Accounting, like any other sector, has a vast range of industry-specific phrases that most of us may not use or even comprehend. While many of the words are used in most corporate situations, some are unique to the accounting field.
If you want to know your big data from your GAAP and your general ledger, here’s a simple dictionary of crucial accounts payable terminology to assist you comprehend your finances and interact with your accounting team.
39 Basic Accounts Payable (AP) Glossary Terms
Whether you’re implementing a new accounts payable (AP) strategy or have recently joined the finance team, it’s critical to grasp all aspects of accounting so that you can design the best approach for your firm.
Here are 39 essential accounts payable words that will help everyone from non-accounting employees to business owners better comprehend the language that governs accounts payment processes.
General Accounting Terms
Below are a dozen of the basic accounting terms that can apply to a wide variety of different accounting processes:
1.Cash flow: This is the total amount of cash and cash equivalents moving into and out of a business at any given time. A cash flow statement shows how effective a company is at managing its cash and indicates its ability to fulfill short-term financial obligations. There are three sources of cash flow:
- Operating activities
- Investment activities
- Financing activities
2. Certified Public Accountant (CPA): To become a CPA, candidates must pass the Uniform Certified Public Accountant Examination, which was developed by the American Institute of Certified Public Accountants (AICPA) and is administered by the National Association of State Boards of Accountancy. Individual state boards grant the CPA designation. These specialists generate financial statements, audits, and studies such as revenue predictions and profit margin analyses to help investors and business leaders understand an organization’s financial health. They can also offer individuals and families valuable tax and financial planning assistance.
3. Credit: In accrual accounting, a bookkeeping entry that reduces asset and cost accounts while increasing liability, revenue, and equity accounts.
4. Debit: In accrual accounting, a bookkeeping entry that increases asset and cost accounts while decreasing liability, revenue, and equity accounts.
5. Diversification: A strategy for stabilizing and/or increasing revenue by expanding into markets, industries, or product/service categories outside of a company’s traditional area of emphasis, usually through the acquisition or creation of new business competences.
6. ERP: Enterprise Resource Planning combines accounting, inventory, and order management operations to provide a unified solution that automates manual procedures, centralizes corporate data, and increases visibility into daily performance across the organization. Some ERP systems include CRM and HR services.
7. Generally Accepted Accounting Principles (GAAP): The Financial Accounting Standards Board (FASB) produced these regulations to define its accepted accounting procedures and practices. Publicly traded corporations must adhere to GAAP and issue GAAP-compliant financial statements quarterly and annually.
8. General ledger (GL): If accounting is a system for keeping track of an organization’s financial data, the GL is a record of every financial transaction (such as assets, liabilities, revenue, equity, and expenses).
9. Interest: This is the amount paid on a loan, line of credit, or other debt that surpasses the entire repayment sum (sometimes known as the “principal balance”). Lenders often charge interest in exchange for borrowing money and repaying it over time.
10. Liquidity: How easily an asset, security or other holding can be converted into cash.
11. Present value: This represents the current value of a future sum and is based on a specific rate of return over time.
12. Return on investment (ROI): This metric is used to determine the worth of an investment and is calculated by subtracting the cost of the investment from its current value, which is then divided by the cost of the investment. In most circumstances, ROI is calculated as a percentage. ROI can also be used to define the time it takes for an investment to recoup its initial cost.
Balance Sheet Terms
The balance sheet is an important document created by accountants that depicts a company’s assets and liabilities. Non-accountants may find the balance sheet perplexing, therefore below are explanations of some of the most popular terms:
13. Accounts Payable (AP): The amount of money a business owes to is creditors and suppliers in the form of short-term obligations.
14. Accounts Receivable (AR): A representation of the money that customers owe a company for goods or services purchased on credit.
15. Assets: This includes all valuable assets or resources that an organization owns or controls. Short-term assets consist of cash and cash equivalents. Long-term assets can be either tangible (real estate, equipment) or intangible (patents, trademarks). An organization’s balance sheet shows the value of its short- and long-term assets.
16. Balance sheet: A financial statement that reports all company assets, liabilities and shareholders’ equity for a specific point in time.
17. Book value: The value of an asset as recorded in a company’s accounting books and reflecting the total acquisition cost minus depreciation or amortization. Also known as carrying value.
18. Capital: The financial resources held or secured by a company to fund daily operations and fuel growth and non-financial assets, such as land, facilities and equipment, used to support core business functions.
19. Equity/owner’s equity: The value remaining in a business after subtracting total liabilities from total assets. Equity can be positive or negative.
20. Liabilities: Monies owed by a business to other companies, organizations or individuals for payment of debt, payroll, taxes or other financial obligations.
21. Overhead: Expenses that cannot be directly attributed to the cost of manufacturing products, acquiring goods for resale or delivery of services. Overhead can include things like rent, insurance and advertising expenses.
22. Payroll: A general ledger account that includes all payments to employees in the form of salaries, wages, deductions and bonuses. Payroll is entered as a liability on a company’s balance sheet.
Read more: What Is Payroll Tax?
Income Statement Terms
The income statement, which represents revenue and expenses, contains its own set of jargon that is not always easy to understand. Here are some basic definitions of the most common income statement-related terminology.
23. Amortization: A technique for spreading out corporate expenses over time that involves writing down the book value of an intangible asset or loan over a specific time period. Expenses are divided into smaller ones over several years rather than one huge one.
24.Cost of goods sold (COGS) or cost of sales: The combined value during a given period of expenses directly related to the production of goods or acquisition of products for resale. For services company, it’s the cost of providing the services. The formula for calculating cost of goods sold is:
COGS = starting inventory value + purchases for inventory – ending inventory value.
Indirect expenses, such as sales and marketing, are excluded from COGS.
25. Depreciation: Depreciation is an accounting technique that allows you to expense the purchase price of fixed assets over time, usually several years. Depreciation is regarded as a better method of capturing the value derived from a fixed asset during its useful life. It also acknowledges that the value of a fixed asset depreciates due to wear and tear and other factors.
26. Expenses: This is the money that an organization spends to produce revenue. There are three types of expenses: fixed (constant and predictable), variable (fluctuating), and accruing.
27. Gross margin: Gross margin is the percentage of revenue remaining after direct costs have been subtracted from net sales.
28. Gross profit: This is the amount of money a company earns after deducting the costs of manufacturing/acquiring the products it sells or providing the services it offers. The figure appears on the income statement and is obtained by deducting COGS from revenue (sales).
Gross profit = sales revenue – direct costs
Sales and marketing are not direct costs. Commissions are sometimes included in direct costs, but salaries are not.
29. Net income: Also known as net profit, net income is calculated by subtracting total expenses from total revenue.
30. Profit and loss statement (P&L): Also known as an income statement, this financial report provides a summary of a firm’s revenue, expenses and profit/losses over a given period of time (i.e., a fiscal year or a quarter).
31. Revenue: Any income that a business generates.
Accounts Payable Terms
You won’t stay in business for long if you don’t pay your suppliers, utility providers and landlords on time. Here’s a quick primer on the top accounts payable terms that all companies should learn and know:
32. Days payable outstanding (DPO): This is the average time it takes a corporation to pay for products and services acquired on credit. Days payable outstanding informs investors and other stakeholders about how a company manages its cash. DPO only measures direct expenses (COGS-related expenses), not selling, general, and administrative (SG&A) expenses like as lease payments and office space utilities. Utilities used throughout the production process would be included, however.
33. Immediate payment: Indicates that payment is due upon delivery of a service or product.
34. Invoice: A dated business document that’s produced by a seller and given to a buyer to indicate the amount to be paid for a product or service.
35. Net 15, 30, 90: These are the credit conditions on an invoice that specify when full payment is due. The term “net” refers to the total amount to be paid after any discounts, markdowns, or vendor credits were applied to the purchase.
36. Payment in advance (PIA): Payments made for products or services prior to their delivery or performance. For example, a buyer may be requested to pay a 50% deposit on a particular order.
37. Purchase Order: Also called a “PO,” this document is generated by a customer who, in turn, authorizes the purchase transaction. The PO becomes a binding contract once the seller accepts it.
38. Recurring invoice: An invoice that’s sent to a customer on a regular schedule for a specific service or product.
39. Terms of sale: Payment terms that a corporation and its customer have agreed upon prior to the sale. The terms may include price, delivery date, quantity, payment method, and payment terms.