Understanding key accounting terms is essential for managing your business finances effectively. Whether you’re handling your own bookkeeping or working with an accountant, knowing these terms will help you make informed financial decisions and keep your business on track.
1. Accounting
The process of recording, summarizing, and reporting financial transactions to provide a clear picture of a business’s financial health.
2. Accounts Payable (AP)
The total amount of money a business owes to suppliers or vendors for goods and services received but not yet paid for.
3. Accounts Receivable (AR)
The amount of money owed to a business by its customers for products or services that have been provided but not yet paid for.
4. Accrued Expenses
Expenses that a business has incurred but has not yet paid, such as wages or utility bills at the end of an accounting period.
5. Assets
Everything a business owns that has value, including cash, property, inventory, and equipment. Assets can be classified as current (short-term) or fixed (long-term).
6. Balance Sheet
A financial statement that provides a snapshot of a business’s financial position at a specific point in time, showing assets, liabilities, and owner’s equity.
7. Capital
Funds and assets invested in a business by its owners or shareholders to support operations and growth.
8. Cash Flow
The movement of money in and out of a business. Positive cash flow means more money is coming in than going out, while negative cash flow can indicate financial trouble.
9. Cost of Goods Sold (COGS)
The direct costs associated with producing goods or services, including raw materials, labor, and manufacturing expenses.
10. Credit
An accounting entry that increases liabilities or revenue and decreases assets or expenses. For example, when a business borrows money, it is recorded as a credit in the books.
11. Debit
An accounting entry that increases assets or expenses and decreases liabilities or revenue. For example, when a business makes a purchase, it is recorded as a debit.
12. Depreciation
The reduction in the value of a fixed asset over time due to wear and tear. Businesses use depreciation to allocate the cost of assets like equipment or vehicles over their useful life.
13. Equity
The portion of a business owned by its shareholders or owners after deducting liabilities from assets. In other words, Equity = Assets – Liabilities.
14. Expenses
The costs a business incurs to operate, including rent, payroll, utilities, and marketing expenses. Expenses are subtracted from revenue to determine profit.
15. Gross Profit
Revenue minus the cost of goods sold (COGS). Gross profit represents the money left over after covering the direct costs of producing goods or services.
16. Liabilities
The debts and obligations a business owes to others, including loans, accounts payable, and accrued expenses. Liabilities can be short-term or long-term.
17. Net Income
Also known as profit, this is the amount of money a business has left after deducting all expenses from total revenue. Net Income = Revenue – Expenses.
18. Revenue
The total income generated by a business from selling goods or services before expenses are deducted.
19. Trial Balance
A bookkeeping report that lists all account balances at the end of an accounting period to ensure that total debits and credits are equal.
20. Variable Costs
Expenses that fluctuate based on business activity, such as raw materials, shipping fees, and sales commissions. These costs increase as production or sales volume rises.
Final Thoughts
Knowing these essential accounting terms will help you better understand your business’s financial statements, communicate effectively with your accountant, and make strategic decisions. By staying financially informed, you can improve cash flow management, maximize profits, and ensure long-term success.
