Accurate accounting is essential to the financial well-being of any type of business and there are several basic accounting terms that every business owner should understand. Even if you decide to hire someone to do the accounting for your business, you need to be able to look at the main financial statements and understand the basic terms. There is no need to be intimidated if you are unfamiliar with the following terms. Spend some time looking over the definitions and apply them to the details of your business. If you need further explanation, there are several quality websites that go into further detail about these terms and others.
Accounts Receivable - money owed to your company by customers or clients who have already received your goods or services.
Accounts Payable – Money your company owes to creditors such as vendors.
Accrual Basis of Accounting – A method of accounting in which the revenues (and expenses) are recorded on the income statement at the time they are earned (or incurred). The revenues are recorded even if the cash has not yet been received.
Balance Sheet – One of the main financial statements for a business. It reports the assets, liabilities, and owner’s equity at a specified point in time.
Cash Flow – The cash generated through business activities, such as sales and services rendered, during a specified period of time.
Cash Flow Statement – One of the main financial statements that business owners use. It reports the cash that comes in and goes out of the company. It is a snapshot of the company’s current cash available, so it does not include money expected or owed such as accounts receivable or payable.
Cost of Goods Sold – The direct costs related to selling merchandise or services to the customer. The cost can include factors such as supplies and labor.
Net Income – The total income earned by a company after expenses are accounted for. In order to calculate the net income, subtract the total expenses from the total revenues.
Profit and Loss Statement (P&L) – One of the main financial statements, it is also known as an income statement. It reports the revenues, gains, expenses, losses, and net income of a company for a specified period of time.
Return on Investments – A measure that allows you to evaluate the success of an investment. It is usually stated as a percentage and represents the amount of money earned off of the money invested. Divide the net profit by the cost of the investment to determine the return.