for effective financial management. Whether you’re a business owner or a financial professional, this glossary will empower you to navigate the world of accounts payable with confidence.