You may have been drawn to create your business out of a desire to build something or out of a drive to meet a need that you see in your community. While starting a business requires a fair amount of accounting skills, not every entrepreneur comes to work every day with the background or training to understand the accounting terms that apply to their business. But all small business owners should be familiar with the following terms:
Cost of Goods Sold: This is the cost of producing your product or service. You can’t determine your profit margin without knowing the COGS, and it’s always the first expense listed on a profit and loss statement.
Profit: When you start with your income and subtract the cost of goods sold and your business’s operating expenses, the resulting number is your profit. Don’t confuse your profit with the amount of money you have in the bank — they’re not the same thing.
Balance Sheet: This is a document that shows your company’s assets, liabilities, and equity as of a given moment in time. You should be able to tell how much your company is worth by looking at the balance sheet and subtracting your liabilities from your assets.
Accounts Receivable: When one of your customers owes you money (in other words, you’ve invoiced them and delivered the goods, but they haven’t paid yet), the money they owe you is listed as accounts receivable. Accounts receivable count as assets on that balance sheet.
Accounts Payable: Not surprisingly, this accounting term refers to the opposite of accounts receivable. Your accounts payable are the bills you’ve received from suppliers and vendors that you haven’t paid yet, and they count as liabilities on your balance sheet.
Understanding the basics of accounting is necessary knowledge when you own a small business. When you opt for easy-to-use accounting software like QuickBooks, you put yourself in an even better position to handle your company’s finances.