Every industry has its own language, and accounting careers are no different. Sometimes, accounting itself is described as the language of business because accurately prepared financial statements essentially speak for themselves. Common accounting terms help organizations in different industries communicate and do business with one another.
In your accounting career, understanding how to use accounting terminology is essential. During an interview, your familiarity with how to use accounting terminology will demonstrate your capability in the industry.
The word account literally refers to the financial statements that show a business’s transactions, its net worth, its cash flow, and all other information pertaining to its finances. Accounts payable and accounts receivable are variations of the term, which you will hear often in the accounting industry. Accounts payable are documents that record money a business or individual owes. Accounts receivable are documents that record money a business or individual is owed.
Double-entry bookkeeping is a way of recording transactions that has been popular since the fifteenth century. In double-entry bookkeeping, debits are recorded in the left column of the ledger, and credits are recorded in the right column. Debits are money or value that a business or individual gains, and credits are money or value that a business or individual pays to an outside party. The ledger is where the records are kept. In the past, a ledger would likely be a notebook where transactions were recorded. Now, ledgers are more likely to be in computer programs or electronic records.
Assets and liabilities are other important concepts to understand in accounting careers. An asset is something that a business or individual owns that can generate income or be sold for income. Investments, property, and cash are all assets. A liability is anything that an individual or business must pay. Taxes are a liability. Even things someone owns that have a maintenance cost, such as expensive cars, are liabilities.
A business or individual’s net worth is the sum of assets less liabilities. In other words, in terms of a business, net worth is everything the business earned after paying its expenses. Cash flow, however, refers to the amount of cash or assets a business or individual has access to at a given time. A client may owe a business money for a service, but if the business has not received the payment yet, the payment is not yet part of the business’s cash flow.