Like any industry, accounting comes with a long list of industry-specific terms that the rest of us may not use every day or even understand. And while many of the terms are common in most business settings, others are more specific to the accounting world.
If you want to know your big data from your generally accepted accounting principles (GAAP) from your general ledger, here’s a handy glossary of key accounts payable terms that will help you understand your finances and communicate with your accounting team.
39 Basic Accounts Payable (AP) Glossary Terms
Whether you’re introducing a new accounts payable (AP) strategy or recently joined the finance team, it’s important to understand all of the elements of accounting so that you can develop a strategy that works best for your organization.
Here are 39 basic accounts payable terms that will help everyone from non-accounting employees to entrepreneurs better understand the jargon that dictates accounts payable processes.
General Accounting Terms
Below are a dozen of the basic accounting terms that can apply to a wide variety of different accounting processes:
Cash flow: This is the total amount of cash and cash equivalents moving
into and out of a business at any given time. A cash flow statement shows how effective
a company is at managing its cash and indicates its ability to fulfill short-term
financial obligations. There are three sources of cash flow:
- Operating activities
- Investment activities
- Financing activities
- Certified Public Accountant (CPA): Anyone seeking to become a CPA must pass the Uniform Certified Public Accountant Examination created by the American Institute of Certified Public Accountants (AICPA) and administered by the National Association of State Boards of Accountancy. The CPA designation is granted by individual state boards. These professionals prepare financial statements, audits and reports such as revenue forecasts and profit margin analysis to help inform investors and business leadership about the financial health of organizations. They can also provide individuals and families with valuable knowledge and advice on taxes and financial planning.
- Credit: In accrual accounting, a type of bookkeeping entry that decreases asset and expense accounts, and increases liability, revenue and equity accounts.
- Debit: In accrual accounting, a type of bookkeeping entry that increases asset and expense accounts, and decreases liability, revenue and equity accounts.
- Diversification: A strategy to stabilize and/or increase revenue by entering markets, industries or product/service categories outside a company’s traditional area of focus, typically through the acquisition or development of new business competencies.
- ERP: Enterprise Resource Planning unifies accounting, inventory and order management functions, providing a single solution that automates manual processes, centralizes business data and improves visibility into daily performance across the entire organization. Some ERP systems also include customer relationship management (CRM) and human resources functions.
- Generally Accepted Accounting Principles (GAAP): These are rules established by the Financial Accounting Standards Board (FASB) detailing its approved accounting methods and practices. Publicly traded companies are required to follow GAAP and to produce GAAP-compliant financial statements quarterly and annually.
- General ledger (GL): If accounting is the recordkeeping system for an organization’s financial data, the GL is a record itself for every financial transaction (e.g. assets, liabilities, revenue, equity and expenses).
- Interest: This is the amount of money paid on a loan, line of credit or other debt that exceeds the total repayment balance (i.e., “principal balance”). Interest is generally charged by lenders in exchange for borrowing money and paying them back over a period of time.
- Liquidity: How easily an asset, security or other holding can be converted into cash.
- Present value: This represents the current value of a future sum and is based on a specific rate of return over time.
- Return on investment (ROI): This metric is used to evaluate the value of an investment and is found by subtracting the cost of that investment from its current value, then dividing that by the cost of the investment. In most cases, ROI is expressed as a percentage. ROI can also be used to describe the time it takes for an investment to earn back the initial expense.
Balance Sheet Terms
The balance sheet is a key document produced by accountants that shows a company’s assets and liabilities. It can be a confusing place for non-accountants, so here are explanations of some of the most common balance sheet terms:
- Accounts Payable (AP): The amount of money a business owes to is creditors and suppliers in the form of short-term obligations.
- Accounts receivable (AR): A representation of the money that customers owe a company for goods or services purchased on credit.
- Assets: Includes all items or resources of value that an organization owns or controls. Short-term assets include cash and cash equivalents. Long-term assets are either tangible (e.g. real estate, equipment) or intangible (e.g. patents, trademarks). The value of short and long-term assets is recorded on an organization’s balance sheet.
- Balance sheet: A financial statement that reports all company assets, liabilities and shareholders’ equity for a specific point in time.
- Book value: The value of an asset as recorded in a company’s accounting books and reflecting the total acquisition cost minus depreciation or amortization. Also known as carrying value.
- Capital: The financial resources held or secured by a company to fund daily operations and fuel growth and non-financial assets, such as land, facilities and equipment, used to support core business functions.
- Equity/owner’s equity: The value remaining in a business after subtracting total liabilities from total assets. Equity can be positive or negative.
- Liabilities: Monies owed by a business to other companies, organizations or individuals for payment of debt, payroll, taxes or other financial obligations.
- Overhead: Expenses that cannot be directly attributed to the cost of manufacturing products, acquiring goods for resale or delivery of services. Overhead can include things like rent, insurance and advertising expenses.
- Payroll: A general ledger account that includes all payments to employees in the form of salaries, wages, deductions and bonuses. Payroll is entered as a liability on a company’s balance sheet.
Income Statement Terms
The income statement, which depicts revenue and expenses, comes with its own special set of jargon that isn’t always easy to decipher. Here are some basic definitions for the most popular income statement-related terms.
- Amortization: A technique used to spread out business expenses over time, writing down the book value of an intangible asset or loan over a set period. In this way, expenses are broken down into smaller ones over a number of years instead of one large expense.
Cost of goods sold (COGS) or cost of sales: The combined value during a
given period of expenses directly related to the production of goods or acquisition of
products for resale. For services company, it’s the cost of providing the services. The
formula for calculating cost of goods sold is:
COGS = starting inventory value + purchases for inventory – ending inventory value.
Indirect expenses, such as sales and marketing, are excluded from COGS.
- Depreciation: Depreciation is an accounting process used to expense the purchase price of fixed assets over time, usually several years. Depreciation is seen as a better way to capture the value received from a fixed asset over its useful life. It also recognizes that the value of a fixed asset declines due to wear and tear and other factors.
- Expenses: This is the money that an organization spends in order to generate revenue. There are fixed expenses (constant and predictable), variable expenses (those that fluctuate) and accrued expenses (employee wages, utility bills, etc.).
- Gross margin: Gross margin is the percentage of revenue remaining after direct costs have been subtracted from net sales.
Gross profit: This is the amount of money a firm makes once the cost of
manufacturing/acquiring the products it sells or delivering the services it provides has
been deducted. The figure appears on the income statement and is calculated by
subtracting COGS from revenue (sales).
Gross profit = sales revenue – direct costs
Sales and marketing are not direct costs. Commissions are sometimes included in direct costs, but salaries are not.
- Net income: Also known as net profit, net income is calculated by subtracting total expenses from total revenue.
- Profit and loss statement (P&L): Also known as an income statement, this financial report provides a summary of a firm’s revenue, expenses and profit/losses over a given period of time (i.e., a fiscal year or a quarter).
- Revenue: Any income that a business generates.
Accounts Payable Terms
You won’t stay in business for long if you don’t pay your suppliers, utility providers and landlords on time. Here’s a quick primer on the top accounts payable terms that all companies should learn and know:
- Days payable outstanding (DPO): This is the average amount of time it takes a company to pay for goods and services purchased on credit. Days payable outstanding helps investors and other stakeholders understand how a company is managing its cash. DPO only measures payment of direct expenses (i.e. COGS-related expenses), not selling, general and administrative (SG&A) expenses like lease payments and utilities for office space. Utilities consumed as part of the manufacturing process would be included however.
- Immediate payment: Indicates that payment is due upon delivery of a service or product.
- Invoice: A dated business document that’s produced by a seller and given to a buyer to indicate the amount to be paid for a product or service.
- Net 15, 30, 90: These are credit terms on an invoice that indicate when full payment is due. Net means the amount to be paid includes any discounts, markdowns or vendor credits that were applied to the purchase.
- Payment in advance (PIA): Payments made for goods or services before the items are delivered or the services are performed. For example, a buyer may be asked for an upfront deposit of 50% on a special order.
- Purchase Order: Also called a “PO,” this document is generated by a customer who, in turn, authorizes the purchase transaction. The PO becomes a binding contract once the seller accepts it.
- Recurring invoice: An invoice that’s sent to a customer on a regular schedule for a specific service or product.
- Terms of sale: Payment terms that a company and its customer have agreed to in advance of the sale. The terms can include price, delivery date, quantity, payment method and payment terms.