As a small business owner, you need to be able to interpret and speak intelligently about basic financial accounting. As such, we’ve put together this guide on the 25 Accounting Terms Small Business Owners Should Know to help you understand what all the jargon means.
- Balance Sheet
The balance sheet follows the basic accounting equation of Assets = Liabilities + Shareholder’s Equity. It will summarize all of a company’s assets, liabilities, and shareholder’s equity for specific periods of time. It is important to investors because it shows them what company owes, and what it owns in order to suffice this debt. It also shows the investor how much money has been invested by outside sources (shareholders).
An asset is something that a business owns that it expects to provide them with a future benefit. Assets are found on the balance sheet.
- Accounts Receivable
Accounts receivable is an account that shows what portions of credit sales are still outstanding. It is increased when there are credit sales and decreased when cash is collected from those credit sales, or outstanding collectibles are written off.
Liabilities are legal debts or obligations that a company must satisfy. They can be brought on by operating or financing activities and are settled by the transfer of economic benefits.
Expenses are costs that are accrued through regular business operations. There are four basic types of costs: variable expenses, fixed expenses, accrued expenses, and operational expenses.
Depreciation is the value that is written off of plants, property, and equipment due to the loss in value of these assets over their useful life. There are several types of ways to calculate depreciation with the most common being straight-line depreciation.
- Fixed Expense
Fixed expenses are costs that a business is certain they will incur over a specific period of time no matter the amount of production or the amount of revenue generated. Fixed expenses can include, rent, salaries, and items such as electricity and water expenses.
- Variable Expense
Unlike fixed expenses, variable expenses correlate with the amount of production or revenue generated in a specific period. These can be budgeted for but will fluctuate as production does.
- Bad Debt Expense
Bad debt expense is the amount of accounts receivable that a company budgets to not be collected. The two ways to calculate bad debt expense are the balance sheet method and the income state method.
- Operational Expense
Operational expenses are costs that a company incurs due to doing business. They cannot operate without these expenses.
- Cash Basis Accounting
Under cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when cash is actually paid out.
- Accrual Accounting
Under accrual accounting revenues and expenses are recorded regardless of when cash is actually exchanged. Accrual accounting agrees with the matching principal, which matches revenues and expenses to each other in the same period that they are incurred.
Accruals are adjustments for revenues that have been collected but have not yet been earned by the company. They are also adjustments for expenses that have been incurred by not formally recorded in the financial statements. Accruals are adjusted at the end of a period.
- Accrued Expense
Accrued expenses are costs that have been recorded but have yet to be paid off.
- General Ledger
The general ledger holds record of all financial transactions during a company’s life. It includes information that comprises the three basic financial statements.
The journal is where all financial transactions are recorded before they are transferred to the official accounts of the company such as the balance sheet or general ledger.
- Trial Balance
The trial balance is the report run at the end of a specific period of time to ensure that all transactions that were debited to accounts equal all transactions that were credited to accounts. This ensures that accurate financial statements will be generated.
Capital is the value of financial resources, such as cash or other assets, that a company has available for use.
Revenue is the amount of money generated from selling goods or services over a specific period of time. All discounts and returned merchandise are subtracted from revenues.
Forecasting is the use of a business’ historical data to predict future trends. This is done to help with budgeting and predicting what the demand may be for their product or service. It also gives companies an idea of what expenses will be incurred in the future.
- Profit and Loss Statement
Also referred to as P&L, this is a financial statement that showcases all revenues and expenses over a specific period of time and shows whether or not the company made a profit or loss.
- Fiscal Year
The fiscal year is the period of time used by a company to calculate its yearly financial statements. This period of time can vary but typically begins January 1st and ends December 31st.
Equity is the amount of money that has been invested by the owners of the company. The money can come from different sources including shareholders, venture capitalists or in some cases just the single owner of a company.
Dividends are the portion of money that is paid out to shareholders out of its profits. Dividends are typically issued as cash but can also be issued as stock or other types of property.
- Burn Rate
Burn rate is the rate at which a startup or small business spends (“burns”) its cash during a period of negative cash flow. Typically it is expressed in terms of cash spent per month. Burn rate is important because it helps in determining the amount of capital companies need in order to launch their venture.