Thread by @BrianFeroldi

Accounting is the language of business.

But it’s FILLED with incoherent jargon.

Here are 9 of the most confusing terms explained in plain English:

1: Depreciation

Found on: Income Statement & Cash Flow Statement

Definition: The accounting process of writing down the value of an asset over time.

Plain English: You buy a car for $33,000.

10 years later, you sell it for $3,000.

The value of the car depreciated by $3,000/per year.

2: Amortization

Found on: Income Statement & Cash Flow Statement

Definition: An accounting technique used to periodically lower

1) the book value of a loan or,
2) an intangible asset over a period of time.

Plain English:

You loan a friend $10,000 for 10 years at 2% interest.

The payment is $1,113.27/year.

Each time a payment is made, the remaining balance is amortized (reduced).

Amortization + Depreciation are simliar accounting concepts but apply to different things.

3: Capital Expenditure (Capex)

Found on: Cash Flow Statement

Definition: Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.

Plain English: @Tesla just built Giga-Berlin, a massive new car factory in Europe.

All of Tesla’s costs to buy the property, construct the building, and fill it with equipment are capital expenditures.

4: Deferred Revenue (Unearned Revenue)

Found on: Balance Sheet | Liabilities, Current & Long-term

Definition: A prepayment for a good or service by a customer that has yet to be delivered.

Plain English: A company sells a 1-year magazine subscription in Q1 for $100.

They collect the $100 upfront, but they can’t count it all as revenue until the magazines are delivered.

Deferred revenue is a liability that is gradually reduced as the magazines are delivered.

5: Goodwill

Found on: Balance Sheet

Definition: The premium paid over the fair market value for an acquisition.

Plain English:

Feroldi Foods acquires Stoffel Coffee for $100,000.

The fair market value for Stoffel Coffee's assets & liabilities at the time of the acquisition is only $40,000.

That extra $60,000 has to be accounted for. It is stored as “Goodwill” on the new balance sheet

6: Marketable Securities

Found on: Balance Sheet

Definition: any unrestricted financial instrument that can be bought or sold on a public stock exchange or a public bond exchange.

Plain English: Checking accounts don’t pay much interest.

Some companies keep some of their cash in stocks, bonds, or money market funds to earn a higher return.

Marketable Securities are the value of all securities that can be quickly converted into cash.

7 & 8: Operating Lease Right-of-Use / Operating Lease Liability

Found on: Balance Sheet

Definition: a lease agreement in which the lessor provides the lessee with the right to use an asset for an agreed-upon period of time.

Plain English: A company signs a contract to lease a building for 10 years at $1 million per year.

The company has to report $10 million as an asset (Operating Lease Right-of-Use) and $10 million as a liability (Operating Lease Liability).

Note: Some financial websites count Operating Lease Liabilities as debt.

Ex: Yahoo finance says $ULTA has $1.8 billion in debt

In reality, it’s not debt.

It’s an Operating Lease Liability (that is offset by the Operating Lease Right-of-Use asset)

9: Retained Earnings

Found on: Balance Sheet

Definition: the cumulative net earnings a business has generated after it has paid out dividends to its shareholders.

Plain English:

The grand total of all of the profits that a company business has generated over its lifetime, minus its loses and dividends paid out to shareholders.

Learning accounting is an incredibly useful business skill, but it's filled with jargon + nuance.

@Brian_Stoffel_ and I are teaching a live course in January that explains accounting in plain English.

Interested? DM me for a coupon code.

maven.com/brian-feroldi/…

Want to keep learning for free?

You'll love this other thread that I wrote on accounting: