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17 accounting terms that every entrepreneur should know

The understanding of some accounting terms It is very important for entrepreneurs. It is in some decision making that are based on own accounting information or that of other companies and institutions. Likewise, it is necessary to be able to collaborate in planning and control tasks. It is also true in compliance with certain accounting and tax obligations. And it is also because it improves your corporate culture.

Within the set of accounting terms, along with those of cost accounting, others gain special relevance, such as those related to the financial Accounting, since it constitutes the main presentation letter against third parties.

Why should the entrepreneur know some accounting terms?

Accounting terms have a definition formal, which regulatory evolution tends to qualify over time. This definition is intended define some aspect of business life for your quantification. Thanks to this framework we can establish, not without certain limitations, in some important cases, analysis and comparisons.

There are many accounting terms. Some are integrated into the colloquial language of the majority of the population, although it is not unusual to find some confusion. Thus, for example, many people find it difficult to differentiate what is a collection of income or a payment of an expense.

The life of an entrepreneur is dizzying. Fortunately, today there are tools that make it easier to develop several tasks in parallel. Therefore, the collaboration with the accounting advisor and, where appropriate, with the company's accounting department is crucial.

The accountant is responsible, among other functions, for deciphering the accounting information to that is understandable by the management. Therefore, it is a key piece for the company. In many cases, dubious points (even for professionals) and complex issues will arise. And, frequently, some important decision will revolve around these aspects that will demand the attention of managers and owners.

So that there can be good communication between the internal or external accounting staff and the rest of the company, it is important that the address has a minimal knowledge. It is not that you know all the national and international accounting standards, administrative resolutions and consultations and jurisprudence. It's about having a mental idea of what the most common concepts in accounting language refer to.

The top seventeen accounting terms

All accounting terms can be interesting for the entrepreneur. The more you know and the better you master them, the easier it will be for you to navigate this field. However, there are some that have more use, of which we can say that it is essential harbor a mental idea. Let's look at the main ones.


1) Active

The assets are the estate that the company owns, but also the rights. For example, a machine is an asset, but so are other intangible elements such as a patent right. We can say that they are the investments that the company has made.


2) Passive

The passive represents the financing of the company. Everything that has been invested has had to be financed in some way. In general terms, it includes both the money that belongs to the owners of the company and the debts. In a more restricted sense, only debts are understood as liabilities.


3) Own funds

The own funds They are the part of the company that has been financed with money that belongs to its owners. These funds include what was put in when the company was established, what was subsequently contributed in successive capital increases and the profits that have been retained in the company, instead of being distributed to the owners.


4) Net worth

Traditionally, the concept of own funds and net worth have been taken as practically synonymous. However, the General Accounting Plan understands net worth as a broader concept. In addition to own funds, subsidies, donations and legacies and certain accounting adjustments made to certain financial instruments are part of net worth.


5) External financing

The Foreign financing They are the debts of the company. Among them, we find, for example, the financing provided by banks or what, in the case of some large companies, they obtain from the issuance of bonds, company promissory notes and other debt securities. Likewise, part of external financing is what is owed to suppliers, the Treasury, Social Security, the money owed to workers, etc.


6) Income

The income They are the increases in the company's net worth that are not produced by contributions from the owners. Sometimes, they coincide with the charges, but not necessarily. For example, the return of money owed to us represents a collection, but not income that increases net worth.


7) Expense

The bills They are decreases in the company's net worth that do not have the owners as recipients. For example, a capital reduction, if it entails the return of contributions, implies a payment that does not involve an expense.


8) Balance sheet

He balance It constitutes a kind of “still snapshot” of how the company's assets are made up at a given time and how it has been financed. Normally, it is done at the end of the year.


9) Profit and loss account

Unlike the balance sheet, it does not measure what happens at a specific moment, but rather throughout an entire period between two moments, normally the opening and closing of the financial year. Collect all income and all expenses.


10) Cash flow statement

It is an accounting statement that analyzes where the collections and where are they destined? Payments. The different movements are analyzed depending on different types of activities.


11) Memory

The memory it's a explanatory document which adds clarifications and details that allow a better understanding of the company's situation. It is divided into a series of points, in which notes are made that serve to complement what we know through other accounting statements such as, for example, the balance sheet and the profit and loss account.


12) Annual accounts

The annual accounts a set of documents that aim to reflect the situation and evolution of the company. For third parties outside the company, it constitutes one of the most available approximations to the reality of the company. Therefore, there is an obligation to formulate them and deposit them in the Commercial Registry. The standards require different formats of annual accounts depending on the characteristics of the company.


13) Accounting consolidation

It is an operation through which it is intended to show accounting information referring not to an individual company, but to a cluster. Normally, these will be companies that remain under the same control, that is, a parent company and its subsidiaries.


14) Working capital

He working capital It is the part of the company's long-term financing that serves not only to finance long-term investment, but also a proportion of short-term investment. In this way, the aim is to avoid having to get rid of long-term investments in order to satisfy short-term debts.


15) Provision

The provisions They include disbursements that the company is likely to have, but in which there are doubts about their amount or when they will have to be made. In another broader sense, one can also speak of provisioning when losses in the value of assets that may be reversible are recorded. This second conception of the term had more use during the validity of the previous General Accounting Plan, but it is still used in slightly more colloquial language.


16) Reservations

These are figures that belong to own funds. Most come from undistributed profits, although they may come from accounting changes, and may have different functions. Among them, voluntary ones stand out, which constitute an important way of applying the results obtained to the financing of the company.


17) Daily book

It's a accounting book where the operations in chronological order. This is a mandatory book. Normally, operations must be recorded day by day, but the law also allows in some cases to group them into longer periods. The journal must go through a process of legalization in the Commercial Registry that helps guarantee its authenticity.


The improvement of the entrepreneur's accounting culture directly translates into an increase in its capabilities communication with other people and comprehension the internal and external context in which it must take decisions.


Fountain: SAGE

Academic Coordinator Financial-Fiscal Area - EIP eLearning training coordinator at MAINFOR - Technological and Educational Innovation

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