Accounting Terms Every Business Owner Needs To Know

As a small business owner, you wear many hats and take on many different responsibilities. In order to run a profitable business, you must first understand the jargon used to evaluate the financial status of your company. Below are terms that every business should know and be familiar with.

Accounts Payable

Accounts payable (AP) is money owed by a business to its suppliers (unpaid bills). AP is shown as a current liability on a company's balance sheet.

Accounts Receivable

Accounts receivable (AR) includes money owed by customers to a company or individual as payment for goods and/or services. It is considered an asset on a company’s balance sheet, because there is an understanding that the clients are legally obligated to pay this amount.

Accrual Basis Accounting

The Accrual Basis Accounting method records revenues and expenses when they are incurred, regardless of when cash is exchanged. There are rules that dictate when income is and isn’t recognized for the reporting period, as well as best practices for dealing with bad debt expenses.

*See Cash Basis Accounting Below

Assets

Assets are everything that a company owns. In most cases, accounting assets are tangible assets, such as equipment, property, land, cash and tools. But intangible assets, such as stock, copyrights, patents and trademarks, can also fall under this category.

Balance Sheet

A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time. This financial statement provides a snapshot of what a company owns and owes, as well as the amount invested by owners.

Cash Basis Accounting

Cash Basis Accounting is a method of recording accounting transactions for revenue and expenses only when the corresponding cash is received or payments are made. Thus, you record revenue only when a customer pays for a billed product or service, and you record expenses only when it is paid by the company.

Chart of Accounts

A listing of the accounts available in the accounting system in which to record entries. The chart of accounts consists of balance sheet accounts (assets, liabilities, stockholders' equity) and income statement accounts (revenues, expenses, gains, losses). The chart of accounts can be expanded and tailored to reflect the operations of the company.

Dividends

Dividends are company earnings that are distributed on a regular basis to company shareholders. Dividend amounts or percentages are typically decided by a corporation’s board of directors and can be issued as cash, shares of stock or other property.

Double Entry Bookkeeping

The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

Equity

Equity is the amount of money that has been invested in the company by its owners. If the company is small with only a handful of owners, this can also be referred to as “owner’s equity.” If the company has many different owners, or if the company’s ownership has been parsed out via stock options, equity can also refer to ownership collectively held by shareholders.

Expenses

An expense in accounting is the money spent, or costs incurred, by a business. Essentially, expenses represent the cost of doing business.

Fiscal Year

A fiscal year is the twelve-month period over which an entity reports on the activities that appear in its annual financial statements. This period does not have to correspond to the calendar year. For example, a fiscal year might span the period from May 1 to April 30 of the following year. The span chosen usually corresponds to the natural business cycle of an entity.

Gross Profit

Gross profit is the profit a business makes after subtracting the direct costs that are related to manufacturing and selling its products or services. You can calculate gross profit by deducting the cost of goods sold (COGS) from your total sales. Most industries have standards or averages for this category (i.e. restaurants typically have a gross profit margin of approximately 70%).

Liabilities

Liabilities are debts that a company is responsible to pay in the short or long term.

Net Profit

Net profit is the company's profit (or loss) after operating costs, taxes, interest and depreciation have been deducted from total revenues. This term is often referred to as a company's "bottom line" and may also be described as "net earnings" or "net income".

Profit and Loss Statement

Commonly referred to as “P&L,” a profit and loss statement is a report generated by the company or its accountant that lists revenues, expenses and net profits for a given period of time.

Revenue

Revenue is the total amount of money collected for goods or services sold before any expenses are subtracted. It also includes any credits or discounts for returned merchandise.