What comes to your mind when you hear "Accounting?"
Big corporate offices, cubicles, and number-crunchers buried in spreadsheets!?
That's what I imagined to! But accounting is actually more than that!
In reality, the average adult practices accounting every day when managing personal finances, budgeting, paying bills tracking income and planning expenses. Yeah, you herd that right!
Truth is, you don't need any fancy schooling or a corporate job title to handle your own finances. Believe it or not, personal finance is simply basic accounting in action! That means everyday people like you and me are already capable of using fundamental accounting skills, even if you don't realize it!
The real challenge comes when we stop and take a closer look:
WHAT DO ALL THESE ACCOUNTING TERMS ACTUALLY MEAN?!
If you're just starting out in the accounting field and feel overwhelmed by the terminology or if you've recently started a small business and need a quick, no-nonsense breakdown of common accounting terms, you're in the right place!
This post is here to UNCOMPLICATE the terms for you! Hopefully relieving the stress and confusion!
Let's get straight to it!
We're going to start off with the most common terms; Assets, Liabilities, Equity, Revenue, Expenses, Profit, Depreciation, Cash Flow and Balance Sheet.
I know I know, it's a lot of words and seems overwhelming already! HAVE NO FEAR!!!!
ASSETS- Items of VALUE that you own. Personal assets would be the car you drive to and from work every day, the cash you keep in your wallet or bank, the iced-out jewelry around your neck or on your finger, or even the house you have your weekly book club meetings in. Business assets take form in buildings, cash, inventory and even patents.
LIABILITIES- It's what you OWE. Medical bills, Unpaid Taxes, those pesky credit card bills, utility bills, and loans.
EQUITY- It's what you have LEFTOVER after you subtract LIABILITIES from your ASSETS. Theres a very simple accounting equation for this, its goes
ASSETS - LIABILITIES = EQUITY
REVENUE- The MONEY you earn from providing a service or selling an item or selling inventory. So, if your little cousin Jimmy mows 10 lawns and earns a total of $75.00, this is his revenue! Or, if you sell an item on marketplace, let's say a pair of jeans and you get $10.00 for them, this would be your revenue. In business, revenue is earned by providing a service, like snow plowing, or selling items or inventory, like bags of popcorn.
EXPENSES- The MONEY you spend on things, money leaving. What do you spend your money on? Clothes, dining out, groceries, utilities, rent, childcare? These are all expenses. Business expenses can be anything from office supplies to marketing and advertising all the way to employee salaries.
PROFIT- This is the MONEY you have left and what you keep after subtracting EXPENSES from REVENUE. Again, there is a simple accounting equation for this as well.
REVENUE - EXPENSES = PROFIT
DEPRECIATION- This one can get tricky; a lot of factors can come into play! But we're going to keep it simple! Depreciation means that the value of an item loses its worth over a period of time from use.
👇For further info on Depreciation watch this short video👇
CASH FLOW- The money that's coming in and the money that's going out! In other words, the money you earn ($$coming in$$) and the money you spend ($$going out$$). This is the CASH FLOW!
BALANCE SHEET- The balance sheet shows the financial position you are in at any given time. It is made up of 3 things! ASSETS, LIABILITIES and EQUITY. It shows what you own, what you owe, and what is leftover....EQUITY.
💥And there you have it💥
There are many more terms we can go over, but these are the most common used terms.
Stick around there's more to come!
