Accounting Terms Every Business Owner Should Know
How many times have you talked to an accountant or bookkeeper and left feeling confused on what they were saying? Trust me, you are not alone. In fact, that is one of the main reasons I left the traditional accounting path, but more on that in a later post.
There are a few main terms that your accountant and bookkeeper want you know and understand when running a business. I am going to break them down for you in a clear and simple way so that you aren't left confused when trying to understand your finances.
Three Main Financial Statements:
1. Balance sheet shows the financial overview of a company at a specific point in time, mainly showing what the company owns and what it owes, along with the owners/shareholders equity. The balance sheet follows the equation: assets = liability + equity.
Asset is anything your business owns that has a money value AND anything that is owed to you. Assets can include things like real estate, cars, money in your bank account, money that is owed to your (which is called Accounts Receivable).
Liability is something that you owe to someone else. This is the opposite of an asset. Liabilities usually include things like mortgages, credit card debt, bills due (which is called Accounts Payable) and usually anything where you owe someone else money.
Equity of a business is the difference between the assets and liabilities. Think of it like the net worth of your business. Let's say you have $10,000 in your bank account and you have $3,000 on your business credit card. That leaves you with $7,000 of equity (net worth) in your business.
2. Income Statement, also know as the Profit & Loss, shows the businesses performance during a certain period of time. This report shows how much money the business brought in, what its expenses were, thus letting you know what the net profit was. You will typically see things like sales, cost of goods sold (COGS), gross income, expenses and net income.
Sales is obviously all the money that you brought in during a set period of time.
Cost of Goods Sold (COGS) is the cost of a product or service that directly ties to its income. If you purchased a piece of clothing that you were going to turn around and sell in the future... that purchase is the cost of goods sold.
Gross Income is the sales minus COGS. This is the income that you have made before any of your businesses expenses have been taken out.
Expenses are the cost of running your business. Things like subscriptions, insurance, and marketing are all business expenses.
ps. If you want a list of commonly use tax deductions (expenses) for the solopreneur... click here!
Net Income, or profit, is the amount of money your business made after all of its costs and expenses. This is truly the number that tells how well a business is doing. A business might be making 50k sales in a month, but if their expenses are 42k... that means they are only profiting 8k. Same goes for a business who might make 20k of sales in a month, but if their expenses are only 5k... then their profit is 15k.
3. Cash Flow Statement shows the flow of cash during a certain period of time. It ties together the balance sheet and the income statement to show what comes in your business and what goes out. This tells you the amount of cash you have on hand at a certain point in time, in a way, it's like a glorified bank statement.
While it's great to know all these terms, you still need to make sure you have a solid bookkeeping system in place so that you know your numbers are accurate. No more guessing what your income is and what your expenses may be. And no more just looking at your bank account to determine whether you are on the right path.
Ready to have your bookkeeping done for you so you can focus on the profit producing side of you business? That's where I come in.
With my monthly bookkeeping service you will get simple, easy to understand reports sent to your email each month to give you the clarity to make informed business decisions that will lead to you being able to achieve your goals!
