23 Accounting Terms Every Business Owner Should Know

accounting terms

Although accounting terminology is used in many aspects of daily life, not all people are using them correctly. We’ve also heard people say they are afraid to ask questions about certain terms, fearing they will look unprofessional. It’s better to have a solid foundation than not when it involves what you know. Understanding the terms that accountants and peers might use could be a great help. We’ve compiled below 23 of our most frequently used terms:

Asset

Assets are any resources owned by a company. They can be tangible resources (like art or gold) or intangible resources (patents and brands) that can be turned into cash/produce financial value.

Revenue

Revenue, also known as ‘Income,’ is the amount of money a company makes by selling products or services to customers. This includes all expenses.

Profit

After deducting expenses such as wages, materials, marketing costs, and overhead, profit is the money that has been made.

Appreciation

Appreciation is the increase in value over time. This is often true for stocks, houses, or art assets.

Depreciation

Depreciation, which is the opposite of appreciation, refers to an asset’s value decreasing over time. Examples of assets impacted by depreciation include machinery, automobiles, and office space.

Balance Sheet

A balance sheet is a financial report that a company uses to report its assets, liabilities, and shareholder equity. It gives a general overview of the company’s assets and liabilities and information about what has been invested in it.

Book Value

The company’s book value is the amount it would be worth if all its assets were sold and all its liabilities paid off. Note that book value is based on the original purchase price adjusted for depreciation. This is different from the market value, which determines the value of an asset on the open market.

Interest

Interest is a term that you are already familiar with. It is the cost of borrowing money to fund your business. It is usually shown as a percentage.

Expense

An expense is money that was spent on revenue generation. There are different types of expenses, such as operational expenses or expenses associated with sales (cost of goods sold or cost of sales).

Fixed Costs

Fixed costs are costs that don’t change due to an increase or decrease in goods or services. Rent, wages, and interest are some examples.

Payroll

Payroll is the compensation a business must pay to its employees for a set period and on a given date. The payroll process can include tracking hours worked for employees, calculating pay and tax, and distributing payments.

Net Income

Net income can be described as similar to profit and, in some cases, interchangeable. It is also known as the ‘bottom line.’ This is the net income after revenue and taxes.

Cash Flow

Cash flow refers to the cash or cash equivalent transferred into and out of a company. Cash flow is different from revenue because it only deals with cash. It is one of the most critical financial indicators of the health of a business.

Credit (as an accounting entry)

Credit is an entry that increases equity, liability, revenue, or revenue in an account and decreases an asset, expense, or other accounts. It’s money coming in.

Debit (as an accounting entry)

A debit is an entry that reduces equity, liability, and revenue and increases asset or expense accounts. It’s money being taken out.

Liquidity

Liquidity is the speed at which an asset can be converted to cash. A bar of gold, for example, is relatively easy to liquidate because it can be sold quickly around the globe. However, a house is more difficult.

Return On Investment (ROI)

Companies lose money because they don’t know what part of their expenses was revenue-driving. The return on investment is a financial indicator that measures how likely you are to get a return and analyze your gains and losses.

Accounts Receivable

Accounts receivable refers to money owed by a company to its debtors. It’s also the invoices you have sent that are not yet paid.

Accounts Payable

Accounts payable is money that a company owes its creditors. It’s basically the invoice they sent to you that isn’t paid (unpaid expenses).

CPA (Certified Public Accountant)

A CPA is a Certified Public Accountant (term used primarily in USA). This means that they are qualified to handle your taxes. Have you decided when to hire an accountant for your business?

Profit and loss statement

The profit and loss statement shows revenues, expenses, and costs for a given period. The P&L, also termed income statement, can be used to evaluate the business and decide where to generate more profit or reduce costs. It also helps you check the company’s health.

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General Ledger

The general ledger is a summary of all financial information about your business. This is a great tool to keep track of the big picture, even if you have it in spreadsheets.

Loss

The last term is loss, which, although it’s a term that you may be familiar with, refers to an unrecoverable, unanticipated decrease or increase in resources or assets beyond normal business operations. Accounting professionals can use losses to reduce their tax liability by analyzing the risk you took.

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