Basic Small Business Accounting Terminology and Definitions

Basic Small Business Accounting Terminology and Definitions

As a new business owner, you’re not expected to be a bookkeeping wizard, you hire professionals to do that for you so that you can concentrate on running and growing your business. But keep in mind two reasons you should have a basic understanding of bookkeeping, to keep the IRS happy, and to help you manage your business.

Most people tend to be masters in one or two fields rather than everything they try. You may be an expert when it comes to thinking up creative ideas or an artist when it comes to making those ideas a reality. You might have great people skills or be a genius with all things technical. So if you’re a natural entrepreneur but still can’t name three important financial documents, you’re not alone. According to some counselors to America’s small businesses, many small business owners would flunk basic bookkeeping. With that in mind, here are some basics that every small business owner should be familiar with.

Certain words and terms will become familiar to you in time, but the following is the most basic business terms you will need to understand: Balance sheet is a financial statement that shows an overview of the company’s finances. In order to balance your books, follow this formula:

Assets = Liabilities + Equity: Assets are resources, what the company owns, like cash, inventory, equipment, and vehicles. Liabilities are what the company owes others, including bills to vendors, credit card balances, and any loans you have taken out.  Equity is all the money invested in the company by its owners.

Know your accounting method: Cash-basis accounting is when you record transactions only upon payment. Accrual accounting is when you record transactions when they happen, regardless of whether you’ve been paid yet. Income statement is a financial statement that shows an overview of the company’s financial activity over a specific period of time. In order to assess where you’re at, follow this formula:
Net Profit or Loss = Revenue – Cost of Goods Sold – Expenses
Net Profit or Loss – A positive number means your business made money, and a negative number means you’ve lost money.Revenue: The money earned from selling goods and services.

The Cost of Goods Sold: The money spent on producing goods and services.

Expenses: The money spent to operate the business, not including the cost of goods sold.Accounts payable is the account from which you pay your bills.

Accounts receivable is the account in which you deposit money from sales or other invoices.

One of the most difficult aspects of trying to build a business with traction is the fact that money can be tight. As tempting as it is, you should avoid the pitfall of spending every penny you make. Uncle Sam wants some of that money, too. Systematically put money away throughout the year for the taxes that will be due on your income.

Even if you just learn the basics, that will be enough to provide you with the knowledge to track your company’s financial situation. So take a little time to set up a simple bookkeeping system or hire a professional accountant so that you can keep growing your business.