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If you’re just starting to navigate your books, you may be unsure of some of the lingo. It’s like a different language for those outside of the accounting world, but the more you work with your books, the quicker you’ll catch on. What’s important is to think of everything in terms of your business; these terms provide you with vital information about your company’s standing. Let’s go over some common terms you’ll frequently hear and need to use in order to discuss and understand your books.

Let’s talk about the difference between accounts payable (A/P) and accounts receivable (A/R). It’s easy to get these two confused, but they’re important components to your books. They’re the primary indicators of the financial health of your company, which means they’re constantly changing to keep up with all the moving pieces. Let’s focus on the basics.

Account Payable is a company’s liability account where they record the amounts they owe to vendors or suppliers for their goods or services the company received on credit.  

Accounts Receivable is a company’s current asset account where they record the amounts they have a right to collect from customers who have purchased their goods or services on credit.

Have you ever left a conversation with your accountant with nothing but confusion, asking yourself “What did they just say?” You’re not alone. We’re here to bridge the gap between accountant and client. Here is a list of common terms you will likely here from your accountant, if you haven’t already, and what they actually mean:

Accounts Payable (A/P): Money you owe to others.

Accounts Receivable (A/R): Money others owe to you.

Asset: Items of value owned by a business. This includes money in your bank, A/R, equipment, vehicles, buildings, and so on.

Bad Debt: Uncollectible A/R.

Balance Sheet: A list of company assets, liabilities and equities for the company.

Cost of Goods Sold (COGS) (a.k.a. Cost of Sales—COS): What it directly costs to produce your product or service. For manufacturing companies, this includes raw materials and the direct labor to make your product. For service companies, this includes the cost of labor to directly service your customer.

Equity: How much you have invested into your business or taken out of your business. This is where any profit from your business will show up.

Liability: This includes all the debts you owe to other businesses, such as A/P, credit cards and loans.

Profit and Loss Report (a.k.a. Income Statement): This shows you how well (or not) the business did for a specific time period (month/quarter/year).

Next time you speak with your accountant,