Knowing an entry level set of jargon for any industry is important and will make you sound and appear more credible.
It’s not just about knowing your numbers, it’s about knowing what they mean. Because of how the accounting industry has been glorified with all manner of qualifications and hearsay, accounting may seem inaccessible for those who have never touched it before.
In reality, the figures in themselves are straightforward, it’s only the odd bits of technical language that you need to be familiar with.
Below are some basic phrases and words to get you started on how to read a standard set of accounts without going into too much detail.
Terms to remember which appear in your statutory accounts:
- Profit and loss account/statement of comprehensive income – this is the main statement you’ll notice on most accounts, it is a basic outline of what a company has earned, spent and the bottom line profit for the given period
- Balance sheet/statement of financial position – this is the second main statement and is available on all accounts, it summarises a company’s assets (what the company owns), liabilities (what the company owes), and then the company’s equity at the date that the accounts are made up to
- Revenue/turnover/sales – the amount of income earned in the year for the company
- Cost of sales – this is the direct expenses relating to producing the goods/services that are sold to generate income
- Gross profit – core profit derived from trade, not taking into account general overheads
- Administrative expenses – general overheads and operating expenses e.g. rent, legal fees etc
- Operating profit – this is profit after deducting the cost of sales and administrative expenses from sales
- Net profit – the bottom line profit after subtracting all costs from sales, the major difference between this and operating profit is usually interest receivable/payable and tax
- Tangible fixed assets/non current assets – physical assets you own that provide benefits to the business for longer than a period of a year, e.g. computer equipment, servers, monitors
- Intangible fixed assets – similar to tangible fixed assets, but assets that are not physical that provide benefit for longer than a period of a year e.g. software, trademarks, IP
- Stock/inventory – the physical merchandise of your trade that is held by the company and is available for sale
- Debtors – in short, it is cash or services that are owed to the company
- Creditors – being the opposite of debtors, it is therefore cash or services that you owe
- Capital and reserves/shareholder’s equity – in the most general sense, equity is assets minus liabilities. An owner’s equity is typically explained in terms of the percentage of shares a person has ownership of in the company. The owners of the shares are known as shareholders.
- Share capital – funds raised by a company in exchange for shares.
- Share premium – share premium is the amount received by a company over and above the nominal value of its shares. Most shares have a nominal value of say £1 a share, however obviously the market value of this can be considerably higher. The “premium” is the amount paid for a share in excess of its nominal value.
- Retained earnings/profit and loss reserve – refers to the amount of accumulated net profit of a company that has been retained in the business rather than distributed e.g. to shareholders as dividends
Other phrases that are commonly used when having investment discussions may include:
- KPIs – this acronym stands for Key Performance Indicators and is exactly what it says on the tin, these are financial measures that are used to measure a company’s performance such as the company income or profit
- Burn rate – in simple terms, this is the speed at which you spend your cash to help calculate how long a company can stay cash positive based on the amount of cash they have
- ROI – this stands for return on investment and is an indication of the performance of an investment, a simple formula is as follows: (Gain from Investment – Cost of Investment) / Cost of Investment