A Glossary Of General Accounting Terms – Part 1

Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific industry, and the bookkeeping and accounting business is no exception.

To help you understand the terms, acronyms, and phrases regularly used, Centrosome Inc. has created a four-part handy reference guide to essential terms used in the industry. Over the course of the next four weeks, these guides will provide you with valuable information that will allow you to comprehend and communicate your bookkeeping and accounting needs effectively.

This week, we’re going to begin with the first part of our glossary of essential General Accounting terms.

Accounting Period: An Accounting Period is designated in all Financial Statements (Income Statement, Balance Sheet, and Statement of Cash Flows). The period communicates the span of time that is reported in the statements.

Allocation: The term Allocation describes the procedure of assigning funds to various accounts or periods. For example, a cost can be Allocated over multiple months (like in the case of insurance) or Allocated over multiple departments (as is often done with administrative costs for companies with multiple divisions).

Bookkeeper:  Someone who’s role or function is keep records of the financial affairs of a business.

Business (or Legal) Entity: This is the legal structure, or type, of a business. Typical company formations include Sole Proprietor, Partnership, Provincially Incorporated, Federally Incorporated. Each entity has a unique set of requirements, laws, and tax implications.

Cash Flow (CF): Cash Flow is the term that describes the inflow and outflow of cash in a business. The Net Cash Flow for a period of time is found by taking the Beginning Cash Balance and subtracting the Ending Cash Balance. A positive number indicates that more cash flowed into the business than out, where a negative number indicates the opposite.

Certified Public Accountant (CPA): CPA is a professional designation that an accountant can earn by passing the CPA exam and fulfilling the requirements for both education and work experience.

Credit: An accounting entry that may either decrease assets or increase liabilities and equity on the company’s balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: A credit and a debit.

Debit: A debit is an increase in an asset or expense account, or a decrease in a liability or equity account.

Diversification: Diversification is a method of reducing risk. The goal is to allocate capital across a multitude of assets so that the performance of any one asset doesn’t dictate the performance of the total.

Fixed Cost (FC): A Fixed Cost is one that does not change with the volume of sales. For example, rent and salaries won’t change if a company sells more. The opposite of a Fixed Cost is a Variable Cost.

General Ledger (GL): A General Ledger is the complete record of a company’s financial transactions. The GL is used in order to prepare all of the Financial Statements.

Generally Accepted Accounting Principles (GAAP): These are the rules that all accountants abide by when performing the act of accounting. These general rules were established so that it is easier to compare ‘apples to apples’ when looking at a business’s financial reports.

International Financial Reporting Standards (IFRS): These are a set of common rules so that financial statements can be consistent, transparent and comparable around the world. IFRS are issued by the International Accounting Standards Board (IASB). They specify how companies must maintain and report their accounts, defining types of transactions and other events with financial impact. IFRS was established to create a common accounting language, so that businesses and their financial statements can be consistent and reliable from company to company and country to country.

Click here for Part 2 of our Glossary Series.

To help you better understand these terms as well as others, reach out to the experts at Centrosome Inc. We are a small business bookkeeping and accounting company, based out of Ottawa, ON, that services clients across Canada and the US. View our full list of services here, read customer reviews here, or get in touch with us here.