Every new business owner needs to quickly familiarise themselves with key accounting terms to ensure they stay on top of their finances. Even without any financial background, business owners are expected to understand core principles, including cash flow, accounts receivables and liabilities. Here are 14 key accounting terms every business owner should memorise.
Key accounting terms
Accounts receivable: This is the money currently owed to your business by customers or clients. Because it’s money you can expect to receive, it’s listed as an asset on your balance sheet.
Accruals: Expenses that you have been invoiced for but are yet to pay, and sales that you have fulfilled but have not yet received payment for are called accruals.
Assets: These are all the things your company owns. Assets can be fixed or current; current assets are those that can be converted to cash within one year such as inventory or accounts receivable, while fixed assets are purchased to provide a long-term benefit to the company, such as factory equipment or property. Assets can also be intangible, for example, copyrights or trademarks.
Audit: The Australian Tax Office (ATO) may carry out an official review of the accuracy of your financial reporting, which is known as an audit. You can also conduct an internal audit to better understand the financial health of your business.
Balance sheet: The balance sheet summarises what your business owns (its assets), what it owes (its liabilities), and owner or shareholder equity to give an overall view of your current financial standing.
Capital: This can refer to financial assets, such as cash, or the value of a financial asset, such as inventory. Working capital is your current liabilities subtracted from your current assets to show the capital your business has readily available.
Cash flow: This is the amount of cash expected to flow into your business from sales and the resulting expenses over a given period. A cash flow statement compares the two to give a clearer view of your ability to pay creditors and stay profitable.
COGS: This stands for cost of goods sold. It’s a measure of how much it costs you to make or buy your products. Subtract your COGS from the sale price to determine your gross profit margin.
Depreciation: Depreciation is an accounting method for recording the cost of business equipment or expenses. Rather than deducting the total cost of an asset as you purchase it – which could create an artificial loss for that financial year – depreciation allows to record the expense in increments based on the depreciation method you choose.
Expenses: These are the costs associated with running your business and tend to be categorised as either fixed, variable, accrued, or operational expenses.
General ledger: Think of this as your business’s accounting master file. It is a complete record of all your company’s financial transactions.
Gross profit margin: This is the difference between how much it costs to produce your goods or services and the price you sell them for. It’s vital to understanding your business’s profitability.
Liabilities: These are the debts or expenses incurred during business operations that you’re expected to pay in the short or long term. A current liability is one you’ll pay within the year, while a long-term liability might involve regular payments over a given period.
Profit and loss statement: This is a financial report that lists your earnings, expenses, and net profits over a specified period.
Revenue: Also known as turnover or gross profit, this is simply the total amount of money you receive for selling your goods or services.