Business success involves having lot of business know-how at the very beginning of your business (though you’ll learn a lot on the job!). Why not check out some accounting terms you should know? While business accounting terms may not seem like they should be the first item on the “to learn” checklist when you start a business, it can help you connect many financial dots from the get-go.
Whether you have an accountant or do your own accounting, here are some key accounting terms to know.
38 Key Accounting Terms Every Business Owner Should Know
We’ve compiled a list of 38 of the best accounting terms you need to know to be a pro in your field.
- Accounting: The accounting term involves reporting financial transactions and records for a business entity. For example, a small business may use accounting principles to maintain balance sheets and income or cash flow statements.
- Cash Flow: Cash flow refers to the money that flows in and out of your business. A positive cash flow in a company means more cash comes into the business than from it. On the flip side, a negative cash flow means more money flowed out of the business than what came in.
- Cash Flow Forecast: A cash flow forecast estimates future sales and expenses. This refers to cash coming and out of a company, predicting future cash balances for the company. A cash flow forecast helps determine whether you’ll have enough cash to expand a business or cut back.
- Balance Sheet: Balance sheets, one of the most important accounting terms, show how much your business has in cash and assets. A balance sheet also shows how much debt and equity you have in your industry. For example, a company owner may create a balance sheet in Excel to keep track of the company’s health.
- Capital: Capital refers to financial assets held that contribute to the growth and financial security of the company. For example, it can include a company’s working capital, debt capital from taking out loans, equity capital (such as investing in stocks), and trading capital for purchasing and selling assets. Capital can include machinery, patents, stock, real estate, and more.
- Certified Public Accountant: A certified public accountant (CPA) handles business taxes and accounting. CPAs are licensed through the board in each state to encourage professionals to meet certain standards in the industry. Businesses hire CPAs to help businesses reach their financial goals.
- Accounts Payable: Accounts payable recorded on the balance sheet as a “current liability account,” is the money a company owes a supplier, contractor, and other creditors. For example, accounts payable may include the cleaning staff a company pays to maintain its premises.
- Accounts Receivable: Accounts receivable (another one of the most important accounting terminologies) include the funds customers owe your company for invoiced products or services, pending payments. For example, a graphic design company invoices a client for graphic design services which has not yet been paid.
- Accrued Expense: An accrued expense is an expense that has occurred but has not yet been recorded in the company’s ledger. An example of costs accrued might include utility expenses.
- Liability: A liability refers to money the business owes or debts your company has, such as bank loans. If your company has agreed to repay a mortgage loan but hasn’t yet finished paying the loan, it’s a liability.
- Expense: Expenses are the costs of running a business and the costs a company incurs to generate revenue. Business expenses include payroll, rent, utilities, insurance, equipment, and software.
- Revenue: Revenue refers to the total amount of money a business earns or the value of all goods and services a company generates. For example, if a company produces a certain amount of sales, that qualifies as revenue.
- Gross Profit: Gross profit, or gross income, means company revenue minus the cost of goods sold. A company can use a simple formula to summarize gross profit: Revenue – Cost of Goods Sold.
- Gross Margin: Gross margin, one of the accounting basic terms, is the amount of money a company has left over after subtracting the cost of goods sold from the company’s net sales. A company can use it to assess how efficiently it generates profit based on its sales and services.
- Net Income: Net income references gross income minus costs and expenses, such as taxes and other deductions. A business can calculate it by using the total amount of money earned and subtracting expenses, including interest payments and taxes.
- Net Margin: Net margin, or net profit margin, measures net income or profit generated as a percentage of revenue. A company can measure the remaining earnings percentage once deducting all operating and non-operating expenses from revenue generated through the year.
- Cost of Goods Sold: Cost of goods sold (COGS) is the wholesale price of items or the direct costs needed to produce a product for sale. For example, a company may total up the total costs to create a product that the company has sold.
- Depreciation: Depreciation is an accounting method that refers to the reduced value of a tangible or physical asset over its life due to wear and tear. Your company may depreciate vehicles, and office equipment like computers and projectors. It allows companies to deduct the “used up” portion of an asset through taxes.
- Credit: A credit indicates incoming money, or money coming into an account. A business would record a credit as a positive number to reflect money that comes into the account. When money comes in, an accountant for a business may abbreviate it as “cr.” for “credit.”
- Debit: A debit is the opposite of credit — it is outgoing money. An accountant may use the abbreviation “dr.” When money flows out of the business, an accountant will abbreviate it to “dr.”
- Fixed Cost: A company’s fixed costs refer to recurring costs that a company incurs, such as lease payments, insurance, property taxes, and other costs. A company can total up all costs that don’t change, such as rent, salaries, and additional charges.
- Variable Cost: A variable cost changes depending on how much a company produces or sells. A company may total variable costs like raw materials, labor, commissions, and credit card fees.
- Marginal Costs: Marginal costs are the costs associated with producing an additional unit of output. They are usually expressed as the cost per unit of output. A company can use the following formula to calculate marginal cost: Change in Total Expenses / Change in Quantity of Units Produced.
- Break-Even Analysis: A break-even analysis is a way a business calculates the costs of a new business, service, or product to determine when it will break even. It shows a business when it will sell enough to cover its costs.
- Burn Rate: The burn rate shows how an unprofitable company consumes its cash reserves. A company might measure its burn rate by showing the speed it goes through its money.
- Income Sheet: An income sheet, a key financial document for a business, details a company’s income and expenses over a specific accounting period. A company can use it to summarize revenue minus expenses and losses.
- General Ledger: A general ledger is an account or record. A business uses it to sort, store, and summarize a company’s transactions.
- Receipt: Receipts are official records representing proof of a financial transaction or purchase. A business uses receipts to keep track of various costs.
- Business/Legal Entity: A business/legal entity is a business organization of any company or organization that has legal rights and responsibilities, including tax filings.
- Accrual Accounting: Accrued revenue occurs when a company has delivered a good or provided a service. However, it has yet to receive payment. For example, a company may record a widget sale as revenue when the goods get shipped off to the customer prior to the customer actually paying for it.
- Financial Statement: Financial statements are written records that show the business activities and financial performance of a business. A company can summarize all of its financial activities through a financial statement.
- Generally Accepted Accounting Principles (GAAP): Generally Accepted Accounting Principles (GAAP) refers to rules that standardize accounting rules and financial statements. The U.S. Securities and Exchange Commission (SEC) has adopted these well-followed financial reporting standards.
- Liquidity: Accounting liquidity measures how easily a business can meet its financial obligations with the liquid assets available to it. For example, a company may determine its liquidity in order to pay for a short-term liability.
- Interest: When you take on a debt, you also pay interest to your lender as the fee to borrow money. Interest is usually expressed as a percentage, such as an annual percentage rate (APR).
- Material: Material refers to the raw inventory from which finished goods are made. For example, a business may use raw materials — anything used during the production process qualifies as a material.
- Overhead: Overhead which can’t escape accounting glossaries, includes the costs to run the business on a day-to-day basis. A business can count overhead as costs like rent, utilities, fees, and payroll.
- Payroll: Payroll simply means that you pay the company’s employees, including tracking hours, calculating pay and taxes, and other items related to employees’ pay.
- Equity: Equity, one of the most basic accounting terminologies, is the net amount of funds an owner invests in a business, plus any retained earnings. Equity equals total assets minus total liabilities — a business owner can determine the value of its business after subtracting what it owes.
Know Your Terms
Now that you know basic terms of accounting, consider using these accounting terms to know throughout your business journey. They offer valuable insight into the trajectory of your business. The best accounting software in 2023 can help you keep track of every aspect of your business. Learn more about accounting with Sifter.
