Essential Accounting Terms
Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific industry, and accounting is no exception.
To help you understand the terms, acronyms, and phrases regularly used in accounting and tax services, Infinite Accounting Solutions has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your accounting, bookkeeping, and tax needs effectively.
A lot of construction industry clients confuse this term to mean actual materials used on a job. However, accountants use this word in terms of relevance. For instance, if something is material, that means it's relevant for its purpose or audience. The opposite of this is immaterial, meaning that it's not relevant at all.
Definitely not a word used in normal conversation, accruals is an accounting principle which typically refers to recording revenues and expenses when they are earned/used, not when they are paid.
The opposite of accrual-based accounting is cash basis accounting. Under this concept, revenue/expenses are recorded when they are paid, not when the asset/liability occurred.
Capitalization occurs when an item is recorded as an asset instead of an expense. Your accountant or bookkeeper will set a minimum amount that an item needs to cost in order for it to be capitalized - usually $500 before taxes. Items which are deemed capital assets will be amortized/depreciated on your balance sheet.
This is an estimated amount of reduction of the value of an asset during time, due to wear and tear. The government sets limits on different categories of assets in terms of their life expectancy and percentage of decline over the life of the asset.
Reclassification occurs when amounts are transferred from one account to another. An example of this is if a capital asset was allocated to an expense account in error - this transaction would be reclassified to the proper capital asset account when the entry is discovered.
Audits can sound like an intimidating word, depending on the type of audit being done. The definition of an audit is an inspection of your companies' accounts, although there are various types of audits that can be done. A government audit can investigate different types of taxes your company collects on their behalf, to ensure processes and being done properly. A financial audit may be required from a lender or stakeholder of your company.
If you’re looking for exceptional bookkeeping services paired with first-class customer service, Infinite Accounting Solutions has been serving Langley, BC and the Fraser Valley since 2008. Our Bookkeepers ensure your books are kept up to date and organized, allowing you to focus on growing your business. We also offer a full suite of office solutions including software training for owners/staff, procedure writing, and Human Resource management. Visit our website or get in touch with us today.