Small Business Accounting Terms You Should Know

Small Business Accounting Terms You Should Know

As a small business owner, you may have an entrepreneurial mind, but fall short on the accounting side of your business. Accounting is the backbone of your business, tracking your income, expenses, and profit, making it an important area to understand. Comprehending small business accounting terms is the first step to gaining control over the accounting function in your business.

Balance Sheet

The balance sheet is one of the main financial statements that your business will generate. Included on the balance sheet are assets, liabilities, and shareholders’ equity. Every transaction that your business engages in will be run through the balance sheet, making it important to track. The money you are expecting to receive, the amounts you owe, and past earnings will all be included on the balance sheet.

Income Statement

The next financial statement that your business will generate is an income statement. The income statement tracks all the income you receive and each expense you incur. This financial statement is critical to maintain to track growth and profit. In addition, the items reported on the income statement will be reported on the tax return with subsequent taxes paid.

Cash Flows

The third financial statement that your small business should know is the statement of cash flows. The statement of cash flows analyzes the change in your cash account between periods, highlighting major expense categories, such as purchases of fixed assets and payments on loans. Many investors will look at this statement when determining lending decisions.

Gross Profit

Gross profit is reported on the income statement and examines the amount your business made after direct costs. Costs of goods sold are subtracted from net revenue to generate the gross profit number. Understanding if your small business is making a profit before variable costs is critical to make more informed business decisions.

Net Income

Net income or loss looks at how profitable your business was after all direct and variable costs are considered. Investors, lenders, business owners and creditors will look at your net income or loss for the year since it provides critical insight on the profitability of your operations. This number is found on the income statement and is usually the bottom-line number.

Asset

An asset is everything your business owns, including cash, accounts receivable, prepaid expenses, inventory, and fixed assets. Growing your small business is generally done through acquiring more assets, resulting in an important business term to understand.

Liability

Contrary to an asset, a liability is everything your business owes including accounts payable, loans payable and accrued liabilities. To be successful, your assets should outweigh your liabilities, meaning you have enough items you own to cover what you owe.

Equity

Equity is found on the balance sheet and includes retained earnings and your general capital structure. Equity should be a positive number to indicate your business is consistently making money. Your capital structure will determine the items found in the equity category.

Summary

Understanding basic small business terms will allow you to make more informed business decisions and effectively track key metrics. Sometimes these terms can take time to fully comprehend, which is why working with Faber LLP can be beneficial. Faber LLP takes the time to help our clients realize what each terms mean, leading to successful application in your small business.