As a small business owner, you’re not expected to know the ins and outs of accounting…until you are. It isn’t until some kind of financial crisis happens that many small business owners are hit with the hard reality of what they don’t know when it comes to their books. We don’t expect you to know every definition in the accounting dictionary, but here are the top 10 accounting terms every small business owner should be aware of:
- Net Income: (AKA profit!) This term is sometimes referred to as ‘net profit’ or ‘earnings,’ but no matter what you call it, your net income is what’s left after your all of business expenses are subtracted from your earnings.
- Balance Sheet: A statement of the company’s financial position shown in terms of assets, liabilities and ownership equity for a specific period of time. This is a snapshot of the small business’ current financial position. The difference between the total assets and total liabilities is known as the company’s net worth. Basic accounting rules tell us that a company’s net worth must be equal to the assets minus the liabilities. We talked about balance sheets a bit more in this video.
- Income Statement: We also call this a profit and loss statement. An income statement is a summary of the company’s profits and losses during a period of time, usually a month. Income statements show all money earned during the month, as well as the operating expenses. Learn more about profit and loss statements in this video.
- Deduction: If you’ve been running a small business for any length of time, you’ve heard the hype about deductions. Basically, a deduction is any money spent to run the business, which in turn reduces your year-end taxable income. Deductions are great for lowering tax bills for small business owners.
- Asset: An asset is any item owned by the business that is expected to last several years. Assets normally refer to larger or more expensive items like cars, office furniture or computer equipment. If you are going to lease or rent property to tenants, it can include rental houses or improvements made to business property. General office supplies are not considered assets, but can be used as deductions.
- Liability: A business liability is an obligation that came about from a prior transaction done by the business. In accounting, a liability is assigned a dollar value and the business is responsible for repayment of that amount in the future.
- Revenue: Refers to all the money made by a company doing what a company does–whether they’re selling products or services, revenue is the total amount of money made. Sometimes you’ll see revenue referred to as “gross income.”
- Accounts Receivable: When you’ve sold products or services to a person or company that have not been paid, this is considered your accounts receivable. Your accounts receivable can be listed as assets on your balance sheet.
- Accounts Payable: This includes any bills you have yet to pay for your small business. The sum of all your accounts payables are listed as a current liability on your balance sheet.
- Tax Credit: this number is subtracted from the final amount of taxes you owe the IRS come tax season. If you have $1,000 worth of tax credits and you owe $8,000 in taxes, you’ll only pay $7,000.
Brush up on these quick need-to-know accounting terms and stay in the know about the basics of your small business bookkeeping and accounting.