Running a small business is your job, but knowing all the accounting terms associated with your business may not be. For instance, here are some essential accounting terms you should know for your small business. We’ll tell you what they are and what they mean to your bottom line.
The term Accounts Payable represents the money you owe to a vendor or client for the payment of goods or services they provide to your business.
Accounts Receivable are the opposite of accounts payable. Therefore, this is the money a customer owes you for payment of goods or services your business provides.
This term refers to everything that the business owns. So, this could include tangible and intangible items, including:
The Balance Sheet is a report that represents a snapshot of your business’s financial health and status. In particular, it will include assets, equity, and liabilities. So, the balance sheet equation is Assets = Equity + Liabilities.
Cost of Goods Sold (COGS)
These figures include the total amount you spend to acquire or make a product or service sold to the customer.
The value of a business asset that declines over time, most often used for long-term assets. Then, your accountant will use depreciation on your annual tax return to write off a portion of the diminished value. This way, you can recoup some of that loss through reduced taxable income.
Dividends are distributions of company earnings the reports will provide to company shareholders. The board of directors will determine the amount and distribute it evenly amongst the shares.
The cost of acquiring a good, service, or piece of property used in the process of doing business is an expense. Depending on the expense, this cost is typically classified as one of the following four:
A 12-month period determined by the company used for accounting purposes is known as the fiscal year. Some companies use the calendar year, while others create a fiscal year running from July to June, or October to September.
Forecasting uses past historical company data to determine future business trends. You can use forecasting to predict:
- Future sales
- Gross profits
- Asset values
- Long-term debt payoff timeline
A running tally of the company’s financial transactions since inception, the general ledger includes:
- Owner’s capital
Generally Accepted Accounting Practices (GAAP)
This acronym stands for the principles, rules, and standards in accounting. You will notice that all CPAs, bookkeepers, and businesses adopt and use these practices for accounting purposes.
This report is a summary of the company’s financial health over a period of time. In this case, your accountant will normally produce income statements on a monthly, quarterly, or semi-annual basis. You can find the net profit or loss on the income statement by subtracting COGS and expenses from the revenue.
Your inventory keeps a running list of all the products available and ready to be sold to customers.
These are also called accounts. Your bookkeeper or accountant records real-time transactions here before they are transferred to the general ledger. Journals are more detailed compared to the general ledger.
We call long and short-term debts that the company owes liabilities. Some examples of company liabilities are credit card balances and mortgages.
This is the perceived value of the business determined by investors. It will be based on the general ledger and balance sheet information.
The way a company pays employees for work performed is known as payroll. In particular, employers are responsible for withholding state and federal taxes and other applicable deductions before paying the employee the remainder, or net earnings.
Profit and Loss Statement
We sometimes call the Profit and Loss Statement the “income statement” or “P&L.” Especially since this document encompasses the company’s earnings, expenses, and net profits during a specified amount of time.
When we say “revenue,” we mean the total amount a company receives in exchange for a product or service before they apply expenses.
In the trial balance phase, we create this report, which will verify if debits and credits balance out. So, completing the trial balance is essential before generating financial documents. However, most accounting software performs these calculations automatically.
Do You Need More Help With These?
Now that you have the rundown on these essential accounting terms, your head may be spinning! In this case, if it is, JStevens Accounting can help you gain clarity as we work through your financials. Furthermore, we can present the information you need to effectively manage your business! Hence, you should contact us today, and let’s set up an appointment to sit down and discuss your business’s needs!