Running your own business requires knowledge in managing the company and understanding its various aspects including accounting.
What is accounting? Accounting basically tracks all the income and expenses so you know how the business is doing and have a view if your operations are running efficiently.
But besides showing where the money is coming from and where it is going, it also records the company’s transactions so you can generate the financial reports that can help you make sound business decisions. Given its importance to the business, entrepreneurs like you should know the basics, starting with the accounting terms that you need to learn.
Here’s a roundup of the 20 accounting terms to help you get started:
1. Assets
Assets are what a company owns that have value. These include bank accounts, land, property, machinery, vehicles, patents, etc.
2. Liabilities
Liabilities, on the other hand, are what the company owes such as loans that are payable in the short, medium or long term.
3. Equity
Equity is the money the owners have invested in the company, which can be stocks purchased by shareholders or capital infused by an investor.
4. Capital
Capital comprises the company’s financial resources that are available for use, which can be spent on items needed in the business.
5. Profit
Profit is a measure of how well a business is doing. This refers to the money a company makes after all the expenses are deducted from the revenues.
6. Dividends
Dividends are the profit of a company after removing the taxes which are distributed to its shareholders on a regular basis.
7. Expense
Expense refers to what the business spent to produce the products or services it sells in order to generate revenues. These include –
Operating expense that allows a company to conduct its day-to-day activities such as payroll, transportation, repair, sales commission, etc.
Fixed cost that remains more or less the same in a given period like wages, rent, etc.
Variable cost that changes depending on the company’s production or sales such as electricity, raw materials, etc.
Accrued expense that has been incurred but which hasn’t been paid yet like utilities, salaries, etc.
8. Revenue
Revenue is what the company earns for products and services sold, before removing the expenses.
9. Cash Flow
Cash flow represents operating activities as it is the movement of money into and out of the business.
Accounts receivable is money a customer owes to the company to pay for products and services availed.
11. Bad Debt Expense
Bad debt expense is actually the accounts receivable that the company is no longer able to collect.
12. Accruals
Accruals refer to a company’s list of short-term liabilities or sales made that have yet to billed.
13. Capital Expenditure
Capital expenditure is money the company spends to acquire or upgrade long-term assets like equipment, plant and building to improve efficiency or increase capacity.
14. Depreciation
Depreciation refers to the decreasing value of fixed assets over time, depending on their estimated useful life.
15. Forecasting
Forecasting is a planning tool to help the company foresee future trends using its historical and present financial data.
16. Journal
Journal or accounts record the day-to-day transactions of the company that are eventually transferred into its general ledger.
17. General Ledger
General ledger is the source of all the data needed to prepare the financial statements of the company as it records all its financial transactions over its lifetime.
18. Financial Statement
Financial statements summarize the results of the company’s operations and show its current financial position in a report. The basic reports are –
Balance sheet that shows the financial position of the company based on its assets, liabilities and owner’s equity.
Income statement or profit and loss statement that reflects the profitability of a company or otherwise (losses), based on its revenues and expenses.
Cash flow statement that summarizes incoming and outgoing cash over a certain period.
19. Cash Basis Accounting
Cash basis accounting, a method used by small businesses because of its simplicity, records cash received as revenues and payments made with cash as expenses.
20. Fiscal Year
Fiscal year is the accounting period set by the company wherein it prepares its financial statements at the close of the period. It may coincide with the calendar year.
Leave us a reply, tell us other terms that are important to you as business owner!