Accounting Terms Every Small Business Owner Needs To Know

February 18, 2016

The process of recording financial transactions undertaken by your business is basically what accounting is; each transaction is documented in such a way that it can be analyzed in order to help you make sensible decisions regarding your business. 

There are many different accounting terms used during this process, some of which may be confusing to new business owners. Below are some of the most frequently used terms along with a brief description: 

Accounting Equation: Also known as the balance sheet equation this represents the relationship between the business owners’ assets, liabilities and equity. 

Balance Sheet: Assets, liabilities and equity displayed in a dated, basic accounting financial report. 

Account Payable: An amount due to the company as the result of a sale that has yet to be paid.

Account Receivable: An amount due to the company from a debtor who has yet to pay for a product or service that was sold to them on credit. 

Bookkeeping: This term describes the recording aspect of accounting; such as when transactions are entered into a journal, invoices are prepared or bills are paid.

Liabilities: A legally binding obligation of a business towards its creditors; accounts payable is an example of this. 

Asset: Any kind of resource or property owned by an individual or an organization. 

Journal: A place where business transactions are first recorded before they are moved to ledger accounts and placed into appropriate groups. 

Budgeting: This involves the planned allocation of available funds to different departments of a company. 

Equity: The difference between the values of assets or interests and the cost of the liabilities of something owned.

Trial Balance: Ledger accounts are listed here along with their debit and credit balances; they should all total zero.

Capital Stock: The equity of a business that has resulted from the sale of shares and corporate stock to its shareholders.

Cost Accounting: This forms a part of basic accounting, where the costs of producing a product or service are collected and controlled.

Cost Of Goods Sold: The cost of a product or service is calculated taking into consideration factors such as, materials, labor costs and freight or postage, etc.

Invoice: A statement that is itemized to show goods or services purchased and sold.

Purchase Order: A form used by the purchasing department when they place orders, authorizing the supplier/manufacturer to ship the product to the customer.

Chart Of Accounts: Assets, liabilities, equity, revenue and expenses are listed here.

Income Statement: This is a basic statement referring to the revenue earned by a business and the expenses that were incurred while earning the revenue, the corresponding net profit or loss is also shown here.

Controller: This person would be responsible for the whole accounting function of a large business; they would report to the business owner or Vice President of Finance.

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