5 Important Accounting Terms You Should Know as a Business Owner
As a business owner, your knowledge extends beyond the services or products you offer. There are more things you need to learn about. The reason is that some aspects of your business which you outsource require that you have enough knowledge of the processes involved. If you are unaware, many things will slip through the cracks, and land you in a mess. The worst thing that can happen to a business owner is not knowing the business’s essential aspects because they think it is not necessary.
One of the most critical aspects of the business that you should get acquainted with is accounting. It is a no-brainer; this is the money aspect of your business. It requires all your attention and due diligence needs to be done. Maybe figures are not your thing, so you outsource it to a firm or an accountant. You should have, at least, a basic understanding of accounting. This way, you can understand what you are being told, and more importantly, if there is an issue that needs reporting, you will be able to do it using the right words. This makes for good communication between you and your accountant, and with every business-related conversation, proper and understandable communication is critical.
That said, here are five accounting terms that you should have basic knowledge of as a business owner.
1. Financial statement
A financial statement is a report containing every transaction that you have made so far? What did you buy? How much was it bought? Some money came in, what was it for? All of these questions should be answered in your financial statement. This particular document is one of the most important documents you must have while running a business. This is because, without it, you may not know what happened to your money or how it was spent.
Having a financial statement in your hands helps you see if you were spending more than you were making, or it was the other way round. Without a financial statement, you will not know many things about your business’s finances. At the end of the month, or quarterly, banks send a mini statement to their customers; other times, they are requested. This helps the customers get a good idea of their expenditure for that period and how they can move forward with their finances. This document involves cash flow statements, balance sheets, and income statements, simply put, this involves every of the money business involved in the running of the business.
2. Income sheet
This is a document that details the net profit that your business has made for some time. This report is made based on all revenues, without including the expenses. Every money that has been made in profit is recorded here. Without an income sheet, you will not know when you went at a loss. The calculation of your profit helps you know what time you had more profits and what time you did not. This way, if there was something done that increased profits, you know to do it again, and the same goes for if there as a reduction in profit. Your income sheet is like a progress report to see how you are doing and what you can do better.
A liability is debt a business owes. For better understanding, liability means the money owed by the business to its creditors. It is divided into two namely; current liabilities and long-term liabilities. The former being the debts you currently owe and the latter being the debts you have owed for a while.
4. Balance sheet
A balance sheet is like a financial statement, only different in that it contains the reports of two significant headings—Liability and Assets, both of which are equal to equity.
We have already explained liability prior. Assets are the properties owned by your business. The things you can bet on. Like liabilities, this is divided into current assets and long-term assets; the definitions remain the same with liabilities.
In simple terms, equity means this; if all your assets are liquidated and your debts paid, what does your business have left? What is the value of your business if all were sold, and your liabilities dealt with?
Your balance sheet just shows you what you need to do to improve your equity. If there is not much left of your business after liquidation and liabilities payment, you need to get to work.
5. Break-Even Point
You have reached your break-even point when your revenue is equal to your cost of operation. This document shows you if your income is lesser than your expenditure or if they are equal. You need this to know if you will reduce the cost of operation or work hard at increasing revenue. When you reach your break-even point in your business, you are doing good.
When relaying your finances to your accountant, it is in your best interest to be articulate. Money matters require an almost perfect articulation. Knowing these terms, what they mean and how to use them will help you adequately articulate your request or report. Also, you now have a better understanding of what your professional accountant says; no need to request that they explain in “English.”