If you're a business owner, you likely wear many hats. From sales and marketing to HR and operations, the list of responsibilities is endless. And while you may not have a background in accounting, it's important to have a basic understanding of common accounting terms. After all, accurate financial reporting is essential to the success of any business. Don't worry, we're here to help. In this blog post, we'll provide a glossary of common accounting terms so you can hit the ground running!
These are just some of the accounting terms every business owner should know:
This refers to the money your business owes to suppliers, vendors, or contractors.
Conversely, this refers to the money owed to your business by customers or clients.
An audit is a formal review of your company's financial statements. It's typically conducted by an independent third party, like an accounting firm or the IRS.
A balance sheet is a snapshot of your company's assets, liabilities, and equity at a specific point in time—typically the end of a quarter or year. This statement gives insights into your company's financial health as well as its ability to repay debts.
A cash flow statement shows how much cash is coming into and going out of your company over a given period of time. This statement is important because it provides insights into whether or not your company will be able to meet its short-term financial obligations.
Equity is the portion of your business you own outright. If your business has any shareholders, they will also have equity in the form of stock ownership.
In accounting, an expense is any cost that your business incurs in order to generate revenue. These can include everything from office supplies and employee salaries to marketing and advertising costs.
(Here are 6 Expenses You Can't Claim As Business Deductions)
Fixed assets are physical items that your company uses on a daily basis, like computers, furniture, and vehicles. They're called "fixed" because they're not intended to be sold—unlike inventory, for example.
An income statement shows your company's revenue and expenses over a specific period of time (usually one year or one quarter). This statement provides insights into whether your company is profitable or not.
Liabilities are debts or obligations your business owes to others. This includes short- and long-term debt, accounts payable, salaries payable, and interest payable.
Liquid assets are cash or investments that can be quickly converted into cash. This is important because it shows how much money your company has on hand to meet short-term obligations.
This is the bottom line of the cash flow statement that shows the net increase or decrease in cash over a specific period of time. A positive net cash flow means your business has more cash than it did at the beginning of the period.
(Money metrics such as your net cash flow matter! Read why in this post)
Payroll refers to the process of compensating employees for their work. This includes wages, salaries, bonuses, and commissions.
A profit and loss statement (P&L) is a summary of your company's revenue and expenses over a specific period of time (usually one year or one quarter). This statement provides insights into whether your company is profitable or not.
(Read about understanding your profit and loss statement next)
Revenue is the income generated by your business from its normal operations. This can come in the form of sales, service fees, or interest income.
Start-up costs are expenses incurred during the initial phase of starting a business. This can include costs like legal fees or marketing expenses.
While this is not an exhaustive list, it provides a good starting point for understanding some of the most commonly used accounting terms. By familiarizing yourself with these terms, you'll be better equipped to make informed decisions about your business's finances.
For more detailed explanations of each term, a quick Google search will bring up plenty of information (just make sure it’s from a reliable source). And as always, if you have any questions, don't hesitate to reach out to the friendly team of bookkeeping experts at Two Roads!
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