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  • Writer's pictureTZM Bookkeeping

Understanding Common Accounting Terminology For Your Small Business

The language used in accounting can be difficult to comprehend, particularly for those who are not familiar with the specialized terms and phrases. Below are some examples of commonly used accounting terminology employed by accountants:

• Assets: These are resources that your business owns, such as cash, inventory, or equipment.

• Liabilities: These are debts or obligations that your business owes to others, such as loans or accounts payable.

• Revenue: This is the total amount of money your business earns from sales or services.

• Expenses: These are the costs associated with running your business, such as rent, utilities, and salaries.

• Equity: This is the difference between your assets and liabilities and represents the value of your business.

• Accounts Receivable: This is the amount of money that customers owe your business for products or services they've received but haven't yet paid for.

• Accounts Payable: This is the amount of money that your business owes to suppliers or vendors for products or services received but not yet paid for.

• Accruals: This refers to revenues or expenses that have been earned or incurred but have not yet been paid or received.

• Cash Flow: This refers to the movement of cash in and out of your business and is an important measure of your business's financial health.

• Balance Sheet: This is a statement that shows a company's assets, liabilities, and equity at a specific point in time.

• Income Statement/Profit and Loss Statement: This is a financial statement that shows a company's revenues, expenses, and net income or loss over a specific period.

• Cost of Goods Sold (COGS): This measures the direct cost of producing a product or providing a service.

• Depreciation: This represents the systematic allocation of the cost of an asset over its useful life.

• Gross profit: It is the amount of money that a company makes from its core business operations before taking into account other expenses such as rent, utilities, salaries, and taxes.

• Journal Entry: This is an accounting transaction that records a financial event in an accounting system.

• Reconciliation: This is the process of comparing two sets of records or accounts to ensure they are in agreement. Any discrepancies are addressed.

• Return on Investment (ROI): This is a measure of how much profit a business generates relative to the amount of investment made.

• Break-Even Point: This is the point at which your business's revenue equals its expenses and is an important measure of your business's financial viability.

Knowing these common accounting terms can help small business owners communicate more effectively with their accountant or bookkeeper and develop a better understanding of their finances. They can have more meaningful discussions about their financial statements, tax obligations, and other financial matters related to their business. As a result, they can make informed decisions about how to handle their finances, plan for growth, and accomplish their business objectives.

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