As a small business owner, the idea of learning accounting lingo can be intimidating. You may not know many terms used in accounting. To better understand your business’s finances, you may want to review a few basic accounting terms. To help you get started, below are explanations of common accounting terms.
Common accounting terms
Review your accounting terminology and definitions to test your accounting knowledge. You can better manage your books by having a better grasp on your accounting terms.
Accounts receivable is money owed to your business from providing goods and services to customers.
Assets are resources or items of value you own. Some examples of assets include cash, land, supplies, or inventory.
Assets can be fixed or current. You can turn current assets into cash within a year. However, you can’t convert fixed assets into cash within one year. Fixed assets are long-term assets that bring continual value to your business, like buildings or land.
Assets can also be considered tangible and intangible. Tangible assets are physical assets, like cars and property. Intangible assets include things you can’t touch, like trademarks and patents.
Balance sheets provide a snapshot of your business’s financial health. A business balance sheet includes your business’s assets, liabilities, and equity on a given date. On a balance sheet, your assets must equal your liabilities and equity.
Cash flow is the money flowing in and out of your business. A positive flow shows more money coming in than going out. A negative cash flow indicates more money going out than coming in.
Record your cash flow on cash flow statements. Cash flow statements are one of the primary financial statements for your business.
Chart of accounts
Your business’s chart of accounts is used to record financial transactions. Your chart of accounts is a helpful tool to identify the best account to record a transaction.
Cost of goods sold
The cost of goods sold (COGS) includes the direct costs (e.g., labor and materials) used to create your products or services.
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A credit is a journal entry made on the right side of an account. It either increases an equity, liability, or revenue account, or decreases an asset or expense account.
A debit is another journal entry made on the left side of an account. It either increases an asset or expense account, or decreases an equity, liability, or revenue account.
Equity represents the value of company ownership. Equity in a business is the difference between your assets and liabilities. Examples of equity include retained earnings and common stock.
A general ledger for small business contains a company’s complete financial records. It is where you record credit and debit transactions. Information from a general ledger can be used to create financial reports.
An income statement, also called a profit and loss statement, is another key financial statement which reports a business’s profitability during a period. An income statement can show periods such as a year, month, or a few weeks. Income statements list out your expenses and income and show whether you have a net profit or net loss.
An invoice shows how much money is owed for goods or services. A seller issues an invoice to a buyer to request payment. Invoices can include items purchased, prices, and buyer and seller information. As a small business owner, you can create invoices for customers you extend credit to. You can also receive invoices when you purchase things on credit.
A journal entry records transactions. It contains the account to be debited, the account to be credited, and the date the transaction occurs. When you create a journal entry, your debits and credits must be equal.
Liabilities include the money your business owes to others. Report liabilities on your business’s balance sheet. The more debt your business has, the more your liabilities increase. Liabilities are assets minus your equity. Common examples of liabilities are bonds payable, wages payable, and loans payable.
Reconciliation is the process of balancing an account to prove your debits and credits are equal. An example of reconciling is verifying that your checkbook balance matches your bank statement.
As a small business owner, you need an easy way to record your incoming and outgoing money. You can complete your books in a few simple steps with Patriot’s online accounting software. Try it for free today!
This article has been updated from its original publication date of November 27, 2018.
This is not intended as legal advice; for more information, please click here.