November 9, 2021

Doing Your Business Accounts? Knowing These Terms Can Give You A Headstart

Business owners will come up against bookkeeping at one stage or another. Whether they’re running a small one-person business or a large corporation, accounting in the correct way is vital. It can save you a lot of money as numerical mistakes can be avoided, you’ll have a clear grasp on your finances and you’ll also be able to confidently get your taxes right. It also helps with forecasting, keeping track of payments, and ensuring your business is in good health.

With that said, there are certain instances of accountancy that are pretty complicated. They’re all learnable, but in the first instance, they might take a while for you to get your head around, especially if you’re having to complete complex accountancy calculations within the stated terms. Here are some of the more complex accountancy terms explained.

Amortization or Depreciation

Alone, it’s not too difficult to get your head around either of the terms. However, they are often confused with each other and it’s forgivable because the two terms do have similarities. They’re also pretty important if you’re a business owner as they represent deductibles. In terms of their actual definition:

  • Amortization:  Usually is used in regards to the writing down of the value of a loan or an intangible asset. It’s usually easier to calculate the writing down of a loan rather than intangibles, but both might be needed over the course of your business. Usually, expensed intangibles help bring together the cost of the asset in question with the revenue generated by it following the principles laid out in GAAP (generally accepted accounting principles).
  • Depreciation: as assets lose value, they depreciate. Depreciation is the calculation of these losses over time. There are four methods for depreciation under GAAP, these are straight line, declining balance, the sum of the year digits, and unit of production.

The two are confused because, in reality, they’re both methods for calculating value as time goes on. Usually, an accountant is needed to calculate complex amortization or depreciation calculations.

Lease Accounting

Lease accounting involves the accounting for certain leases a business might enter into. Essentially, it’s a transaction a company has entered into which gives it the right to use a certain asset. The dynamics of lease accounting have changed recently due to a shift from the old standard ASC 840 which has been replaced by ASC 842. The guidance can be complex to those who haven’t had to account for leases before, but it essentially revolves around contracts granted control of an asset. Again, if you have the time and are doing the accounts yourself, you’ll probably be able to get your head around it but if time is of the essence you might be better off seeking advice.

Double Entry

It’s one of those methodologies that sound absurd when you first learn about it. However, when you get the hang of it using double-entry can help you get your books in order. The simple term which defines double entry is: assets = liabilities + owners equity. Essentially, everything which is entered on one account has the opposite effect in a separate account. It ensures iron-clad bookkeeping and is certainly a method worth exploring if you’re struggling. The account has two sides known as debit and credit. If you want to adopt this system, it’s worth thoroughly learning it first before jumping right in.

Hybrid Securities

These are the bane of many an accountant and if you end up having to account for them you’ll realize why. They’re securities that have an aspect of both debt and equity, hence the word hybrid. There are a variety of different hybrid securities, such as:

  • Preferred stocks
  • Convertible bonds
  • In-kind toggle notes

Hybrid security usually pays in a way that’s pretty similar to a bond. They pay a fixed or floating rate until a certain date. If you or your business own them, they’re pretty difficult to calculate sometimes due to the fact they’re made up of both debt and equity. It’s certainly worth asking for help from someone who knows what they’re doing. Even more so if you’re converting ownership of hybrid security from one company to the other or between individuals and need to account for it.

Impairment Losses

These are difficult to process because if you already have depreciation it can be a little tricky to work out. The actual definition of an impairment loss, as understood by most subscribing to GAAP (generally accepted accounting principles), is a decrease in the overall net carrying value, the cost of acquisition minus depreciation, of an asset that is larger than the future undisclosed cash flow of the same asset. Usually, it occurs when an asset of a business depreciates in fair market value, but in excess of the actual book value of the asset on the company’s statement (being balance sheet, asset register, etc.). You can probably tell from the paragraph that it’s a pretty complicated accountancy term. Usually, most sole traders won’t need to use this, but it’s worth knowing because it allows you to claim higher levels of loss. Again, it’s probably worth checking your calculations properly if you’re going to use an impairment loss due to the complexity of asking an advisor’s opinion.

It’s All About Knowledge

Accounting goes way deeper than the usual profit/loss, revenue, deductions, etc. There are so many terms and usages that the normal person won’t know about. If you’re hiring a competent accountant then you won’t usually need to know the more complicated terms but if you’re doing complex accounting yourself, for your own business or firm, it’s always worth putting in some research so that you know you’re getting everything that you’re entitled to. The internet is full of brilliant advice, but remember, the advice is usually generic in its approach. It isn’t catered for you and your business. There is some brilliant technology out there too that can automate a lot of the process for you, choosing the right software and tech can be a little daunting but once done it’ll save you a whole bunch of time.

About the author 

Peter Hatch

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