Accounting Terms Decoded: Basic Principles Every Business Should Know

Small business owners need to have some amount of financial literacy to run and grow their companies. However, around 42% of business owners had no or limited financial knowledge when they launched their businesses. Understanding basic accounting terms is essential, whether you're outsourcing to an accounting professional or attempting to manage your books yourself. 

This article will discuss key accounting terms you should know. Avoid feeling confused after talking to your accountant by brushing up on business accounting principles. 

Accounting

Accounting refers to the analyzing, organizing, and keeping of financial records. This applies to businesses, individuals, and organizations. Financial records are important in the business world as they tell you if you're losing or making money. 

Accounts Payable

Accounts payable refers to keeping track of how much money your business is making. It also refers to the amount of money it's spending. Accounts payable tracks how much a business owes to the following:

• Suppliers

• Creditors 

Accounts Receivable 

Accounts receivable is any money owed to a business by other companies or customers. These parties have received their requested services or goods from the business and need to compensate them. 

Assets

There are two different types of assets a business can have - current and fixed assets. Current assets are things that can be converted into cash within 12 months. They can include:

• Accounts receivable 

• Inventory

• Cash 

Fixed assets are considered long-term and can provide benefits to a business for over a year. Examples of fixed assets include machinery, land, or real estate. 

Balance Sheet

A business's balance sheet is a financial report. It summarizes some of the following information:

• Assets

• Liabilities

• Shareholder and owner equity 

Cash Flow

Cash flow is the money that comes into your business from customers. It also refers to where a business is spending money. 

A positive number or net gain shows that more cash is flowing into your company than out. A net loss, or a negative number, indicates that you're spending more money than you're making. 

Profit and Loss Statement

A profit and loss statement shows the revenues, costs, and expenses of a business during a certain timeframe. Accountants use this statement along with the balance sheet and cash flow statement to get a snapshot of a company's financial health. 

Return on Investment

Accountants strive to help businesses increase their profits by making more money and spending less. This includes figuring out the return on investment (ROI). It refers to how much profit a business makes and the amount they spend. 

Stay on Top of Your Essential Accounting Knowledge 

Accounting doesn't have to be something that you feel confused or hesitant about. Taking the time to learn accounting basics will fill you with confidence the next time you talk to your accountant. Learn more about the ins and outs of your business's finances to help you make more informed decisions. 

Business Watch Global is a leading source for business and accounting basics. Our blogs help business owners take charge of their companies and increase their profits. Explore our website to find more helpful blogs.