Accounting is everything in a business. It’s the credit card processing done in your store and it’s the electricity bills you pay. You need to have a basic understanding of accounting before launching a business, so here are a few accounting terms you should know as a business owner.
Why is it Important to Know Some Accounting Terms?
Understanding major accounting terms can help you analyze your financial records without the need for an accountant. For instance, you can go through your online payment processing records and calculate your gross profits and expenses.
Knowing basic accounting terms can also help you plan and control your business better. You’ll be able to analyze areas surrounding lenders, POS systems, and employees and know what’s not working for your business. Once you identify the problem, you can remove it and find a replacement that will help grow your business.
Tax preparation is the other reason why you should take some time to learn basic accounting terms. Even though you can hire an accountant to get your returns in order, it helps to understand how your business’s tax is calculated and the amount you’re obligated to pay.
Top 5 Accounting Terms you Need to Know
There are five accounting terms that all business owners should know. These terms are interlinked in several different ways, so below we take a closer look at what they’re all about.
Assets
Assets are the items that can provide financial benefits for your business in the future. You or your business should own these items and they should be valuable. Examples of assets include cash, company-owned vehicles, real estate, and store equipment such as POS systems or credit card processing hardware.
All these examples have the ability to put some money in your pocket, so if you’ve got any of them, try calculating today to see how much they’re worth. Just don’t forget that the financial health of your business is equal to the number of assets you have.
Liabilities
In accounting, liabilities are what you owe other parties. They basically take money out of your business and are divided into two- current and long-term liabilities. While current liabilities are resolved in a year, long-term liabilities take more than a year to get resolved.
Common liabilities include taxes, employee wages, bank debt, money owed to suppliers or merchant account providers, and mortgage debt. A lot of money is needed to resolve these issues, so always ensure that your liabilities don’t surpass your assets.
Keep your liabilities in check and you’ll never have to worry about going bankrupt in the future!
Equity
Equity is the amount of money that your business can make if all assets are liquidated and all debts are paid off. In simple terms, your business’s equity is its net worth and it can be determined by subtracting liabilities from the assets.
The equity of a business is an important concept for many investors, banks, and credit card processing companies. These financial institutions like supporting businesses that stand on solid equity. Therefore, try your best to pay off all of your liabilities on time to prevent falling into isolation.
Expenses
An expense is the amount of money your business pays to run smoothly. Expenses are largely categorized into fixed, accrued, and variable. Fixed expenses are payments made regularly such as rent or mortgage. Accrued expenses are yet to be paid and variable expenses change from time to time such as labor and supplies.
In accounting, you may also encounter the word non-operating expenses. Such expenses do not directly affect the business’s day-to-day operations. A good example is the interest you’ll pay after getting a loan or the charges you’ll incur after setting up a merchant account for online payment processing.
Revenue
Revenue is the amount of money a business generates from the sale of goods or services. The amount of revenue your business brings in helps in determining its financial strength. However, kindly note that income is what truly matters at the end of the day.
You can calculate your business’s income by taking the revenue and subtracting the expenses. Income is essentially the profit that falls in your pocket and revenue is what shows how good your business is at making sales.
Conclusion
Although what we’ve discussed in this guide will help you understand how your business’s revenue is being utilized, don’t hesitate to hire an accountant if you get overwhelmed. Things may get complicated especially when it comes to inventory maintenance and credit card processing. Therefore, go through your files and ensure your numbers are growing your business and bringing in profits.
