6 Essential Accounting Terms for Small Businesses

Working with your bookkeeper is the best way to learn about how you’re doing financially. It is essential that you work closely together throughout each quarter on an ongoing basis in order keep up-to date and understand any issues better than before! We have found that a lot of small business owners are master of their trade but have some difficulties in understanding the accounting jargon or in communicating with the bookkeeper to better understand the financial health.

If you want to increase your accounting knowledge so you can have more informed, insightful discussions with your account this quarter?

Start right now, with this list of 7 essential accounting terms for small business owners.

1. Balance Sheet: A balance sheet is a snapshot of your company's financial position at a specific point in time. It lists your assets (what you own) and your liabilities (what you owe). The difference between the two is your net worth. Balance sheets provide the basis for computing rates of return for investors and evaluating a company's capital structure. In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculating financial ratios.

2. Profit and Loss Statement: A profit and loss statement, also known as an income statement, is a summary of your company's revenues and expenses over a specific period. The P&L statement is a financial report that shows how much profit or loss exists in an organization at any given time. This can be broken down into two categories: positive numbers, which represent increases to company revenue; negative figures related with cost reduction efforts gone sour because they decreasingly affect their bottom line (the amount left over after all expenses have been paid).

3. Accounts Receivable & Accounts Payable: Accounts receivable is the total amount of money that your customers owe you. This figure includes both current and past-due invoices. Accounts payable is the total amount of money you owe your suppliers. This figure includes both current and past-due invoices.

4. Cash Flow statement: Cash flow is the movement of cash in and out of your business. It's important to track your company's cash flow so you can make sure you have enough cash on hand to cover your expenses. The CFS measures how well a company manages its cash position, meaning how well the company generates cash. The CFS complements the balance sheet and the income statement. The main components of the CFS are cash from three areas: operating activities, investing activities, and financing activities. The two methods of calculating cash flow are the direct method and the indirect method.

5. Budget: A budget is a plan for how you want to use your company's money over a specific period. It can help you track your expenses and stay on track with your financial goals. A budget is basically a financial plan for a defined period, normally a year that is known to greatly enhance the success of any financial undertaking. Corporate budgets are essential for operating at peak efficiency. Aside from earmarking resources, a budget can also aid in setting goals, measuring outcomes, and planning for contingencies. Personal budgets are extremely useful in managing an individual's or family's finances over both the short- and long-term horizon.

6. Gross profit and net Profit: Gross profits are what remains when you subtract COGS from your total revenue. Net Profit, on other hand, reveals more details about how much money is made after all operating expenses have been paid - including taxes owed or interest paid for debt using credit card bills as an example of borrowings against inventory purchases which will decrease its worth over time if not proactively retired through sale/exchange transactions with respective creditors.

We hope this list of essential accounting terms will help you better understand your company's.  Please let us know if there were any other terms you would like for us to help you with, join the conversation, and empower smarter decision-making.

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