As a small business owner, have you ever look at a financial statement and throw your hands up exclaiming, “What do all these numbers mean?” After all, you’re a small business owner, not an accountant.
Hiring an accountant is widely considered best practice for small business owners. But delegating financial analysis and reporting doesn’t mean completely checking out of the process each month or quarter. It’s also recommended that business owners work closely with their accountants to better understand their financial position, and make smart plans for future growth.
Here’s an explanation of some basic accounting terms to help you get started.
1. PROFIT & LOSS STATEMENT
Or ‘P&L’ for short. A record of your business’ profits and losses, over a defined period of time (eg. quarterly). The profit and loss statement (also known as the income statement) is one of the most important documents used by accountants to determine the profitability of your business.
2. BALANCE SHEET
A balance sheet is a financial statement that shows what a business owns, what it owes, and how much the owner has invested in it. It presents a snapshot of the business’s financial position as of a particular date in time. It’s called a balance sheet because the things owned by the business (assets) must equal the claims against those assets (liabilities and equity).
3. ACCOUNTS RECEIVABLE
Accounts receivable includes money owed by customers to another company or individual as payment for goods and/or services. It is considered an asset on a company’s balance sheet, because there is an understanding that the clients are legally obligated to pay this amount.
4. ACCOUNTS PAYABLE
Money that your business owes its creditors. Here creditors can include suppliers, or your phone or energy company, for example. Anyone who provides you with a service and bills you for it afterwards. Listed as “liabilities” on a balance sheet.
Everything that a business owes and for which it is legally bound. Think of loans, bonds, mortgages, unpaid bills, money owed to staff and so on.
Assets are everything that a company owns. They can be divided into tangible and intangible assets. In most cases, accounting assets are tangible assets, such as equipment, property, land, cash and tools. But intangible assets, such as stock, copyrights, patents and trademarks, can also fall under this category.
7. CASH FLOW
The amount of cash you generated and the amount you used during a given period. It can be a measure of your business’ financial strength. That’s because the availability of cash impacts your ability to pay expenses.
Revenue is the total amount of money collected for goods or services sold before any expenses are subtracted. It also includes any credits or discounts for returned merchandise. The difference between your revenue and expense is your operating profit.
Expense is the cost you incur to produce that revenue. Example of business expenses might be employee wages, office rents etc. Both revenue and expense show up on a document called your “income statement.”
Commonly referred to as the amount of money a company has to invest or spend on necessary items for the business, capital is money that can be accessed, not including company assets or liabilities. It is often referred to as “working capital.”
All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown in shares of stock.
The money a company needs to pay if it borrows money from a bank or other company. For example, when you buy a car using a car loan, you must pay not only the amount you borrowed but also interest, based on a percent of the amount you borrowed.
Defined as the decrease of an item’s value over time due to use, depreciation is especially important for tax purposes, as larger pieces of equipment that directly impact the company’s ability to make money can be written off on tax returns based on their depreciation. These are items that are used for more than a year.
14. FISCAL YEAR
A fiscal year is a period of time that a company uses for accounting purposes and in preparing financial statements. The fiscal year can coincide with the calendar year; however, it can also be different, such as October to September or July to June. Fiscal-year start and end dates are normally determined by the company and may depend on how long it will take to close out the books for the year and prepare all financial statements for federal and state tax submittals.
15. TRIAL BALANCE
How you test to be sure the books are in balance before pulling together information for the financial reports and closing the books for the accounting period.
SEE HOW WE CAN HELP…
It’s clear that you need to have complete financial control of your business in order to succeed. Even if the theory of financial reporting is fairly straightforward, the reality of it can consume a lot of time, money and energy. Collating all this data, and then using it in a way that helps you to run your business, is an art in itself.
To lighten the work-load we recommend using online accounting software in keeping track of your cash inflows (invoice sales) and outflows (expenses). With little or no accounting experiences, you can stay in control of your business cash in-flows and out-flows with ease.