As a small business owner, there are many accounting terms you need to learn. Even if you have an accountant handling most of your finances, it’s still a good idea to grasp financial jargon so you can discuss your small business finances with your bookkeeper. If you do all of your own accounting, learning basic accounting vocabulary that applies to your business helps you understand financial reports, prepare your tax returns, and chat intelligently about your business’s financial position.
Understanding Accounting Vocabulary
Being a small business owner means taking responsibility for every duty in your company. That includes developing a working knowledge of how to keep things operating smoothly and learning the basics of accounting. When you first start your business, you may be struggling financially and might not be able to afford an accounting department, so it is wise to understand some basic accounting terms.
• Net Income – This is sometimes referred to as net profit, bottom line, or earnings, and it refers to what remains after all of the expenses of operating your small business are subtracted from your earnings.
• Income Statement – Also known as a profit and loss statement, this is a summary of your profits and losses during a specified time. It shows all revenues earned and all operating expenses during the same period.
• Depreciation – When you purchase assets for your small business, such as computers and other equipment, they are added to your asset list and reflected on your balance sheet. Depreciation enables you to deduct a portion of the purchase price over the life of the asset.
• General Ledger – This includes every transaction and is organized by your chart of accounts. It allows you to see a history of your accounts quickly.
• Current Assets – Resources in this category include those that you will most likely use within a year, such as accounts receivable, inventory, and cash.
• Non-Current Assets – These types of assets add value to your business over one or more years. Equipment, vehicles, real estate, and computers fall into this category.
• Fiscal Year – This is a period used for preparing financial statements. It can align with the calendar year or be determined by how long it takes to close out your books and provide all of the required financial statements for federal and state tax submittals.
• Trial Balance – Trial balance is an activity that enables you to confirm final figures before producing financial statements. It entails listing credits and debits on a worksheet to assure the accuracy of any current balances.
• Journals – Also referred to as accounts, journals are where you record all of your transactions as they occur before transferring them to official accounting documents, such as the general ledger.
• Forecasting – The process of using your historical financial data to predict future business trends is known in the accounting industry as forecasting. It is typically used by companies to calculate resources for an expected period and often incorporates expenses, sales records, and supply and demand figures.
Developing a substantial knowledge of accounting terms will enable you as a small business owner to navigate the intricacies of the accounting world.
Small Business Finance and Accounting
The finance-savvy small business owner realizes that each aspect of the profession must be viewed in financial terms. That doesn’t mean earning an accounting degree overnight, but learning key accounting terms is helpful. Separating your business and personal finances early on allows you to evaluate clearly the success of your company. By maintaining accurate records and tracking your sales, you’ll begin to collect the insights necessary to make intelligent business decisions. Additionally, your files are what the IRS uses to evaluate your business, so it’s a good practice and legal requirement to track certain basics about your company. These include accounts receivables and payables, cash expenditures, inventory, employees, and revenues and expenses.
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