EBIT, EBITDA, amortisation…your eyes glaze over and your mind wanders, you nod politely as you wonder, what is my Accountant talking about?
As a business owner, it is very beneficial for you to understand your financial accounts so today we are taking a look at Accountant talk and documenting a glossary of the most common accounting language that we like to use. Here we go…
Accrual Accounting – an accounting method which involves recognising income and expenses when they occur rather than when the cash is received or paid
For example: You receive an invoice from a supplier for $220 on 23rd March and you make payment on 15th April. When accounting using Accruals you would record the expense in the March accounts and March quarter BAS, whilst if you were using cash accounting, you would record the expense in April and it would be in the June BAS.
Accounting Entry - the recording of business transactions in the business accounts as debits and credits
Accounting Period – the period for which financial statements are prepared – normally
monthly and annually
Amortisation – similar to depreciation, amortisation is a technique used to write down the value of an asset across different accounting time periods, however depreciation relates to physical assets and amortisation is for intangible assets. Intangible assets include purchases including trademarks, patents and licenses.
For example, you may purchase a software licence for $30,000 which comes to an end in 3 years, you would amortise the expense such that $10,000 is moved from the Balance Sheet to the Profit & loss Statement each year.
Asset - Anything which has a commercial value that is owned by the business, for example, cash, cars, office equipment, tools and machinery, buildings
Break Even - The amount, measured as either a unit quantity or a dollar value, that the business needs to achieve before a profit is made
For example, if your business has $25,000 in expenses per month, you would need to generate an income of $25,000 per month in order break even. If your business product sells for $50 each, then your breakeven point at which you will cover all business expenses is the sale of 500 units of product.
Budget - A financial plan for the business which details expected revenue and expenses and therefore expected profits for a time period. Budgets are generally prepared once a year and can be for the next 12 months only or can also include longer term budgets for 3 years or 5 years.
Capital Expenditure - The amount of money that is allocated or spent on purchasing assets
Cash Accounting – an accounting method which involves accounting for transactions when the cash is received or paid
Cash flow - The net flow of cash into and out of the business via sales and expenditures
Cost of Goods Sold (COGS) - The total cost value of all goods sold during the period.
For example, during the month, you sell 20 toy trucks for $50 each. Each toy cost $25 to purchase. The COGS would be 20 trucks x $30 each = $600
Creditors – Also known as payables and accounts payable, the amount you owe to your suppliers
Current Assets – Cash assets and other assets that are expected to be, or could be, turned into cash within the next twelve month period
Current Liabilities - Liabilities that are required to be paid within the next twelve month period
Debtors – The money which is owed by your customers to you. Debtors are also known as Receivables and Accounts Receivable.
Depreciation - The periodic write-off of an asset’s value over a period of time. Depreciation can be calculated using a variety of methods including the Simplified Depreciation Rules for small business which enables an instant write off for certain assets and the ‘pooling’ of assets which has simplified calculations for depreciation.
Depreciation is applied to physical assets including machinery, cars, computer equipment and office furniture.
Drawings - Where the owner(s) of the business take something of monetary value – cash or other assets - permanently out of the business. The term is used with regards to sole traders and partnerships.
EBIT - Earnings before interest and taxation expenses.
EBITDA – Earnings (net profit) before interest, taxation, depreciation and amortisation expenses
Equity - The net amount that the business owes the owners. Also recognised by the accounting principle: Assets - Liabilities = Equity.
Expenses – Expenses are the costs incurred to earn the business income, including rent, wages, advertising, internet, website etc
Financial Statements - Financial Statements (Profit and Loss Statement, Balance
Sheet) document the financial performance and health of your business for a given period of time, generally monthly and annually
Forecasting - The process of predicting and documenting the future financial performance of a business including sales quantity, revenue, expenses and profit that the business aspires to.
Gross profit – Calculated as Sales revenue less Cost of Goods Sold = Gross Profit. This is determined before general operational expenses are deducted.
Inventory - The items that a business purchases, or manufactures, to sell
Intangible Assets - Assets that don’t have a physical form e.g. patents and goodwill
Liability - The amount the business owes external parties. This includes accounts payable, loans and asset financing.
Mark-up - The amount by which the sales price exceeds the cost price and generally recorded as a percentage. For example, for the toy truck used earlier, if revenue is $50 per toy and the cost is $30 per truck, the Mark-up is ($50 less $30) / $50 = 40%
Net profit – Net Profit is calculated by deducting business expenses from Gross Profit.
Owners’ Equity – Equals the amount of capital contributed to form the business or added by the owner during the operation of the business and Profits.
Overheads - Costs not directly associated with the cost or manufacture of the products or services sold by the business, for example, rent, telephone, marketing. Also referred to as operational expenses.
Purchase Order - A commercial document issued by a buyer to a seller which details the type, quantity and agreed price for products or services the seller will provide to the buyer
Receivables - Amounts that are owed to the business by customers, also known as debtors and accounts receivable.
Revenue - The income the business earns from its operations. In our toy truck example, the revenue would be 20 trucks @ $50 each = revenue $1,000
Retained Profit - Profits that have not been distributed to the owners so are kept in the business.
Reserves - Retained profits that are held for a specific purpose or the result of a revaluation of assets.
Taxable Income – Taxable income is income for tax purposes less expenses that are tax deductible. The taxation liabilities of the business are calculated on your Taxable Income.
Working Capital - Working capital is the amount of net assets (current assets less current liabilities) that is in the business in order to drive and improve the business.
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