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15 Accounting Terms You Should Know

Owning a business means that you will have financial responsibilities.

So, it’s important to know these terms when handling your finances or when discussing your finances with your bookkeeper or accountant.


1. Accounts Receivable

When you perform a service or provide a product, the amount your customer owes you will be the account receivable. Although you are waiting for this amount to be paid, it will still be added as a credit to your account since your business will eventually receive that amount.


2. Accounts Payable

Similar to accounts receivable, accounts payable is the amount that is owed from a service or product. However, it is the amount you owe someone such as a supplier or a vendor.


3. Credit

On a balance sheet, you will mainly see credits and debits to your account. A credit will be an entry that either increases your liability or decreases your assets.


4. Debit

On the other hand a debit, will either increase your assets or decrease your liabilities.


5. Diversification

Business owners tend to diversify in order to reduce overall risk. This is done by allocating your investments into various assets. In other words, you aren’t putting all of your eggs in one basket.


6. Cash Flow

Money going into your business and the money going out of your business is what determines your amount of cash flow. It will be calculated from your revenue and expenses over time.


7. Fixed Expenses

If you rent a space, that amount you pay is fixed because it will not change. Fixed expenses are expenses that will remain consistent over a set period of time.


8. Variable Expenses

Opposite of fixed expenses, variable expenses is something that isn’t a consistent amount. For instance, your delivery fees or raw material purchases may vary.


9. Equity

Equity can be calculated by taking your assets minus your liabilities. That number will show you how much your business is worth.


10. Liabilities

In short, liabilities are what your company owes. They are your financial obligations that need to be paid such as loans and credit card balances.


11. Return on Investment or ROI

Return on investment or ROI is used to determine the profitability of an investment. To calculate ROI divide the net profit by the cost of the investment. Your total will be read as a percentage. So, if you have a net profit of $100 and the cost of the investment is $1000, you will get an ROI of 10%. A good annual ROI is going to be around 7% or higher.


12. Single-entry Bookkeeping

For each transaction that occurs, one entry is made when it comes to single-entry bookkeeping. This form of bookkeeping can often lead to errors and isn’t the best way to check your company's overall financial health. However, if you have a small amount of transactions a year (usually if your small business is part time or a side-gig for you), then single-entry might not be a bad option.


13. Double-entry Bookkeeping

For each transaction that occurs, there are two entries made. A record is made in both the debits account and credits account. Often, bookkeeping is done this way, so it is easier to review where and why transactions are taking place. An example could be to take out $100 dollars to purchase $100 of office supplies. The amount going out ($100 being taken out) will be in the credit account and the amount going in ($100 of office supplies) will be in the debit account.


14. General Ledger

All of your entries and business accounts can be found in your general ledger. It holds all of your records and all transactions should be properly accounted for.


15. Balance Sheet

All of your assets, equity, and liabilities will be reported in your balance sheet, and it will be the best resource for understanding your financial health.


If you are ever unsure of what a term means or how your finances work, always ask your bookkeeper for more information.

Although it is extremely useful to have someone complete the financial side of your business, it can be just as or even more useful to understand how the main components work.


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