Often, one of the trickiest parts of starting a new business is wrapping your head around the financials. Knowing the difference between your capital and a capital cost could be the difference between one or five visits to your accountant or financial advisor, especially during the EOFY period.
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Financial accounting glossary for business owners
Accrual accounting
A system of accounting that records transactions when they happen regardless of when they are paid. For example, a sale made on December 31 but paid on February 2 will be recorded in the accounts as happening on December 31.
Assets
Things your business owns that can generate cash or be converted into cash. Common assets include property, vehicles, inventory and equipment (and cash itself, of course).
Audit
A check performed by an auditor or tax official on the financial records of a business to make sure everything has been accounted for correctly. You can also audit your own business accounts.
Balance sheet
A balance sheet is a snapshot of a business’s financial position at a particular date (usually the end of a financial year) that lists all of a business’s assets and liabilities.
Bookkeeping
The recording of a business’s financial transactions, and a part of the accounting process. Double entry bookkeeping is the method most commonly used.
Capital
The business’s wealth in the form of cash or assets it owns.
Capital cost
A fixed, one-off substantial purchase of physical items such as plant, equipment, building, or land.
Cash accounting
A system of accounting that records transactions when the cash is received for them, rather than at the time they happen. For example, a sale made on December 31 and paid by the customer on February 2 is recorded as happening on February 2.
Cash flow
The measure of actual cash flowing in and out of a business. A business’s cash flow over a period can also be viewed on its cash flow statement.
Credit
A term used when a customer purchases goods or services with an agreement to pay at a later date – for instance, an account with a supplier, a credit card, or a loan.
Credit is also a term used in double entry bookkeeping to record one side of a transaction in the accounts (debit is the other side – hence ‘double entry’).
Debt
An amount owed by a person or business – for example, unpaid bills and loan repayments. Bad debt is money owed to a business that is unlikely to be paid in the foreseeable future.
Equity
The value of ownership interest in the business, calculated by deducting liabilities from assets. Also known as net assets, net worth, owner’s equity, or shareholders’ equity.
Financial year
A 12-month period over which a business operates, typically from July 1 to June 30.
Income statement
A financial statement listing sales and expenses which is used to show the profit and performance of a business over a period. Also known as a profit and loss statement.
Inventory
The actual goods or materials a business currently has on hand, either for selling or for producing sellable goods. Also known as stock.
Liability
A financial obligation (such as a loan), or amount owed (such as an unpaid bill or credit from a supplier).
Margin
The difference between the selling price of goods or services and the profit. Generally, the margin is worked out as a percentage showing the proportion of profit for each sales dollar.
Petty cash
Cash kept on hand for the purposes of small miscellaneous purchases, like office supplies.
Profit
The revenue a business earns minus the expenses or costs. If this figure is negative, it is called a loss.
Revenue
Different from profit, revenue is the amount earned (usually from a business’s sales) before expenses, tax, and other deductions are taken out. Also known as turnover or gross income.
Working capital
This is the cash a business has available for its day-to-day expenses.
If you need help understanding even more accounting lingo, find a ProAdvisor near you.
Check out more articles related to small business accounting here.
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