Accounting Terminologies All Small Business Owners Should Understand
Hands down, knowledge is power! And since your micro-business means everything to you, it helps to have a basic understanding of the accounting terms involved. Yes, you should familiarize with these terms even if you’ve hired an accountant to take on the job. That way, you’ll always be on the same page with your accounting, as well as in other aspects of the business.
1-Accounts Receivable & Accounts Payable
Simple and clear, just as their names suggest, one is the opposite of the other. Accounts receivable refers to the amount owed to you while Accounts payable is amount you owe to others.
Liability is generally the debt your firm owes either in the form of a low or high risk business loan, sales, credit card balance or payroll taxes.
Remember, liabilities are listed on the balance sheet— and not on the profit/loss statement. Plus, they are paid over a span by reducing the amount in your business checking account and at the same time reducing what is owed on the liability.
In a nutshell, your company’s burn rate is the speed at which your micro-business spends money.
You calculate your burn rate by choosing a term—may be a quarter, or even longer—and subtracting the amount you have at the end of the period from the amount you had at the start of it. Divide the figure you get with the number of months in the stipulated period to get your burn rate.
4-Chart of Accounts
Known by many as COA, your firm’s chart of accounts acts like file for all your financial transactions. It is a complete listing of all accounts in your business’s bookkeeping system.
The COA helps you organize all the data in your general ledger ensuring all your financial reports make sense. That explains why you should work with your accountant to maintain it.
5-Cost of Goods Sold (COGS) or Cost of Sales (COS)
COGS or COS is the direct cost incurred in producing an item or delivering a service. By learning your COGS or COS, you get closer to finding out your gross profit margin.
And since it matters, COGS or COS is the number one expense you’ll meet on your profit/loss statement.
It is a detailed record of all transactions in your company, for its full history. You use your chart of accounts to organize your general ledger.
Always have a backup of this because losing your company’s entire financial history can be a disaster.
The above are only a few terms we thought business owners should learn about. If that were all, then you probably wouldn’t need an accountant.
Author Bio: As an account executive, Michael Hollis has funded millions by using alternative funding solutions. His experience and extensive knowledge of the industry has made him a high risk business loan expert at First American Merchant.