Managers and company owners hire dependable accountants so that they can handle their accounts professionally and ensure the company’s compliance with major financial regulations such as the SOX Act 2002. However, knowing a few important terms is a must to ensure better communication between these professionals. Therefore, to help non-accounting staff understand more about this best standard, here are ten important terms used in the accounting world.
Generally Accepted Accounting Principles
This is the accrual basis of accounting, which indicates that income and costs are recorded when a transaction takes place. The Financial Accounting Standards Board (FASB) established these principles after the Securities and Exchange Commission granted it authority.
An asset is any item which has a monetary value and has a useful life of more than a year. Examples of assets include the office furniture and equipment used for manufacturing goods and services.
A liability is a debt which is to be paid to creditors and other companies, such as utility bills.
This is the net worth of the business. It is usually calculated by deducting the assets from the liabilities (Capital = Sum of Assets – Sum of Liabilities).
Revenue IS NOT equal to profits. Profit is the money accumulated after the sale of goods or services after the deduction of expenses. However, revenue is the sum of money collected from sales before expenses are deducted.
Selling, General and Administrative (SG & A) Expenses
Any costs incurred while doing business, starting from employees’ salaries to the maintenance of equipment, are included under this term.
Net income is the sum of money left over after costs are deducted from revenue. This is important because net income will determine whether a company is profitable or incurring losses.
This is the forecast of the company’s income and expenses in the future. Again, this is important for managers to plan their next move in the market.
These are short-term forecasts which can go up to a year. They usually determine the income, expenses and sales revenue which a company should expect.
This is the opposite of operating budgets. A capital budget is a long-term forecast which helps the company determine how it should finance its long-term outlays for fixed assets.