As an accounting professional, you are undoubtedly a numbers person. That distinction certainly serves you well when it comes to your day-to-day duties. But, when it's time for a job interview or a networking event, knowing how to crunch digits won't necessarily come in handy. You also need an impressive, and, perhaps more important, accurate, financial vocabulary.
Even if you feel you have a pretty decent grasp of the often difficult jargon, it never hurts to give yourself a refresher course every now and then. New expressions are injected into the financial vernacular almost on a weekly basis and yesterday's buzzwords have a way of phasing out quickly. Pay close attention to industry publications and make it a point to learn a few new words a month.
But, for those of you who don't know their asset from their LBO (that's, leveraged buyout), here's a brief introduction into the world of basic "accounting speak"…
Capitalize – To record an expenditure on the balance sheet as an asset, to be amortized over the future. The opposite is to expense. For example, research expenditures can be capitalized or expensed. If expensed, they are charged against income when the expenditure occurs. If capitalized, the expenditure is charged against income over a period of time usually related to the life of the products or services created by the research.
Deferred income – A liability that arises when a company is paid in advance for goods or services that will be provided later. For example, when a magazine subscription is paid in advance, the magazine publisher is liable to provide magazines for the life of the subscription. The amount in deferred income is reduced as the magazines are delivered.
Discounted cash flow – A system for evaluating investment opportunities that discounts or reduces the value of future cash flow.
Inventory turnover – A ratio that indicates the amount of inventory a company uses to support a given level of sales. The formula is: Inventory Turnover = Cost of Sales / Average Inventory. Different businesses have different general turnover levels. The ratio is significant in comparison with the ratio for previous periods or the ratio for similar businesses.
Retained earnings – Profits not distributed to shareholders as dividends; the accumulation of a company's profits less any dividends paid out. Retained earnings are not spendable cash.
Trial balance – At the close of an accounting period, the transactions posted in the ledger are added up. A test or trial balance sheet is prepared with assets on one side and liabilities and capital on the other. The two sides should balance. If they don't, the accountants must search through the transactions to find out why. They keep making trial balances until the balance sheet balances.
Working capital – Current assets minus current liabilities. In most businesses the major components of working capital are cash, accounts receivable, and inventory minus accounts payable. As a business grows it will have larger accounts receivable and more inventory. Thus the need for working capital will increase.
Yes, the language of finance is indeed a fascinating one. If you'd like to become more fluent, brush up on your vocabulary, or simply look up a word you heard or read somewhere, be sure to check out the "Money 101 Glossary".