As a small business owner, you are required to wear many hats including that of an Accountant. The term accounting simply means:
“The systematic and comprehensive recording of financial transactions pertaining to a business.” -Investopedia.
We completely understand the word accounting may freak you out, but don’t think you have to remain in the dark just because you hire a Bookkeeper or Accountant. We’re not saying you need to know all the ins and outs of accounting, but we strongly recommend you familiarize yourself with the basic terms that affect your finances on a daily basis.
1. Financial Statements
These are formal and structured reports that record the financial transactions of your business. They record your cash inflow, outflow and give you an idea of how much money came in and went out at any given time of the year.
2. Balance Sheet
An extremely popular financial statement, the balance sheet records a snapshot at a particular point in time of your assets, liabilities and capital (equity). This report will capture things such as your cash in the bank, inventory and other items. Essentially, the balance sheet should ‘balance’: Total assets = liabilities + equity. Balance sheets are generally prepared once monthly and reflect a cumulative year-to-date balance (i.e. January to July 2015).
3. Income Statement (Also know as Profit & Loss Statement)
Also another popular financial statement, it reflects a summary of your company’s financial performance by recording its revenues, expenses and net income over set period of time. This report will captures things such as sales, cost of goods sold and all overhead costs to operate your business. Income Statements are generally prepared once monthly and reflect a month-to-date balance (i.e. July 2015).
The amount of money your business receives from the sale of its products or services. Also known as gross income – before the deduction of any expenses or costs.
The amount of costs your business incurs daily to operate.
6. Net Income
This is the amount that remains when you subtract expenses from your revenue. It represents your total earnings or ‘net profit’.
7. Accounts Payable
The amount of money you owe to your creditors due to a service or product they provided you. You will most likely receive an invoice stating any outstanding balances you owe.
8. Accounts Receivable
The amount of money owed to you because of products or services you provided to a customer.
Now that we’ve filled you in on these basic accounting terms, do you feel you are much better prepped to handle your company’s finances?