Like any specialized skill or area of expertise, Accounting concepts, practices, and conversations are really only significant and relevant to accountants.
One of the reasons business owners aren’t more engaged with their accountants and bookkeepers is because of the terms and vocabulary they use. With nonchalance, they throw out unfamiliar words packed with meaning that are completely foreign to their clients.
Don’t let yourself be one of those clients. With a little education, you’ll learn more about your business and comprehend more from your conversations with your bookkeeper and accountant once you understand the “language” they use.
Here are 3 more common bookkeeping terms that you need to know and understand.
Chart of Accounts
One of the reasons business owners struggle with grasping the meaning and implication of certain bookkeeping terms is because they hear the term and associate it with a more familiar understanding of what it is or what it means.
For example, when you think of accounts, often what comes to mind are bank checking or savings accounts or credit card accounts. In bookkeeping, your chart of accounts will include those accounts, but also includes many others that you would not automatically consider.
Your chart of accounts is like a filing cabinet; each account within the chart is a folder where you store your respective financial transactions. This means that every transaction in your business has to be classified or organized into the “affected account”.
Examples: Receipts for gas go into an “Auto Expense” folder; Invoices go into a “Revenue” folder.
Note: Your accounts may be named differently. As long as there is method, meaning, and organization to setting up and naming each of your accounts, you have some “creative leeway” in how you do it.
Depreciation
Depreciation is the decrease in an asset’s value over time.
The most common example of depreciation that everyone can understand is the purchase of a car. When you buy a car, you pay the current value of that asset. As time progresses, the value of the car decreases due to wear and tear. Even if you aren’t actually driving or using the vehicle, its value is still decreasing, i.e., depreciating.
In bookkeeping, depreciation is tracked with an end date in mind. Your accountant expects that assets like vehicles or equipment have a set life expectancy. Depreciation accounts track the value that your assets lose over time.
Without tracking the depreciation, the assets of your business would be overstated. This not only causes a few problems with your books, but it will also affect your tax liability. And you don’t want to mess with the IRS!
Reconciliation
Bookkeeping involves a lot of checking your work. Mistakes – both big and small – tend to snowball and become more difficult to fix as time goes on. For this reason, it’s imperative that everything is double, triple, and quadruple checked.
Reconciliation is one of the ways that bookkeepers and accountants check their work.
By comparing your bank and credit card statements to the accounts in your bookkeeping software, bookkeepers and accountants are able to verify that no data has been duplicated or missed.
It seems like a simple, maybe even unnecessary step, but it is a key aspect of the overall bookkeeping process.
Bottom line:
Bookkeeping is a complicated subject so it’s quite acceptable if you have no desire or aptitude to learn it. But you are urged to make an effort to acquire a working knowledge of the fundamental terms and concepts.
If you’ve tried to manage your own books and find yourself drowning a bit, not to worry! Still Waters Bookkeeping can help you find the surface and stay above water. My job is to not only keep your books up-to-date and accurate, but also to help you see how the data resulting from well-kept books helps you become a better business owner.