Do you own a business, but are still a little foggy on some of the financial terms? Having a firm grip on these definitions will better help you understand what your accountant is talking about, or help you manage your own accounts. Read up on these essential business accounting terms to get a good handle on the basics.
Accounts payable is the amount that a business owes in the short term. These are purchases that have been made but not yet paid for, such as office supplies or catering costs. This figure is considered a liability. When a debt is accrued, it is credited to accounts payable, and then when the debt is paid, it is debited from accounts payable. This figure tells you what you owe in the short term.
Accounts receivable is all money owed to you for services or items you have given to customers but have not yet been paid for. This figure is considered an asset. When an item/service is given, the debt is credited to accounts receivable, and when the item/service is paid off, it is debited. This figure tells you what money you can expect to come in in the short term.
Assets are anything of value that a business has. These can be both tangible and intangible things, like real estate, a patent, or accounts receivable. There is also a factor of if an asset is “liquid” or not, which is a question of if that asset can be turned into cash if need be. Keep an eye on assets to know your company’s worth.
Cash flow is the amount of money moving in and out of a business over a given time period. It’s important to know your cash flow to get a handle on what kind of expenses and debts you can handle. It is different from profit, cash flow is instead what sort of liquid cash you handle each month.
A balance sheet is a snapshot of a company’s health and net worth. It should include all assets, liabilities, and equity. Balance sheets should be generated periodically throughout the year to evaluate the state of your business.
Equity is the amount that has been invested by the owner/s of the company. This can either be the equity a small handful of owners have, in the form of stock options, or collective ownership by shareholders.
Expenses come in a few different categories: fixed, variable, accrued, and operational. Having a handle on all of these expenses is essential to running a business efficiently. Fixed expenses are the same every month, like salaries and rent. Variable expenses are tied to the company’s sales and change constantly. Accrued expenses are expenses that need to be recorded but have not yet been paid off. Lastly, operational expenses are necessary expenditures to conduct business – like equipment, marketing, and administrative fees.
A fiscal year is the period of time you designate as a year for financial and accounting purposes. It can coincide with the calendar, or be altered to work around other important financial dates for your company. Each fiscal year, all statements and taxes must be closed out to begin a new year.
Profit and Loss Statement
A profit and loss statement, often called a “P&L,” is a report of earnings, expenses, and profits over a time period. Generating these reports regularly is essential to keeping a finger on the pulse of your company’s health and growth.
Revenue is total amount of all income without any expenses yet deducted. It is very different from profit or net. Revenue is important to understanding what you are bringing in before expenses, and what you could be profiting with lower expenses.
Become a better business owner by being up-to-date on these business accounting terms you need to know. The world of accounting is a big one, but by starting here, you should be able to get a good start on better handling your finances.