Essential Accounting Terms For All Business Owners

Essential Accounting Terms

Accounting is the language of business. This means business owners must know and understand accounting. Whether you perform your own bookkeeping or hire a bookkeeper, these are essential terms you must learn to help grow and maintain a successful business. Neglecting the accounting function of a business can lead to business failure.

Accounting is a set of rules that determines how transactions are recorded and then reported on financial statements. The best way to familiarize yourself with these terms is by reviewing the Balance Sheet and Income Statement.

BALANCE SHEET ACCOUNTS

Assets

Economic resources owned by a business. Examples include: Cash, Accounts Receivable, Fixed Assets (e.g., property, land, and equipment), Intangible Assets (e.g., copyrights, patents, trademarks, etc.), Inventory, etc.

Liabilities

Debts and obligations owed by a business. Examples include: Accounts Payable, Payroll Liabilities, Loans, etc.

Equity

Is the degree of ownership in a business. Examples of equity include: Owner’s Equity, Retained Earnings

• Owner’s Draw - A withdrawal of cash or other assets by the owner for personal use, which decreases owner’s equity.

• Owner’s Contribution - The assets put into the business by the owner, which increases owner’s equity.

Retained Earnings

The amount of profit left in a business from year-to-year, not distributed to owners. The profit is being retained by the business for future needs.

INCOME STATEMENT ACCOUNTS

Revenue

The income produced from the sale of products, merchandise, and services.

Cost of Goods Sold (COGS)

The total of all costs used to create a product or service sold by a business.

Expenses

The cost of things needed to operate a business. Examples of expenses include: Office Supplies, Rent, Insurance, etc.

Net Income

Revenue minus expenses.

• If revenue is greater than expenses, the business has a profit.

• If revenue is less than expenses, the business has a loss.

• If revenue minus expenses equals zero, the business experienced break-even.