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Common Accounting Terms Explained (& Why You Should Know Them!)

Accountants and other financial professionals seem to have a language of their own! If you’re a business owner, you’ll want to know at least the basic accounting terms and concepts. Here are some of the most common ones explained!


“I have an accountant. Do I really need to know accounting terms?”


YES! Every business owner should know the basics of accounting and bookkeeping. Even if you don’t DIY your business finances, these terms will show up in all sorts of places: in reports, while talking with investors, and of course in conversations with your financial professionals. The more informed you are about your money and its management, the better you’ll be able to make decisions for your business.


Types of Financial Professionals


What is an accountant?


Typically, an accountant acts as your go-to for all things financial management in your business. They can manage your books, file your taxes, run reports, and help you make financial decisions. Every accountant offers different services, but most cover these basics. Usually, an accountant holds a bachelor’s degree in accounting.


What is a CPA?


A CPA (Certified Public Accountant) is an accountant who’s completed a set of work requirements and passed their state’s accounting exams. They specialize in accounting in their state, which can be helpful if you live and operate your business in one area.


What is a bookkeeper?


A bookkeeper is in charge of the day-to-day management of your business finances. They track expenses, run reports on income, and help you keep everything organized. They don’t file taxes or assist with big financial decisions, but they can help keep you organized to make those things easier when the time comes.


What is a tax preparer?


A tax preparer’s job is to help you prepare (and sometimes file) your taxes. Usually, you only meet with them just before tax season. They help you find deductions and get your paperwork in order so you can file. Some tax preparers will file for you, but everyone is different.


Basic Accounting Terms Explained


Accounting Period


An accounting period is the period of time referenced in a financial report or statement. Usually, this means the fiscal year, calendar year, or quarter.


Cash Flow


Cash flow is the total measure of all the money moving in and out of your business in a specific accounting period. Understanding your cash flow is key to optimizing your profit.


Break-Even


The break-even point is where your business makes and spends the exact same amount of money, so your income and expenses are equal. You aren’t turning a profit, but you’re also not in the red.


Return on Investment


The return on investment (ROI) is the amount of money you make thanks to a specific investment. For example, if you hired an employee for $5000 per month and they helped you make $10000 more per month, your ROI for that employee would be $5000.


Capital

Your business’s capital is the total value of all your money and assets minus any of your liabilities, like debt or unpaid payroll.


Types of Revenue & Profit


Revenue


Your business’s revenue is the total amount of money that comes into your business. Think of it as the total amount you make in sales before you subtract any of your expenses or take-home pay.


Cost of Goods Sold


This refers to the cost of creating and distributing your product or service. This might include materials, production equipment, shipping, and direct labor (so the labor of the people actually making the product).


Gross Profit


Gross profit is the amount of money you make after you subtract the cost of the goods sold (COGS). So if you sell a candle for $20 and it costs $5 to make, your gross profit is $15.


Net Income


Net income is the true measure of a business’s profitability. This is the total amount left over after subtracting the cost of goods sold and other business expenses, like operating expenses, taxes, and indirect labor (including your cut).


Owner’s Draw


The owner’s draw is essentially the business owner’s take-home pay. This number might vary month-to-month, or you might create a system so you get paid the same each month regardless of your business’s profit. (For more on how to pay yourself, check out this post.)


Types of Expenses


Fixed Expenses


Fixed expenses are the things that cost a set amount and run on a set schedule. Think rent and software fees. These are your regular bills.


Variable Expenses


Variable expenses are the ones that don’t cost the same amount each time you pay for them. These might be labor, equipment, packaging, and other materials.


Accrued Expenses


An accrued expense is on that you owe but haven’t paid yet. These might be things like this month’s utilities or labor costs. If you know you owe them but haven’t paid for or been invoiced for them yet, they’re accrued expenses.


Operation Expenses


Operation expenses are all the other random bills that keep your business running. These are things like business insurance, your marketing budget, and property taxes on your company car.


Want to feel calm, cool, and confident when managing your money?


Who doesn’t?! Check out The Ultimate Accounting Checklist, your guide for managing and maintaining your business finances with ease.




Feeling unsure or worried about the accounting side of your business? Download this free guide with 3 steps to financial confidence in your business.


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