It’s essential for all business owners to know at least 12 basic accounting terms. This ensures you can speak with authority to anyone who asks financial questions about your business. Here are the accounting terms we recommend:
Assets include anything that can quickly convert to cash if necessary. They can be tangible, such as accounts receivable, or intangible, such as ownership of intellectual property. Accountants include all assets on a balance sheet, and the Internal Revenue Service (IRS) allows the depreciation of assets when filing a business return.
When a business reaches its break-even point, it means that it has an equal amount of money going out as coming in. The goal is to get beyond breaking even to post a profit.
Cash Conversion Cycle
This term refers to the time it takes your business to collect accounts receivable, sell inventory, and pay bills.
The ability to obtain credit is essential to growing your business. Some of the most common terms include the line of credit, credit card, business credit score, and personal credit score.
This includes such things as accounts payable, credit card debt, employee wages, taxes, and loan payments. Like assets, your accountant lists liabilities on your company balance sheet.
Profit and Loss Statement
This document indicates your company’s financial performance for a reporting period, which is typically annually or monthly.
Accounts Payable and Receivable
The first term refers to money your company owes to other businesses while the second term describes money that customers and other businesses owe to you.
The balance sheet offers a broad overview of your company’s financial health. It typically includes the owner’s equity, assets, and liabilities. Some common uses for the balance sheet include determining business value and managing assets, debt, inventory, accounts payable and receivable, earnings, inventory, and owner equity.
The term refers to the difference between accounts payable and receivable. Late paying customers are the leading reason companies experience cash flow issues.
Cost of Goods Sold
The amount of money it takes to produce a product is its cost of goods sold. This typically includes materials, labor, packaging, and advertising at a minimum.
This covers all costs associated with running your business, such as rent, wages, materials, utilities, marketing, and more. Expenses can be either fixed, which means they repeat regularly, or accrued, which means you have not yet received a bill but owe the money. The IRS allows businesses to deduct most expenses.
The most important thing to understand about profit is that it’s not the same thing as cash flow. Your financial documents might show the business has more money coming in than going out, but that doesn’t mean it’s profitable since much of the money could be tied up in accounts receivable or inventory.