Like so many other industries, accounting is riddled with jargon and acronyms. If you’re just starting out or entering an accounting degree or study program, it can be a lot to wrap your head around. While you’ll probably cover the basic terminology early on, this quick-reference guide will help you learn the lingo faster.
1. Accounts receivable: This is a record of all the invoices a business has issued to its customers and clients that are yet to be paid. This figure is helpful for tracking the amount of money owed to a business.
2. Accounts payable: This is a record of all the invoices that have been issued to a business and are yet to be paid. This figure is helpful for tracking the amount of money a business owes its creditors.
3. Accrual accounting: Accrual accounting is an accounting method where transactions are recorded when an invoice is issued, or a bill is received – that is, it includes a business’s accounts receivable and payable for a more accurate view of their future financial position.
4. Cash accounting: Unlike accrual accounting, this accounting method records transactions when a payment is received or an expense paid, revealing the real-time financial situation of a business.
5. Balloon payment: This refers to a final lump sum due at the end of a loan agreement and is generally used to reduce the regular repayment amount throughout the term of the loan.
6. Benchmarking: A process of comparing a business’s processes or performance metrics against their competitors, the market, or their own past performance.
7. Capital growth: This is the amount an asset’s value increases over time. When the asset is sold, its capital growth becomes a capital gain.
8. Debt consolidation: You might advise a client to consolidate their debts – or roll multiple debts into one consolidated loan – to obtain a lower interest rate or to help them manage their repayments.
9. Equity: The value left over when a business’s liabilities are deducted from its assets is known as its ‘equity’ and might be used to secure new financing.
10. Overheads: These are ongoing business expenses that aren’t directly related to purchasing labour or direct materials used to create a product. Overheads often include rent, utilities, insurances, and other administrative costs.
11. Plant and equipment: These are the fixed assets a business requires to generate its income, and can include machinery, tools, vehicles, and computers.
12. Return on investment (ROI): ROI measures the return – that is, the gain or loss – of an investment relative to its original cost. To calculate ROI, you need to divide the cost of the investment by its expected (or actual) benefit (return). The result is expressed as a percentage or ratio.
13. Self-managed super fund (SMSF): An SMSF is a private superannuation fund managed by an individual (or group of individuals) rather than by a financial institution.
14. Variable interest rate: This is when the interest rate charged on the outstanding balance of a loan can change as the market changes. The alternative is a fixed interest rate loan, where the interest rate remains fixed for the duration of a loan period.
15. Working capital: This is the amount of cash a business has on hand to cover its operating expenses. Remember, before you take on more complex accounting concepts, you need to start with the basics. Familiarise yourself with these simple definitions and you’ll be on your way to the top of the class.