Accounting Terms Business Owners need to know

Accounting terms can sound like jargon to most people! As a small business owner, it is important to have a base understanding of key accounting terms, so that you can be confident in the language around your business’s finances.

We have rounded up and simplified a list of the most common accounting terms we think you should know below. An accountant (a trained professional who records, analyses and works with businesses to understand finances) will often use these terms in meetings with clients. Save this post and impress your accountant next time you see them!

 

Let’s first talk about the Accounting Equation. It’s the absolute foundation of all accounting.

ASSETS – LIABILITIES = EQUITY – both sides must balance out otherwise there has been a mistake in your accounting. Pretty simple concept? In theory, yes…

Here’s our round up of key terms:

 

ASSETS: are anything that your business owns. (Examples include machinery, property or cash)

BOOKKEEPING: is the process of recording financial transactions properly for your business

CAPITAL: is the financial assets your business owns

ACCOUNTS PAYABLE: are expenses you haven’t paid yet, such as something purchased with credit

ACCOUNTS RECEVIEABLE: are services or products you have provided, but haven’t been paid for yet

ACCRUED EXPENSES: are expenses that have been factored into your accounts, but haven’t been paid yet such as salaries or future purchases

CASH FLOW: is cash that comes in and out of your business. Find out more about the importance of positive cashflow here.

COST OF GOODS SOLD: refers to the costs involved in providing your product and service (for example, buying the stock and staff)

DEBITS: increase assets or expenses decrease liabilities

DEPRECIATION: is the loss of value in an asset whilst it’s been in use, for example cars.

EQUITY: is a business’s worth or value of the owners investment in the business.

EXPENSES: are the costs to run your business. Expenses are categorised into fixed, variable, accrued and operating.

GROSS PROFIT: is your income from sales, minus cost of goods sold.

NET INCOME: is the bottom line of the business, once all cashflows have been considered.

INVOICE: is a list of goods or services provided, with a statement of the sum due for these which are given to clients.

LIABILITIES: are debts owned by the business

LIQUIDATION: is dissolving a business and selling off assets to create cash which pays off debt.

PAYROLL: is a list of your employees, and how much their salary or hourly wage is. It is the entire process of recording information through to paying your employees.

RETURN ON INVESTMENT: is how much you make or lose on an investment after your initial input.

REVENUE: is profit earned by your company.

TAX: is payable by most individuals and companies, to the HMRC and is a compulsory contribution based on income or business profit.

TAX DEDUCTIONS: are expenses individuals and business have that can be deducted from their tax bill. Common expenses include mileage, uniform, stationary and energy bills).

 

This list is NOT exhaustive, but we hope it’s made some of the most common accounting terms a little easier to understand 😊

 

Need help from an accountant? Soldi Partners are currently taking on new clients. Click here to get in touch.

Kindest,

Theresa

 

 

 

 

 

 

 

Button
Understanding Cashflow

Understanding Cashflow

Cash flow is simply the cash that flows in and out of a business. Any cash received is an inflow, and money spent are outflows. Companies can value their business performance based on how much positive cashflow they have, which maximises the free cash flow (cash left after money spent).

A business has inflows of cash from sales, and spends on expenses such as supplies, wages, tax and rent. Positive cashflow after expenses have been paid indicates a company is performing well and is financially flexible, meaning they can invest money into other areas to continue growth, return money to shareholders and ensure future financial protection for the business.

Cash flow is analysed using a cashflow statement. Senior financial officers or accountants will use this to understand how well a business is managing their outflows vs the inflow, and to forecast performance for investors or growth projects.

It is important not to confuse cash flow and profit- cashflow represents a real time analysis whereas profit indicated how much money a company makes overall after expenses are deducted (on record).

How can Soldi Partners help?
Our fully qualified team work closely with businesses, carrying out bookkeeping duties and managing and forecasting cashflow. With an expert eye, and experience in keeping healthy cashflow, we can take on the bookkeeping burden and grant you more time to grow your business.

Want a free copy of a cash flow statement? Download one here.

Want us to discuss any particular topics? Let us know!

Kindest,
Theresa

Button