Unless you have studied accounting and gotten familiarized with the confusing acronyms and abbreviations, chances are that it is difficult for you to understand accounting briefs and near impossible to understand accounting interpretations. Ideally, the task of reading and understanding accounting terminologies should be left with the experts but if you wish to have a taste of accounting yourself or simply want to recheck what your expert professionals are reporting to you. Whatever the reasons must be, this article is your first step in cracking up the accounting terminologies. The easier ones you may already be familiar with, such as A (assets), BS (balance sheet), BV (book value), E (equity) and I (inventory). Let’s begin!
AP – Accounts Payable
These are basically the records of what amounts you owe. The money your company has to pay to creditors, or other short term liabilities.
AR – Accounts Receivable
The opposite of AP, the accounts receivables are the records of the money that others owe to your company. This is primarily revenues but can also be other short-term recoverable amounts.
This is the sum costs that directly go into the final product, without additional costs that might be necessary for running the business altogether. To explain further, the cost of raw materials, direct labor and machinery fuel will be the COGS while the utility bills of the company will not be included in these.
GM and GP – Gross Profit & Gross Margin
Gross profit is the difference between the total revenues and total costs of business. This is the actual profitability of the company, because this amount is not yet deducted for taxes, loans or other such expenses that go into the overall business. Gross Margin is the same GP divided by the revenue. So in other words GP is the manual profit, but GM is the profit as proportionate to the revenues. Accounting formula for GM would be (Total revenues – GOGS) divided by (Total revenues).
P&L or P/L – Profit & Loss Account
This is the overall financial statement that signals the financial and operational strength of a business. All revenues, expenses, overheads, and current incomes and payments are included in the P&L account which is made for any relevant time period. These are usually prepared every quarter, half-year, and annually but can be made for any period of time.
NI or NM – Net Income or Net Margin
Like GP and GM, these are the same things, only adjusted for all expenses instead of just COGS. Other expenses that are deducted from GP to arrive at NP are overheads, depreciation, taxes, and any other expenses like fines or legal penalties.
ROI – Return on Investment
Traditionally this term showed just what it says for the entire business, which is the revenue as a percentage (or proportion) of the initial investment. However, modern accounting professionals also calculate ROI for several different projects and evaluate the profitability of each individual project to make the operations and processes more efficient and thereby the whole company more profitable.
TB – Trial Balance
This is a term you might not see as often as the others, because this is expert accountant level work. A TB lists all accounts in the accounting statements, incorporates all transactions, and accounts for both realized and unrealized debits and credits. At the end of the day all the debits (money that you owe or have paid) should equal to all the credits (money that you are owed or have received), hence the title “balance”.
VC & FC – Variable Cost and Fixed Cost
This is not difficult to understand but slightly complex to explain. The costs that stay the same irrespective of your total output are fixed costs and the costs that change with the volume of the sales are variable costs. For instance if you buy a piece of equipment that produces footballs, you can produce a hundred footballs or just one but the machine would cost the same. That will be FC. However, the leather you buy for footballs may cost you less per unit if buying in bulk gets you discounts, or just your transportation costs fall if you buy more in a single trip. These will be your VCs.
PV & FV – Present Value & Future Value
Present value is the price of any asset as of today, while the future value is the price that asset will fetch in the future. Now to a novice, this concept might get confused with inflation. For instance you might think that a car will cost more in two year’s time than it does today. However in accounting terms it is the value of a single piece of asset, and unless it is a piece of real estate, chances are that FV will almost always be less than the PV.
Other more common acronyms that any accounting student should know might be CAP (capital), CF (cash flow), CPA (Certified Public Accountant), GAAP (Generally Accepted Accounting Principles), GL (general ledger), and CORP (corporation). It is impossible to encompass all accounting terminologies in a single article such as this, but for someone wishing to begin journey into the world of accounting or for someone just wishing to be able to comprehend an accounting statement, the above list should suffice. In conclusion, we will say again what we said in the beginning – leave the task of accounting to those who know it. We at Intersoft BPO have expert accounting professionals for all your accounting needs. Let them take care of all your accounting worries.