Whether you're self-employed or running a small business, you need to stay on top of your business finances.
While you can delegate your company's financial affairs to your accountant, it's still important to have a good grasp of the essentials-such as basic accounting terms and concepts. With this knowledge, you'll be better able to communicate with financial professionals, team members and potential investors.
To help you get started, we've written up an introductory guide to accounting terms you need to know:
Accounts payable (AP)
This refers to money owed to the business by its creditors (suppliers, vendors and other service providers). These are recorded as a liability on the balance sheet.
Accounts receivable (AR)-
This refers to money owed to the business by its debtors (clients and customers). The amounts are recorded as an asset on the balance sheet.
Accruals are amounts that are unaccounted for at the end of the accounting period. These can be expenses that have been incurred or revenue that has been earned, but aren't yet recorded in the accounts.
Any resource that is owned by a company. There are two main types of assets: current assets and non-current assets. Current assets are expected to be consumed within a year, while non-current assets are expected to be held for longer than a year.
The balance sheet shows how much a business owns (assets), owes (liabilities) and the amount that is left over for its owners (owner's equity) at a point in time.
Cash flow refers to the total amount of money that is moving in and out of your business.
Chart of accounts
The chart of accounts is a listing of all the accounts used in the general ledger of the business.
Cost of goods sold (COGS)-
The total of all costs associated with producing your products or services.
An accounting entry that increases a liability or owner's equity account, or decreases an asset or expense account. The term may also be used to refer to an entry on the right side of a T-account.
An accounting entry that increases an asset or expense account, or decreases a liability or owner's equity account. The term may also be used to refer to an entry on the left side of a T-account.
The measurement of the decline in the worth of an asset.
Common methods of depreciation include: straight line, units of production, sum-of-years-digits and double-declining balance.
Dividends are a payment of profit that a limited company distributes to its shareholders.
It is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.
Generally Accepted Accounting Principles (GAAP):
In the UK, the GAAP is a set of accounting standards published by the UK's Financial Reporting Council (FRC) for reporting financial information.
A record of all the accounts that a business uses.
The accounts are classified into three categories: assets, liabilities and equity accounts.
Profit & loss (P&L)
The P&L is a financial statement that shows how much money your business has made or lost.
Debts and obligations of a company.
There are two main types of liabilities: current liabilities and non-current liabilities. Current liabilities (otherwise known as short-term liabilities) are due within a year, while non-current liabilities are due after a year.
Equity can have several meanings in accounting.
Firstly, it refers to the net amount of finances an owner has invested in the company.It can also refer to the residual value of assets less liabilities, as represented by the accounting equation ‚ÄòEquity = Assets - Liabilities'.
Costs incurred by a company for revenue generation.
A few common types of expenses a business may incur are:
- Fixed expenses: The total amount of the expense doesn't change over the short-term, despite changes in sales volume or other business activities. Examples include lease and rent payments.
- Variable expenses: As its name suggests, the total amount of the expense varies in proportion to changes in sales, production or other business activities. Examples include salaries, utility expenses or costs of raw materials.
- Operating expenses: Expenses incurred for activities that aren't directly related to the production of goods or services. Examples include administrative expenses, or legal and financial fees.
Otherwise known as net profit, net income refers to a business' financial position when the total revenue is more than the total expenses.
Present value (PV)
Present value is a calculation that measures the current value of a sum or stream of money to be received in the future, through adjusting for inflation and interest.
Return of investment (ROI)
A metric of profitability used to measure the gain or loss that an investment generates, relative to the sum of money invested.
The amount of money a company receives from selling its goods or providing its services.
It refers to the amount earned before expenses are deducted.
A trial balance is a report that lists the balances of all general ledger accounts of a business at a specific point in time.
An expense should be recorded in the same period that the related revenue is earned.