20 Account Terms Every Small Business Owner Needs to Know
Understanding basic financial terminology as a small business owner may be beneficial. You'll need to know some of this jargon to respond to financial queries. Second, learning these phrases may serve as a crash lesson in business economics, making it easier to plan and comprehend your company's financial future. Understanding these words will help you better understand your company's financial health.
Here are 20 account terms you should know to succeed in your business.
Accounts Payable (A/P) and Accounts Receivable (A/R)
Accounts payable is the term used to describe all of the bills that your firm owes to third parties, excluding payroll expenses. These are costs on corporate credit cards or statements that aren't paid right away. Because they aren't paid right away, they are examples of liabilities. Accounts payable assists you in analyzing your current commitments versus assets before acquiring anything new for your company.
On the other hand, accounts receivable is the money you have not received from people who consumed your products or availed themselves of your services. It is the money to be paid by customers and clients that have received your services or goods. Accounts receivable will be listed as a creditable asset on a company's balance sheet because the clients are legally compelled to pay. Invoices are commonly used to keep track of receivables.
Accrual Basis Accounting
Accrual basis accounting, for most businesses, is the typical accounting approach. When revenue and expenses are reported, the main difference between cash basis and accrual accounting is when they are recognized. It would be best to record expenses and income as they accrue under the accrual accounting technique, regardless of whether cash for the good or service is transferred. Because it shows the present value of sales revenue, the accrual basis accounting method is efficient. It gives you a better picture of your financial situation. It also necessitates the use of the double-entry accounting system. You enter a matching transaction in a different account when you enter an accrued transaction.
A company's asset is something that a corporation possesses. If anything has monetary worth and can be changed into cash, it is termed an asset. These are essential things that a business has. The following are some of the assets that have been considered:
Intellectual Property (I.P.)
"Goodwill" (i.e., Reputation)
These are essential aspects to consider when calculating the worth of a for-sale firm.
A balance sheet is used to assess your company's current financial situation quickly. It consists of the company's obligations and assets and any capital. It allows you to evaluate many components of your organization to calculate how much your firm is worth at any given time.
Bookkeeping is the process of regularly entering the company's financial activities into structured accounts. It can also refer to the many recording techniques available for the business. For several reasons, bookkeeping is a critical aspect of the business's accounting process. You can develop reliable financial reports that assist monitor the business success if you maintain transaction data up to date.
Cash Accounting/Cash Basis
The cash basis accounting method is a straightforward method of accounting. In a cash basis accounting system, you record payments as they are received or processed, and accounts receivable are not considered in the cash basis method.
Cash basis accounting may be more beneficial than accrual accounting if you don't keep inventories. It may be helpful to service-based companies. Certified public accountants may advise against utilizing cash basis accounting.
Cash Flow is what matters most to business owners. The movement of money in and out of business is referred to as cash flow. All of the transactions are represented by the cash flow. There's a positive cash flow when more money is in the account than expenses. However, there will be a cash flow problem when more cash flows out of the business. The cash flow is the business's lifeline. A positive cash flow allows the business to grow, and the pace of cash flow is as vital as having cash flow at all.
It is critical to understand a business's federal, state, and local tax obligations as a business owner. This will assist you in appropriately filing your taxes and making timely payments. When beginning a business, the structure you pick will decide what taxes you'll have to pay and how you'll pay them.
What taxes you must pay will depend on the type of business you run and how you compensate them.
Business taxes are divided into four categories:
Income Tax: All businesses, except for partnerships, must file an annual income tax return. Partnerships are required to file a tax return.
Self-Employment Tax: Self-employment tax (S.E. tax) is a type of social security and unemployment insurance. Individuals who work for themselves are subject to the Medicare tax.
Employment Taxes: If you have employees, you (as the employer) must pay employment tax obligations, such as Social Security, Medicare, Federal Unemployment Insurance, etc.
Excise Taxes: A tax on the sale of specific goods or services, or on goods with certain uses.
Specific items such as fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, tobacco, and other goods and services all include excise taxes.
Debits and credits are used in bookkeeping to ensure that a company's records are balanced. Debits add to asset or cost accounts while subtracting from liability, revenue, and equity accounts. Credits work in the other direction. Every debit entry must have a matching credit entry for the same monetary amount when documenting a transaction and vice versa.
Depreciation is the cost of an asset over time. Every year all items will lose their original value due to being worn out or broken or just by being old. When new high-tech things are made, the older version of those items will depreciate. Depreciation is a method of allocating the cost of a physical item throughout its life rather than all at once. The price of long-term assets is primarily affected by depreciation.
A dividend is a portion of a company's profits and retained earnings that it pays to its shareholders. When a firm makes a profit and accumulates retained earnings, those earnings might be reinvested in the company or paid out as a dividend to shareholders. The dividend yield is calculated by dividing the yearly dividend per share by the share price.
Expenses / Operating Expenses
Expenses are a measurement of the price of doing business. They are necessary to earn income. Unlike COGS, operating expenses indicate the costs of running your company daily. Operating expenditures include rent and wages.
If your liabilities exceed your assets, you have negative equity. The percentage of your company owned by you and your investors is referred to as equity. When your assets are subtracted from your liabilities, you are left with your company's equity.
After a company's costs have been paid, profit is the value that remains. Business owners and accountants can find it on a balance sheet. The corporation is considered to make a profit if the value left after expenditures are removed from revenue is positive, and it is said to cause a loss if the value is negative. Earnings and income are two more phrases that signify the same thing.
Income Statement, or P&L Statement
An income statement is a financial statement that illustrates how lucrative your company was during a particular reporting period. It displays your revenue after subtracting your costs and losses.
Together with the balance sheet and the cash flow statement, the income statement is one of the three most essential financial statements in financial accounting. It is sometimes known as a "net income statement" or a "statement of earnings" (or statement of cash flows).
Inventory is an essential asset for a business. A business cannot earn any profit without a significant inventory. This refers to the raw materials used to make the goods they sell.
Completed commodities, raw materials, and work-in-progress are all included in the inventory. There's a danger in keeping large quantities of raw materials in storage spaces, and these are expiration dates and storage expenses. Businesses should generally avoid keeping significant volumes of inventory for an extended time.
All ongoing debts owed by your company, from long-term loans and bonds to monthly rental charges and energy bills, are classified as liabilities. When someone owes someone else money, they are said to be liable. By transferring money, services, or goods, someone might fulfill the duty of settling a liability. Loans, mortgages, accounts payable, and accrued expenses are all examples of liabilities. Short-term liabilities are those that have a period of less than a year. Meanwhile, Long-term liabilities may also take longer than a year to resolve for businesses.
Net Profit / Net Income / Bottom Line
The bottom line refers to either net income or net profit, which are comparable means of calculating how much money you have at the end of the day. The term comes from the number at the bottom of your balance statement. Net income is your entire sales income minus your direct expenditures. Net income is earned after removing deductions and taxes from gross income. Investors and shareholders use net income to analyze a company's financial health and determine loan eligibility.
Return on Investment (ROI)
All your expenses or capital have been placed back into the company. The ROI is often used to differentiate the efficiency of your business investments—the current value minus the cost of an investment divided by the investment's price. ROI is an effective metric that assists businesses in deciding whether an offer is a significant investment or not.
The entire revenue earned through the sale of goods or services connected to the company's principal business is referred to as revenue. Because it appears at the top of the income statement, revenue, also known as gross sales, is sometimes referred to as the "top line." The whole profits or profit is referred to as income or net income.
Capital refers to a form of asset. Capital sources give a continuous service to the company that uses them, resulting in wealth. Working capital is the amount of money your company requires to run daily, and it's simple to figure out how much you'll need. It is, in essence, a measure of operating liquidity that can assist business owners in determining how much money they can set aside for running expenses. "Operating capital" is created by combining working capital with fixed assets such as office buildings or equipment instead of net value, which includes assets such as buildings and equipment.
Keeping track of your small business's financial situation is similar to keeping track of your own personal wellness. Although you should contact specialists, it's still beneficial to have a broad idea of where you are and what to look for. You'll be able to track your company's financial health more successfully if you're familiar with the phrases listed above. You'll feel more secure when examining your profitability, debt, and cash flow with this information. Still, you'll also be prepared to confront any financial issues as you manage your firm.
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