It’s finally happened. You’ve finished your taxes and taken them to your favorite CPA to be filed. You’re not (too) worried about penalties because your accountant filed an extension for you back in April.
When you drop your paperwork off, however, your accountant has questions for you. Words like depreciation, accruals, and forecasting are thrown about. Your mind spins, and you start to sweat. You suddenly wonder if you’re in over your head rather than moving your business ahead.
Clearing Up the Confusion
The world of accounting is full of jargon. At Adams Accounting Solutions, we believe in keeping it simple, helping educate our clients on accounting and finance terms that pertain to their unique situations. To that end, we demystified some of the more common business terms in our post, Accounting 101: Basic Business Terms. Now we’re taking the process a step further.
Here are a few of the more common terms you might hear when discussing your business and tax situation with your accountant.
Accruals: The term accrual refers to revenues or expenses that impact the company’s income statement or balance sheet but for which no cash has changed hands. For example, you’ve made a sale but haven’t collected payment for it yet. That transaction is an accrual.
Working capital: This is the term for money that’s available to improve the business or invest in things like new machinery or office equipment. Working capital is excess cash, above and beyond what’s needed for daily business operations.
Depreciation: Depreciation represents how much of an asset’s value has been used up at the current point in its lifetime. Accountants use depreciation to allocate the cost of physical assets over their estimated life. By depreciating assets, business owners can earn revenue from the assets and use that revenue to pay taxes on them over time. It keeps business owners from paying taxes on the full cost of an expensive asset in the first year of ownership.
Bad debt: Any accounts receivable that you cannot collect from your clients fall into the bad debt category. Bad debts are those that are uncollectible, often because of bankruptcy or business failure on the part of a client or supplier. Any business that extends credit to customers or partners should plan for a certain amount of bad debt. Bad debts can be written off on both business and individual tax returns.
General ledger: The general ledger is a record of your company’s financial transactions over the life of the business. It consists of numbered accounts that house specific types of transactions, i.e., asset, liability, expense, revenue, etc. Your accountant will likely request access to your general ledger to pull financial reports when preparing your tax return.
Fiscal year: A fiscal year is any 12-month period used for financial and tax reporting purposes. Many companies align their fiscal year with the calendar year. Others use a 12-month cycle that better fits their business model or sales calendar.
Forecasting: Forecasting is the act of using a company’s past performance to predict future performance. Many companies start with the most recent financial performance and factor in current or predicted trends to get an idea of the company’s future success.
Does It Make More Sense?
We hope this primer helps clear up the confusion that can sometimes occur when speaking to accountants. Please remember that most accountants are so involved with these terms that they sometimes forget others aren’t as familiar with them!
At Adams Accounting Solutions, we want clients to feel comfortable asking questions. We’re here to answer them and explain all things tax-related. Give us a call or stop by and say hi. We’re happy to help you make sense of your accounting practices!
