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Accounting/General Terms to Know:

***DON’T KILL YOURSELF MEMORIZING THESE. READ OVER ONCE OR TWICE, MOVE ON, AND REFER BACK AS NEEDED.

Let me preface two things: One, at least some basic accounting terminology is essential to understand investing. Two, I freaking hate accounting. So I’ll make this short! (Only essential terms with a Cliff Notes description)

Balance Sheet Terms:

  • Asset: Anything a company owns that’s worth some money. Can be cash, land, or maybe even a brand (how much do you think the name Chick Fil A means to people?).
  • Liability: All that a company owes. Includes debt, payroll, or accounts payable (basically IOUs).
  • Equity: This is the value left over after you subtract Liabilities from Assets.
    • Equity = Assets – Liabilities. Crude Interpretation, “We’ve got “A” amount of valuable stuff and we owe “L” amount of stuff so the “E” amount of stuff is basically what we actually own”
  • Book Value (BV): Value of an Asset when you subtract depreciation.
  • Inventory: These are the assets that are going to be sold but haven’t been sold yet. Examples: t-shirts, cars, or cabbages.

Income Statement Terms:

  • Revenue (Sales): Money earned by the business.
  • Cost of Goods Sold (COGS): These are the expenses that directly relate to selling a product or a service. Can be the cost of fabric for LuLu’s $500 leggings, the horse-meat McDonalds serves, or maybe how many servers Google uses to allow you to watch Joe Rogan.
  • Depreciation: Assets lose value. For example, cars aren’t worth as much after you drive them a while. This cost of an asset losing value is depreciation.
  • Gross Margins: This is how much money the company has left over after the basic COGS. So Revenue – COGS = Gross Profit. Then that is taken as a percentage of revenue.
    • EX: Revenue = $100 | COGS = $60 | then Gross Profit = $40 and there is a 40% Gross Margin
  • Expense: Any cost incurred by the business.
  • Net Income: This is revenue minus ALL the expenses.
    • Revenue – COGS – Depreciation – Taxes – Other Stuff (Cliff Notes as I said)
  • Net Margin: This is the (Net Income / Revenue). It gives us how much money the company is actually making for how much its selling. For Example, Tesla is selling $24 billion in cars but it’s Net Income is negative $800 million. So their net margin is -3%, true story actually.

General Terms:

  • Cash Flow: Cash enters (inflow) and leaves (outflow) a business. The Net Cashflow is the difference of the amount of cash that is entering minus the amount that’s leaving.
  • Overhead: These are the expenses that relate to running the business but not ones that are involved with making/selling the product. Examples: rent, executives’ salaries, the entire HR department, etc.
  • Payroll: The amount that’s owed to all the employees.
  • Interest: The amount that’s owed for borrowing money. EX: You borrow $100 from a neighbor. It’s at a 5% interest. You would have to pay them back $105 (that’s how banks and credit cards make money).

If you need any more explaination then Investopedia gives good in-depth analysis of all of these terms. There’s no point in wasting our valuable time copying all those down though. Cause we got things to do.

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