Owning a business these days requires a lot of effort, time, and money. One must manage daily operations in addition to keeping up with the competition, new innovations like technological advancements that upend the status quo, and a deluge of information coming at you from all directions.

Additionally, you are required to manage your sales, marketing, and accounting while being a subject-matter expert in your industry. It’s still a good idea for you to be familiar with the fundamentals of accounting even though you can hire an accountant to handle the financial aspect of your business.

In this blog, we go over 25 fundamental accounting terminology that owners of small-sized businesses should understand to enhance their chances of success.

Accounting

Accounting ensures a company’s financial stability by maintaining records. Accountants assist in organizing and documenting all financial activities in businesses. Accountants routinely research and evaluate a company’s financial information to create financial statements while focusing on the big picture. Additionally, they perform audits and project forthcoming business requirements (to check for any irregularities).

Credit

This has two simultaneous interpretations. In double-entry accounting, a credit records money that is spent, including increases in income and equity as well as decreases in assets and liabilities. Credit is a term that is occasionally used to describe borrowed funds. An example of a type of credit is a mortgage or a line of credit.

Debit

An accounting entry known as a debit, which is the opposite of a credit entry, records money arriving in the form of growing assets, liabilities, revenue, expense accounts, etc. Debits and credits cancel each other out since they operate in opposition to one another.

Accounts Receivable

Accounts receivable is the term used to describe the amount of money that a business is owed for the products or services it provides but has not yet been paid for by customers (AR). AR is listed as a current asset on the balance sheet. For instance, a phone company bills clients after they have used its services. The business in this instance records an AR for past-due invoices as they wait for clients to pay their payments.

Accounts Payable

Accounts payable comprise all the costs that a business still owes money for (AP). This is the amount of money that a business owes its suppliers for the goods and services that it provided. This debt is recorded as a liability on the balance sheet because it was incurred by the corporation.

Accounting Period

An accounting period is made up of specific accounting duties that are completed on a regular cycle. In accordance with the calendar or the fiscal year, some of these events occur annually, while others also happen over the course of a week, a month, or a quarter. Statements of financial position and cash flow employ accounting periods.

Accounting Software

Accounting software enables all businesses to control their revenue and expenses, send invoices, and generate financial reports. More and more small business owners are embracing the advantages of cloud accounting software. Software as a Service (SaaS) is a kind of accounting where users can obtain accounting software via the internet as opposed to purchasing physical copies of the program.

Audit

An audit, specifically a financial statement audit, is an independent review and assessment of the financial statements of a company to confirm that the financial records correspond to the activities reported. An accounting firm may conduct audits either internally or externally.

Asset

An asset is everything that a company possesses that has a monetary value. Business assets increase a company’s value by assisting with operations and promoting growth. Real land, merchandise, and intangible assets like royalties and patents are examples of tangible assets.

Average Invoice Processing Cost

The average invoice processing cost is nearly equivalent to the average cost of paying suppliers’ invoices. These costs include overhead, technology, bank fees, etc. On average processing costs, outsourcing, and the level of AP automation can both have an impact (technology that can expedite backend processes).

Balance Sheet

A balance sheet, which is a financial statement, lists all of a company’s assets, liabilities, and equity. Balance sheets can be used by individuals or organizations, including sole proprietorships and limited liability firms.

Bookkeeping

Bookkeeping is the daily documentation of a business’s financial transactions. With the help of bookkeepers, businesses may keep track of their daily financial activities, such as invoices, cost spreadsheets, and income. Bookkeepers are essential because they help business owners make critical operational, financial, and investment decisions.

Business Credit Card

An organization-only credit card, not one for personal use, a business credit card is exactly what it sounds like. By providing more options for cash management, business credit cards help SMEs secure short-term funding and assist organizations of all sizes in building credit profiles (increasing future borrowing terms).

Business Credit Score

A company’s business credit score tells you whether or not it can get a loan or conduct business with another company. Businesses don’t only have one score because there are several credit-reporting bureaus (each uses its own methods and systems). A company’s credit commitments and repayment history, any court filings, the number of years the business has been in existence, and other characteristics are used to create credit scores.

Business Plan

A business plan is a document that in-depth defines a company’s objectives and how it truly expects to attain its goals, not just a grandiose ambition (think of it like a roadmap). A company plan covers every aspect, including everyday activities, marketing, and, of course, the financial side. Because of this, it is essential for new businesses, must concentrate on their target market, and it also provides established business owners with a sense of direction.

Business (or Legal) Entity

As a business entity, an organization is classed or given a legal form. A business entity’s tax treatment will depend on how it is set up and run. Corporations, partnerships, limited liability partnerships, and sole proprietorships are just a few of the numerous types of business entities.

Business Loan

A loan is one way to help you finance your business. It is a reasonably easy way to borrow money without having to give up any stock in the company. Business loans are frequently payable once a month. In order to borrow money for your business, you can choose between secured (where you pledge an asset as security in the event that you are unable to repay the loan) and unsecured (where you can do so without pledging any assets as security).

Accrual Accounting

Using the accrual accounting method of financial accounting, a firm can declare revenue even if it hasn’t yet received payment for the goods or services it has sold. To put it simply, regardless of when cash transactions have occurred, money received is duly recorded on the company’s accounting records.

Cash Basis Accounting

The cash basis of accounting requires immediate revenue and expense recording (this differs from accrual accounting which concerns anticipated revenue and expenses). In other words, actual cash is recorded as it is received and is related to income and expenses. This kind of accounting is used by the majority of sole proprietors and very small businesses.

Cash Flow

Cash flow refers to the inflow and outflow of funds inside an organization. When there is a surplus of incoming funds over outgoing expenses, a company has positive cash flow. An organization is losing more money than it is bringing in if its cash flow is negative. Actually, poor cash flow is one of the major reasons why small businesses fail.

Cash Book

All cash transactions are recorded in a cash book, which also functions as a financial log. Prior to posting to the general ledger, the cash receipts and payments associated with the entries are initially recorded in the cash book. The main use of a cash book is to track a company’s cash flow (e.g. card transactions, bank transactions, and day-to-day expenditures).

Cash Flow Statement

A cash flow statement is a type of financial statement that shows how much money and money equivalents came into and went out of a company over a given period of time. The operating, investing, and financing operations of a business make up the three primary parts of a statement of cash flow.

Cash Flow Forecasting

The act of calculating a company’s cash inflow and outflow over a specific time period is known as cash flow forecasting. Accounting software can be used to provide a precise cash flow prediction, assist SMEs to forecast future cash balances, plan for future cash flow gaps (to prevent any shortages), and managing surplus cash.

Depreciation

Depreciation is the process by which assets lose value over time. Vehicles, equipment, and buildings are typical examples of assets that deteriorate (particularly if they’re not maintained). Depreciation is listed as an item on an income statement and is referred to as a “non-cash expense” because it has no immediate impact on a company’s financial situation.

Direct Costs

Direct costs are the costs a business incurs directly to produce a commodity or service (or when they purchase a wholesale product for resale). Direct expenses fluctuate along with manufacturing volumes and purchasing orders. In retail and wholesale businesses, direct costs are also known as the cost of sales, while in manufacturing, they are known as the cost of goods sold.

Conclusion

When it comes to running a business, business owners need to be aware of a number of different things. They still need to understand a few fundamental ideas even if they engage an accountant to oversee the finances of their business.