***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.
- 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.