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  • Writer's pictureRhys Evans

8 key Accounting terms you need to understand

Do conversations with your accountant feel like they are talking a different language? Aer you just nodding along, pretending to know what they are banging on about, hoping they don’t realise you are lost?


Well I am here to help. I given an explanation to some key terms you need to understand, and should make that call with your accounting slightly less daunting, and ultimately a lot more productive.

 

AR – Accounts Receivable

When we talk about “Accounts Receivable” or “AR” for short, we are thinking about the sales that you have made to your customers, that they haven’t paid you for yet. The balance of this will show on your Balance Sheet as an Asset, as it is the value of money owed to your business. Keep reading for details on “Balance Sheet” and “Assets”.

 

Without keeping on top of your AR, they can quickly get out of control, and cause your business severe cash flow issues. Understanding this principle, and keeping a close eye on the balance is imperative to knowing your numbers and making sure your finances are in check.

 

AP – Accounts Payable

On the other side of the AR coin, we have AP, or Accounts Payable. Here we are thinking about the purchases you have made with suppliers that haven’t been paid for yet.

This balance will show as a liability on your balance sheet, as it is a value that is owed out of your business.

 

Along with maintaining your AR, keeping a close eye on your Accounts Payable will help you forecast your cash flow, and ensure you are well aware of the liabilities coming due in the near future. Keeping a close tabs on your AP will also allow you to take advantage of any extended payment terms or early payment discounts offered to you by your suppliers. Again, giving you the tools to control your Cash Flow. Cash flow discussed in detail, below.

 

Assets

Assets are items of value that your business owns. These live on your balance sheet. Assets are commonly split into “Fixed Assets”, these are assets with a longer lifespans, typically over one year. Think properties, equipment, vehicles here. Shorter term assets are classed as “Current Assets”. These are assets that are more readily available to turn into cash, and generally shorter term in nature. Think Stock, AR and your bank balance.


Liabilities

Liabilities are the opposite of your assets. These are values that you owe others. Like assets, these are split between “Current” and “Liabilities due in more than 1 year”. When thinking “Current Liabilities”, think Accounts Payable, any Bank overdrafts, credit card balances, and any tax that is due to be paid within the next 12 months. Common long term liabilities include and loan balances, deferred tax.


Balance Sheet

The balance sheet is one of the financial statements, and shows what the company is worth, by comparing its assets and liabilities. The difference between the two is expressed as “Net Worth”.

Your balance sheet is snapshot of the business, as balances are expressed at a point of time.

 

Profit and Loss Account- P&L

The Profit and Loss Account, or P&L, is the other Financial Statement, and shows the businesses performance for a given period. This is where all of your Revenue is shown, and expenses deducted to calculate the company’s profit for the year.

 

Revenue

Revenue, or turnover, is the amount you have charged your customers for goods bought, or services provided, net of any Tax applicable – VAT.


Cash Flow

Cash flow is the movement of cash in and out of your business. We aren’t think sales and purchases here, we are thinking cold hard cash!


Understanding your cashflow is of upmost importance in knowing your numbers and running your business.


Making sure you have more cash coming in than going out is what is going to ensure your business success.



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