No matter what size your business, understanding the basics of accounting is incredibly useful.
Accounting is simply the process of recording, analyzing, and interpreting a business’s financial information. It's used to keep track of financial operations, meet obligations, and make better business decisions. It is a necessary part of running a business and has a unique set of terminology you should know. These are the ones on which you can build your knowledge of business accounting.
- Accounts receivable are funds people owe you for goods and services and are considered assets on your balance sheet.
- Accounts payable is money you owe other people or businesses and is considered a liability on your balance sheet.
- Accruals are credits and debts a company has recorded but not yet fulfilled.
- Assets are everything a company owns, both tangible and intangible, including cash, property, trademarks, copyrights, and so on.
- Burn rate is a critical component when calculating and managing cash flow and indicates how quickly a business spends money.
- Capital is the money a company has available to invest or spend on growing its business. It's often referred to as working capital and does not include assets or liabilities.
- Cost of goods sold or cost of sales is the cost of producing a product or service, it is the first expense seen on a P&L statement.
- Depreciation refers to the decrease in the value of a company's assets over time.
- Equity is the amount of money that owners invest in a business. It may also be called owners equity and can include non-monetary items of value such as time, energy, and other resources. It can also define the difference between what a company owns and what it owes.
- Expenses are any purchases a company makes in an effort to generate revenue. There are four categories of expenses including fixed, variable, accrued, and operating, and they are also referred to as the “cost of doing business.”
- A fiscal year is the time period a company uses for its accounting method. It does not always coincide with the calendar year.
- GAAP stands for Generally Accepted Accounting Principles and refers to the widely accepted guidelines for accounting and financial reporting. Many investors and lenders rely on GAAP-compliant reporting when making decisions.
- Liabilities are everything a company owes in the long and short term, including credit card balances, taxes, payrolls, and/or loans.
- Profit, also known as a company's bottom line, is the difference between its income, cost of goods sold, and expenses.
- Revenue is the amount of money a business collects in exchange for the goods or services it provides before expenses are taken out.