It does not matter if you hired a bookkeeper or accountant to handle your financial affairs; it is still best to stay knowledgeable of common accounting terms in order to be able to reasonably understand and discuss the financial status of your business as you deal with accountants and the government.
More importantly, if you are doing the bookkeeping for your business by yourself, it is even more essential to know the basic terminologies in accounting as it applies to businesses, in order for you to more easily and competently understand and prepare tax returns and financial reports, as well as communicate the financial position of your business to others.
Thus, we will discuss ten of the most basic accounting terms that you should know.
These are items owned by your business that can provide future benefit. These can either be tangible assets like vehicle, inventory, machines or intangible assets like patent and trademark.
The liabilities of your business comprise your financial obligation from transactions made in the name of your business. This liability has a monetary value, which your business should pay at a future time.
This is the portion of the total assets that you own which is the difference between all your assets and all your liabilities, or assets minus liabilities.
4. Balance Sheet
Your company’s balance sheet is the statement that represents your financial status, shown in terms of assets and liabilities and the company’s ownership equity. The balance sheet reflects a specific time period. Being limited to a particular point in time, it is usually called a “snapshot” of your business’ financial status.
The revenue of your business is the income you received from your business activities. This include the sales of your products or the services you rendered, regardless if payment has been made.
6. Cost of Sales
These are direct costs required to produce the product or service that you are selling such as raw materials and labor.
7. Operating Expenses
These are expenses you incur to run your business on a daily basis like utilities, salaries and wages and office rental.
8. Net Income
This is also called net profit, bottom line, or earnings. The net income of a business is the remaining amount when all your costs and expenses have already been deducted from your gross earnings.
9. Income Statement
This is also known as your profit & loss statement. It is the summary of your business’ profits and losses for a specified time period. In an income statement, all the revenues you earned for that specific time period as well as all your costs and operating expenses for that same period are reflected.
10. Cash Flow
This tells you how much cash you have on hand by summarizing the movement of all the cash that came in (inflow) and came out (outflow) of the business over a period of time.