Lesson 1 – Understanding Financial Terms

Understanding Financial Terms

Don’t turn away! This part may seem intimidating, but you’ll soon see that this is a very straightforward way of checking in with where the business stands at any moment.

In this session, you’ll review financial and accounting terms, generally accepted accounting principles, and key financial reports.

Accounting Terminology

Finance

The Encarta Dictionary defines finance as, “the business or art of managing the monetary resources of an organization, country, or person.” Bookkeeping, banking, and accounting, are all separate processes with their own definitions.

Seth Godin describes finance as a three-cycle process that continues endlessly:

Recording Financial Transactions

Bookkeeping is the exercise of identifying, categorizing, and recording all the transactions that take place in a business. In general, everything a company does results in a bookkeeping transaction, including things that take place between the business and:

• Customers, who buy products and services sold by the business
• Employees, who are paid wages and provided benefits
• Vendors, who sell services, equipment, and supplies to the business
• Government agencies, who collect taxes from the business
• Sources of equity capital (investors or owners who put money in and take it out of the business)
• Sources of debt capital (banks and lending institutions)

Accounting, on the other hand, is the methodology used to record the transactions and prepare financial statements and reports. Accounting guidelines govern how businesses record transactions. They also dictate the design of the recordkeeping system that a business uses and how reports are prepared, based on the information gathered and put into the system