Common Accounting Terms Explained

Accounting can seem really confusing when you don’t know much about the terminology used. It’s much simpler than you think once you know what you’re talking about. So, let’s dive in and do some learning. 

What are the most important accounting terms that you need to know?

Assets

Assets is a pretty simple accounting term. Assets are all items of value owned by a business or person. This includes houses, buildings, land, cash, etc. Basically, it is anything that can produce a positive economic value.

Liabilities

Liabilities are what a person or business owes, such as debts, money owed to creditors, and payables.

“They include bank loans, mortgages, and payables to vendors that supply goods and services to the business or to various government agencies for tax liabilities. Current liabilities, those that are due within the next year, are listed before long term liabilities.” - Pearson

Equity
Equity is a business’s book value, which can be explained as the differences between liabilities and assets on the balance sheet. Put in simpler terms, it is the value that an asset has left after liabilities are paid.

“Equity is the monetary value of a business or property, beyond any liens or related debts.” - The Canadian Encyclopedia

Equity is assets minus liabilities. 

Balance Sheet

A balance sheet is basically a document that states the assets, liabilities, and capital of a business at a certain point in time.

“The combination of assets, liabilities and shareholder equity tells investors what the company owns and owes and how much money shareholders have invested in it.” - BDC

A balance sheet is essential to any business's financial statements. It serves as it’s foundation.

Financial Statements

Financial statements are a business’s records of any business activities and financial performance. They accurately show a company’s current financial status.

Financial statements are often what is audited by accountants, the government, etc during tax season. That’s why it’s vital that your financial statements are accurate, organized, and up to date.

Cash Flow

Cash flow is simply the movement/flow of money into and out of a business. Cash flow can be positive or negative, such as money spent and money earned. Businesses should try to always have a positive cash flow.

“Typically, a company’s cash flow is measured every month or more. Generating cash flow is one of the most important aspects of a business, as it is what allows them to continue to operate.” - QuickBooks

Net Worth

Net worth is an owner's equity in a business. This is done by deducting a person’s total liabilities from their total assets. It is simply what you own versus what you owe.

For example, if someone owns $400 000 of assets and has $150 000 in liabilities, then their net worth is $250 000.

GST and HST

GST stands for Goods and Services Tax while HST stands for Harmonized Sales Tax.

“GST is a 5% tax that is applied to almost all taxable products or services in Canada. HST replaces GST in some provinces and territories that chose to combine GST and PST (Provincial Sales Tax), creating the HST.” - Signal Operations

These are just a few basic accounting terms that you should know. There are tons of other terms out there that you can learn as well. The more terminology you know and understand, the easier accounting is.

Did you learn any new accounting terminology today? Let us know in the comments below!

If you need some more help figuring this all out or need any other bookkeeping/accounting help, book a discovery call.