Accounting Terms for Distribution Professionals
Most non-accountants would probably agree that accountants tend to use a lot of jargon. If all those acronyms and unfamiliar words have you confused, never fear — we’ve put together a handy list of accounting terms that a distribution professional should probably be familiar with.
Accounts Payable (AP)
Accounts Payable is the account typically used for purchases of goods and services. Think of it as the money your company owes to its vendors.
Accounts Receivable (AR)
Accounts Receivable is the account typically used to receive payments for goods and services. It’s the account that your customers are contributing to when they make purchases from your company.
When inventory is allocated, it is marked as “spoken for” by a sales order or other transaction. The inventory hasn’t been shipped to the customer yet, but it’s not available to add to other sales orders. Essentially, there’s dibs on the inventory.
Average perpetual is an accounting method that uses an average unit cost for each individual purchase. This average cost changes based on the amount and actual cost of inventory sold.
Balance Sheet (BS)
A balance sheet is a financial document listing credits and debits for your company, and demonstrating how the credits and debits balance out.
Blind shipping is the vendor’s role in drop shipping. Drop shipping is a method of delivering a product to a customer via a third party. The shipment looks like it came from your company’s warehouse (your company’s name is on it), but it actually shipped from a separate location.
Cost of Goods Sold (COGS)
Your company’s cost of goods sold is the sum total of the direct costs your company incurs in order to sell your products. This includes the materials needed to create the products, the cost of the labor, etc.
Drop ship (or dropship)
Drop shipping is a method of delivering a product to a customer via a third party. The inventory never enters your company’s warehouse. Instead, it ships straight to your customer from the vendor’s warehouse.
First-in, first-out (FIFO)
The first-in, first-out accounting method is a practice in which the oldest inventory items are marked as sold first. By using this method, the cost of inventory recorded on your company’s balance sheet will represent the most recent costs, rather than costs that have changed since the inventory was first acquired.
Free on Board Shipping (FOB)
Free on board shipping indicates whether the customer or the seller is responsible for inventory damaged during the shipping process. FOB shipping point means that the customer is liable for the inventory while it is being shipped, and FOB destination means that the seller is liable until the inventory reaches the customer.
Fulfillment is the term used to describe the process of getting a piece of inventory off of the shelves and to wherever it needs to go in order to complete a transaction. For example, into the hands of the paying customer to fulfill a sales order, or into a separate warehouse to fulfill a transfer.
General Ledger (GL)
Your company’s general ledger is the “master” accounting document that keeps track of your company’s finances. It holds the information necessary for accountants to prepare financial statements.
Last-in, first-out (LIFO)
The last-in, first-out accounting method is a practice in which the newest inventory items are marked as sold first. Companies who use this accounting method can reduce their income taxes in times of inflation due to the differences in costs for the same inventory items produced at different times.
Lot Tracking (or Batch Tracking)
Lot tracking is a method of keeping track of inventory by assigning it a lot numbers. Lot numbers refer to multiple individual pieces of similar inventory. For example, all blue toolboxes might be assigned one lot number, and all red toolboxes a different lot number.
A multi-bin warehouse is a warehouse that uses a series of bins to methodically store inventory using numbered bins (or shelves), in an effort to make finding any given piece of specific inventory a more efficient process.
Payment terms are the terms set forward by your company for when the customer is expected to pay for the inventory. Due on receipt is a common payment term, as is Net 30, which means that they have 30 days to pay their bill.
Profit or Profit Margin
A company’s profit margin is the amount of money that the company made by selling a product. If it cost your company $10 to purchase and sell a toolbox, but the customer paid $12 for the toolbox, then the profit margin would be $2.
Serial tracking is a method of keeping track of inventory by assigning serial numbers to each individual piece of inventory.
A company’s shipping method is their chosen means of getting inventory to the customer. For example, UPS Next Day Air ® is a shipping method, as is FedEx Standard Overnight ®.
Sales Order Processing to Purchase Order Processing (SOP to POP)
SOP to POP is a method of linking an inventory item that is currently on a sales order to an inventory item on a purchase order. This, in essence, “commits” the item on the purchase order for the sales order, ensuring that the customer receives the item as quickly as possible.
Sub Ledger (SL)
A sub ledger is a ledger dedicated to a specific set of accounting transactions, the sum total of which are recorded onto the general ledger.
Terms discounts are discounts that are given to a customer if they meet certain terms set forth by your company, such as paying in full before a given date. For example, if a customer’s payment terms are Net 30, you might give them a terms discount of 2% 10 Net 30, which means that if they pay their bill within 10 days, they will receive a 2% discount.
Until Next Time
There are, of course, more accounting terms out there, but we think these cover the bases pretty well. If there’s an accounting term you were hoping to see but we didn’t cover it- let us know in the comments below! We’d love to connect with you.