As a small business owner, it’s important to have a basic understanding of accounting terms and concepts. Knowing these terms can help you make informed decisions and better understand your business’s financial performance. Here are some of the most common accounting definitions that every small business owner should know:
ASSETS are anything that your business owns and has value, such as cash, inventory, property, and equipment. These items can be used to generate income and are essential to the operation of your business.
LIABILITIES are what your business owes to others, such as loans, accounts payable, and taxes. These are debts that must be repaid over time.
EQUITY represents the ownership interest in your business. It’s the residual interest in your business assets after you deduct your liabilities.
REVENUE is the money that your business earns from selling products or providing services. It’s the top line of your income statement and is calculated by multiplying the price of your products or services by the quantity sold.
EXPENSES are the costs that your business incurs to operate, such as rent, utilities, salaries, and materials. These are deducted from revenue to calculate your profit or loss.
PROFIT & LOSS (P&L) is also known as the income statement, this financial statement shows your revenue, expenses, and net income (or loss) over a specific period of time.
CASH FLOW is the movement of money in and out of your business. It’s important to keep track of your cash flow to ensure that you have enough money to cover your expenses and investments.
BALANCE SHEET is a financial statement that shows the assets, liabilities, and equity of your business at a specific point in time. It provides a snapshot of your business’s financial position.
DEPRECIATION is the gradual decrease in the value of an asset over time. It’s important to account for depreciation when calculating your business’s profits and losses.
RETURN ON INVESTMENT (ROI) is a measure of the profitability of your business’s investments. It’s calculated by dividing the net profit by the cost of the investment.
Having a basic understanding of accounting terms and concepts can help small business owners make informed financial decisions. These definitions can serve as a starting point for further learning about accounting principles and practices. By mastering these terms, small business owners can take control of their finances and position their businesses for success.
We can help with getting your bookkeeping caught up so that you can create meaningful financial reports. Contact us to learn more about our bookkeeping packages.