Starting a business is not only exciting and rewarding but it also comes with a learning curve if you’ve never been on the financial side of business operations. To help you with this learning curve, my team and I have compiled 9 bookkeeping terms that every business owner must know.
We consider these must-know terms since they are the most used terms in accounting systems and in discussions between business owners.
1. Accounts payable/Accounts Receivable – These are two terms that you are going to hear a lot of. Accounts payable account is comprised of all of the money that your business owes other businesses for goods or services provided to you. For example: if you hire Balanced Ledger to do your bookkeeping, the invoices that we send you for our monthly contract would be entered into your accounts payable account.
On the opposite side, accounts receivable would be all of the money owed to your business from your clients and customers for goods or services your business has provided them. Every time you send an invoice you increase your accounts receivable amount. Every time an invoice is paid you decrease your accounts receivable. The increase and decrease of your accounts receivable is important to know so you can calculate your accounts receivable turnover. This turnover number provides beneficial insights for forecasting.
2. Accrual Accounting/Cash Accounting – not many business owners realize that there are two different types of accounting: accrual and cash basis. The difference between the two is based on when the transaction is recorded. If you follow the accrual method, you will record the transaction when it occurred. If you follow the cash method you will record the transaction when the payment was either made or received.
3. Bank Reconciliation – this is one step that a lot of business owners skip. A bank reconciliation is a simple process of recording the transactions that come in and out of your bank account and assigning them to the proper account in the accounting system.
4. Asset/Liability – these are two very important terms to know if you’re a business owner. Assets are anything of value that the business owns. Can be cash, accounts receivable balances, inventory, buildings, vehicles, trademarks, copyrights. Liabilities are anything that the business owes to someone else. Mortgage on a building, loans on a car, accounts payable, accrued expenses.
5. Credit/Debit – this refers to the placement of a number in an accounting entry to record a transaction. A credit is an entry that is made on the right side and will increase a liability or equity account and decrease an asset account. A debit is an entry that is made on the left side and will decrease an equity account or liability account and increase an asset account.
6. Depreciation – This refers to the amount of an asset that has been used over a particular period of time, or the life of the asset.
7. Overhead – many business owners use this term mistakenly when discussing their finances. Overhead refers to any expense of doing business that is not directly related to creating a product or service. Office rent, insurance, and administrative personnel are all considered overhead.
8. Revenue – often confused with profit, revenue is money you receive from people who purchase your products or services.
9. Net Profit/Loss – these terms refer to the final number after all expenses have been accounted for. If it’s a positive number then you have a net profit. If it’s a negative number you have a net loss.
These are just SOME of the terms that are extremely important to know as a business owner. If you ever run into a term that you aren’t sure of feel free to reach out to us. We totally geek out over things like this and are always excited to chat and help educate other business owners. All you have to do is hit the Book A Free Call button above or send us a DM over on Instagram and we’ll be happy to help!