Episode #29 – Decoding Accounting Terms

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Hello! Today, I'm here to break down some complex accounting jargon and turn it into everyday language that anyone can understand. You know, that feeling when you chat with your bookkeeper or CPA, and it's like they're talking in a whole different language? Well, I've got your back!

My mission today is to demystify the world of CPA and bookkeeping lingo. So many times they often forget how foreign their financial jargon can be to busy business owners. I mean, think about it, you're swamped with client work. Hiring new folks is already a puzzle, let alone trying to decode a whole new financial language.

So, here are nine terms that CPAs and bookkeepers toss around like confetti, leaving many business owners scratching their heads:

1. Profit and Loss (aka P&L)
2. Gross (the big picture)
3. Net (what's left in your pocket)
4. Balance Sheet (a financial snapshot)
5. Chart of Accounts (your financial recipe book)
6. Accounts Payable (what you owe)
7. Accounts Receivable (what's owed to you)
8. Cash or Accrual (how you count your money)
9. Owner’s Draw (payday for you)

My goal is to make these terms feel less alien to you. I want to give you some mental pictures that can help you remember what these words mean. That way, you won't feel so overwhelmed by the numbers and financial stuff. You'll become more confident, and you'll start using these tools to your advantage.

Let's dive in and make sense of it all together! 🚀

1. Profit and Loss (P&L): Think of this as your business's report card. It shows how much money you made (revenue) and how much you spent (expenses). When you subtract expenses from revenue, you get your profit (or loss if it's negative). It's like figuring out how much money you have left after paying all the bills.

2. Gross: Gross is like the total amount before you take anything away. Imagine you're baking cookies, and you have all the ingredients on the counter. That's your gross. It's the big picture, but it doesn't show what's left after the baking is done.

3. Net: Net is what you end up with after you've taken away all your costs and expenses from the gross. It's like the number of cookies you have on the plate after baking and accounting for the ingredients used.

4. Balance Sheet: Picture this as a snapshot of your business's financial health at a specific moment in time. It lists your assets (what you own), liabilities (what you owe), and equity (the value you have in the business). It's like taking a picture of your business's financial condition.

5. Chart of Accounts: Think of this as your financial recipe book. It's a list of all the categories where you track your money, like ingredients in a cookbook. It helps you organize your income, expenses, assets, and liabilities.

6. Accounts Payable: This is like your shopping list of bills. It's the money you owe to others, like suppliers or vendors. When you pay these bills, you're reducing your accounts payable.

7. Accounts Receivable: Accounts receivable is money others owe you. It's like when your friends owe you for those cookies you baked. It's the money you're waiting to collect.

8. Cash or Accrual: This is all about how you count your money. Cash accounting is like keeping track of money when it actually changes hands. Accrual accounting records transactions when they happen, even if the money hasn't exchanged hands yet. It's like marking down that you'll get paid for those cookies when your friends promise to pay.

9. Owner’s Draw: Imagine you're taking a portion of your business's profits and putting it in your pocket. That's an owner's draw. It's like paying yourself for your hard work as the business owner.

These explanations should make these financial terms a little less mysterious and more relatable. They'll help you navigate your business's finances with more confidence and clarity.

Listener’s Question of the Week

It’s time for our listener’s question of the week.  Today’s question is from Jerry.

Jerry writes – I’m doing Profit First and I’m confused about when to make my allocations. The book talks about the 10th and 25th rule but in your podcast episode I just listened to, you say to do the allocations weekly or every other week. I just want to make sure I’m doing this right.

Hi Jerry! I’m sorry for the confusion! The best thing about Profit First is that it’s a system that is easily tailored for your best use. So, yes, in the book, Mike suggests making allocations on the 10th and 25th of every month. His logic is because many businesses pay their bills twice a month on the 15th and last day of every month.

For me, I can’t follow that because I pay my bills every other week but I also stress out about what happens when the 10th or 25th falls on a weekend.  So, I work with my clients to encourage them to make their allocations on a schedule that works with their existing processes. For most, that is tied to their payroll processing which is weekly or every other week. Money is then available in the correct accounts when needed.

I take the approach of habit anchoring which is something I first read about in the book “Atomic Habits”.  I hope this helps!

If you have a question to be answered on a future podcast episode, please send it to [email protected].

Inspirational Quote

This week’s inspirational quote is from anonymous, “You don’t need a new day to start over. You only need a new mindset.”

Final Thoughts

Final thoughts for today! Did my explanations of the 9 jargon terms help? Were there terms not on the list? Let me know and I am happy to record a follow up episode with additional terms!

If you have any questions about today's episode please let me know. If you're watching on YouTube, you can comment below or send me an email to [email protected] and if you know someone who might need to hear this information please share this episode with them or if you're on YouTube, you can tag them below. 

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Did you enjoy this episode? Please consider leaving a review. 

And before I go, remember profit is something you intentionally plan for in the beginning. It is not a potential bonus at the end of the year. 

Thanks and have a great day.

Let’s simplify nine important financial terms commonly used by CPAs and bookkeepers. These terms often sound like a foreign language to business owners. 

Be sure to follow and subscribe to get notifications for future episodes!

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