We all know that starting a small business is not a simple task. It requires a lot of hard work, dedication, and of course, money. And once you have finally started your business, you need to keep track of its financial performance to ensure that it is running smoothly. For this purpose, small business accounting is extremely important.
Hiring an accountant or bookkeeper is obviously the best way to keep track of your business finances. However, if you cannot afford to do so, you need to at least know the basic terms used in small business accounting. This way, you will be able to understand your financial statements and make better decisions for your business.
Here are some of the most important terms you need to know for small business accounting:
Accounts payable refers to the debts that a company owes to its suppliers. In other words, it is the amount of money that a company owes for goods and services that it has purchased on credit. Accounts payable is generally represented as a line item on a company’s balance sheet.
Accounts receivable refers to the money that is owed to your business by customers. This may include money for goods or services that have been delivered but not yet paid for. Accounts receivable are an important part of your business’s cash flow, as it represents money that will eventually come into your business.
Accruals are accounting entries that refer to earned revenue that has not yet been received, as well as expenses that have been incurred but not yet paid. This can cause confusion for small business owners, who may not be used to thinking about money in this way.
Assets are anything of value that your business owns. This includes cash, inventory, equipment, and even buildings and land. You need to track your assets carefully so that you know exactly what your business owns and how much it is worth.
A balance sheet is a financial statement that provides a snapshot of your company’s assets, liabilities, and equity at a given point in time. It’s basically a mathematical equation that must balance out: Assets = Liabilities + Equity. To put it another way, what you own (assets) must equal what you owe (liabilities) plus the value of what you’ve invested in the business (equity).
The break-even point is the sales level at which your company’s revenues equal its expenses. It also means your business has neither made nor lost any money.
Burn rate refers to the rate at which a company is spending its cash resources. Burn rate is often used as an early indicator of financial distress because it can indicate whether a company has enough cash on hand to cover its upcoming expenses. A high burn rate indicates that a company is spending more money than it’s taking in, while a low burn rate suggests that the company is in good financial shape.
Cash flow is the movement of cash in and out of business. A positive cash flow indicates that a company is bringing in more cash than its spending, while a negative cash flow indicates the opposite. You need to track your cash flow carefully to ensure that your business has enough money to cover its expenses and to make sound decisions about its future.
Credit is a financial term that refers to the borrowing of money or the extension of credit. When a business takes out a loan or obtains a line of credit from a lender, it is using credit. Credit can also refer to the ability of a customer to purchase goods or services now and pay for them later, either through a loan or through the use of a credit card.
Depreciation is an important concept because it allows you to spread the cost of a major purchase over several years. This can be a helpful way to manage your cash flow and keep your business healthy.
Dividends are essentially distributions of company profits to shareholders. They can be issued in cash or stock and are typically paid out quarterly. The amount of the dividend payment will be based on the number of shares owned multiplied by the amount per share that has been declared by the company’s board of directors.
Expenses are the costs that your business incurs from operating. This includes things like rent, utilities, inventory, and employee salaries. You need to track your expenses carefully to ensure that your business is not spending more money than it is making.
Not all businesses operate on a calendar year basis. Some businesses opt for a fiscal year, which is a 12-month period that doesn’t necessarily correspond to the calendar year. For small businesses, picking the right fiscal year can save you money on taxes and help you better manage your cash flow.
Forecasting is the process of estimating future revenues and expenses. This can be done using historical data, but it’s often more accurate to use market trends and other factors to make predictions. Either way, forecasting is an essential part of decision-making for any business. It helps you allocate resources and plan for growth.
Liabilities are the debts and obligations that your business owes to others. This includes money owed to suppliers, creditors, and even employees. You need to track your liabilities carefully so that you can stay on top of your payments and avoid defaulting on any of them.
Profit and loss statement
A profit and loss statement, also known as an income statement, is a financial statement that shows how much revenue a business has earned during a specific period of time (usually a month, quarter, or year) and how much of that revenue has been turned into profits. It can also show losses, if any.
If you are a small business owner, it is important to understand the basics of accounting to make informed decisions about your finances. The terms we’ve covered above should give you a good foundation for working with an accountant and keeping your books in order.
At FShad CPA, our team of experienced accountants can help you take care of all your bookkeeping needs so you can focus on running your business. Contact us today to get started!
This publication is produced by FShad CPA Professional Corporation as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.