In our perpetual quest to make accounting (and accounting software) easier, we thought we'd dive into explaining some of the industry's most common acronyms and abbreviations. Why? Because for those new to accounting, acronyms and abbreviations can be scary. (OK, scary might be too strong of a word, but you get the idea.) Let's break down some of the most common accounting acronyms and abbreviations...
AP: Accounts Payable
Accounts Payable categorizes what your business owes and to who. It manages your business' debts; pending outflows. The money's still "in your possession" but it's already owed to someone else.
AR: Accounts Receivable
Think of Accounts Receivable as "payment to be received." You've sold something or performed a service, have invoiced for it, and now are just waiting on the payment to actually arrive. AR basically tells you who owes you what.
COGS: Cost of Goods Sold
Nope. We're not talking about parts of machine here. We're talking about the cost of goods sold. Translation: the amount it cost you to acquire the product you're selling.
GL: General Ledger
Ah, the good ol' general ledger. In short, it's your business' complete financial history. It includes assets, liabilities, equity, revenue and expenses. This is a handy thing to have when it comes time to prep financial statements.
P&L: Profit and Loss
This one should be pretty familiar. The P&L tells you your bottom line for any given timeframe (i.e., the year, the quarter, the month). In simplest terms, it's revenue over expenses.
ARR: Average Rate of Return
When you're considering an investment in your company, it makes to sketch out the average rate of return. Said differently, how much money will an investment net the business annually?
LTV: Life Time Value
Perhaps more of a sales and marketing acronym, you can figure out the life time value of a customer by multiplying three numbers: the average value of a sale, the number of repeat transactions and the average retention time of a typical customer. (Shout out to Brad Sugars.)
In a double-entry accounting system, every credit has a debit! A credit entry to your accounting system can decrease an asset or increase a liability.
As you can guess, every debit has a credit. A debit entry to your accounting system can do one of two things: increase an asset or decrease a liability.
To better understand both credits and debits, read up on the accounting equation.
IRS: Internal Revenue Service
Sure, you already know this one, but it's worth listing!
CRA: Canada Revenue Agency
Same explanation as above!
CPA: Certified Public Accountant
When it comes time to prepare your business' tax filings a CPA can be an immense help. For our fellow Canadians, the acronym is slightly different for this designation: Chartered Professional Accountant.
You'll occasionally see depreciation abbreviated as DEPR. What is depreciation you ask? It's a bit more in depth than a paragraph to handle, so we'll steer you over to our appreciation vs. depreciation overview.
PM: Profit Margin
In accounting, the profit margin is a good indicator of financial health. It's the ratio of profit earned over cost. Knowing your profit margin ultimately can tell you whether or not there's a market for what you're selling. A health, positive profit margin means there is. A small or negative one may indicate something less awesome.
Of course there are plenty of other accounting acronyms and abbreviations, but as cable news show interviewers always say when they're coming up against a commercial, "We'll leave it there."
As always, shoot us questions! firstname.lastname@example.org