25 Basic Accounting Terms You Should Know Before Starting A Business

25 Basic Accounting Terms You Should Know Before Starting A Business

25 Basic Accounting Terms You Should Know Before Starting A Business 1000 667 Ryan Holloway

Starting a company doesn’t require a business degree, but it does require an education.

While many people use accounting terms in their day-to-day regardless, not everyone is using the words correctly. Furthermore, there are certain terms we’ve heard people express that they’re intimidated to ask about, fearing that they might look unprofessional. However, as it’s always better to have a strong base than not when it comes to what you know, having an understanding of the terms your peers and accountant might be talking about could come in handy. That’s why we’ve compiled 25 of the most commonly used terms we’ve heard from budding entrepreneurs. Check them out below:

An asset is any resource by a business owned by an economic entity. This can be anything tangible (such as art, stocks, or gold) or intangible (patents, copyrights, and trademarks), that can be converted into cash/produce economic value.

Revenue (also called ‘Income’) is the total amount of money a business brings in by selling goods or services to customers. This is calculated without expenses, purely as the total amount brought in.

Profit is the amount of money brought in after deducting expenses, including wages, materials, transportation, marketing costs, and production overhead.

In accounting, appreciation is defined as the increased value of an asset over time. This is usually the case for assets like stocks, houses, and art.

The opposite of appreciation, depreciation is when the value of an asset decreases over time. Some common examples include machinery, automobiles, and office space.

Balance Sheet
A balance sheet is a financial statement a company uses to report assets, liabilities, and shareholder equity. It provides a basic overview of what a company owns and owes, as well as what’s been invested into it.

Book Value
Book value is the total amount a company would be worth if it sold its assets and paid back all its liabilities. We’ll note that book value uses the original purchase cost adjusted for depreciation, which is different than the market value, which judges what price an asset would be worth on the open market.

A term you’re definitely familiar with, interest is the cost of obtaining a loan, usually expressed as a percentage of the total amount loaned.

An expense is the money spent or cost incurred while trying to generate revenue. As expenses can be tricky to write-off if you don’t know what criteria the IRS has set, it’s best to have an expert run through the proper expenses for your business.

Fixed Cost
A fixed cost is a cost that doesn’t change with an increase or decrease in goods or services sold. Some common examples include rent, wages, or interest expenses.

Payroll is the process of paying your employees. This includes filing and tracking hours, as well as how much is withheld from each paycheck. Payroll can also help with summarizing cashflow for labor.

Net Income
Net income is similar to profit (and in some cases, interchangeable), however, is defined as ‘the bottom line’. Essentially, this is how much was made even after paying taxes and revenues.

Cash Flow
Cash flow is the amount of cash or cash-equivalent being transferred in and out of a business. The difference between cash flow and revenue is that cash flow only deals with cash, while revenue can host a number of different methods for income.

…having an understanding of the terms your peers and accountant might be talking about could come in handy.

A credit is an entry that increases the equity, liability, or revenue of an account and decreases asset or expense accounts. In other words, it’s money coming in.

A debit is an entry that decreases the equity, liability, or revenue of an account and increases asset or expense accounts. In other words, it’s money going out.

Liquidity refers to how quickly can an asset be converted into cash. For example, a bar of gold is easy to liquidate since it could be sold around the world quickly, while a house is not.

Return on Investment (ROI)
The biggest reason why most spend money at all, the return on investment is a financial metric used to measure how probable getting a return on something is, including analyzing the gains and losses.

Accounts Receivable
Accounts receivable is money owed to a company by its debtors. In other words, it’s the invoice you’ve sent out that are unpaid.

Accounts Payable
Accounts payable is money owed by a company to its debtors. In other words, it’s the invoice they’ve sent you that’s unpaid.

CPA (Certified Public Accountant)
A CPA is a Certified Public Accountant, or someone actually qualified to handle your taxes. State laws can vary on the legality of using the title ‘accountant’ without having passed the CPA exam, which is a good thing since it avoids fraudulent actors from stealing your money.

Profit and Loss Statement
The profit and loss statement shows the revenues, costs, and expenses incurred during a specified period. Similar to the income statement, the P&L is helpful for generating more profit, revenue, or reducing costs, as well as checking on the health of your company.

A 401k is a retirement account with big tax advantages if you keep your money in for several years. Usually an employer-sponsored program, 401ks can help quite a bit with saving money.

Roth IRA
Another retirement plan is the Roth IRA, which offers tax-free growth and withdrawal. As long as you’ve owned the account for more than five years and are 59.5 and older, you’re completely free to take your money out.

General Ledger
The general ledger summarizes all the financial information on your business. Usually kept it spreadsheets, this is a great tool for keeping track of the big picture.

Finally is losses, which although a term you’re probably familiar with, is essentially an unrecoverable or unanticipated decrease in resources or assets outside of normal business operations. Losses are a wonderful tool for accountants, helping reduce tax liability based on the risks you previously took.

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