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When you go in to meet with your local Cedar City accountant to discuss your business, there are many business-specific accounting terms that will be used. While our accountant is always happy to stop and explain an unknown term, you may feel more comfortable going into a business meeting with a firm understanding of accounting terms that apply to company operations.

While there are industry-specific terms, below are thirty accounting terms that all business owners should know.

General Accounting Terms

To start off, let’s lay the groundwork for other accounting terms by clarifying general accounting terms. Many of these terms are what business owners will encounter even before they start their company, so it is essential to understand what they mean.

1. Accountant

The term accountant often gets thrown around to describe anyone who deals with numbers. However, this loose definition isn’t quite sufficient.

While the exact requirements can vary to state-to-state, an accountant should have a four-year accounting degree from a higher education institute. They can act as bookkeepers, and with the right certifications, certified public accountants.

2. Accounting Period

An accounting period is a defined time span where all of a company’s financial statements—i.e., balance sheet, income statement, statement of cash flow—are included. By having accounting periods to reference, business owners can quickly find information on how the company financially performed during any set time.

3. Cash Flow

To describe the flow of cash in and out of a business, accountants use the term cash flow. The cash flow is tracked from the beginning of an accounting period and ends with the conclusion of the accounting period. A negative cash flow indicates a business had less money comes in than went out, while a positive cash flow shows the opposite.

4. Allocation

Allocation describes how businesses assign funds to different accounting periods or departments within the business.

5. General Ledger

A whole and complete financial record that keeps track of a business’ financial accounts. This ledger should be maintained on a daily basis, and it is used to help create financial statements.

6. Business Entity

The term business entity refers to the legal structure of your company. For most small business owners, these company formations are usually sole proprietor, limited liability corporation (LLC), or partnership. There are also s-corporations and corporations. Depending on what business entity applies to your company, there are different laws, compliance requirements, and tax ramifications.

7. GAAP

Generally Accepted Accounting Principles (GAAP) refers to the basic rules that all accountants follow as they perform their duties. These principals guide accountants so that it is easier for other financial experts to review a business’ financial records.

8. Fixed Cost

Businesses have fixed costs, which are costs which do not change no matter how many sales are made. An example of this would be the rent of a business’ location, which would be a recurring fixed cost. While the rent could be raised over time, it will remain fixed throughout the length of the rental contract.

9. Variable Cost

Opposite of fixed costs are variable costs, which are business operation costs that change with how many sales are made. An example of this would be something like the cost of deliveries. With fewer sales, the amount of business funds dedicated to delivering goods is lower, though costs will go up as more sales are made.

10. Overhead

A business’ overhead refers to the expense of operating a business and is often a fixed cost. That means that overhead often refers to things like business rent, employee salaries, inventory storage costs, and fixed costs.

11. Liquidity

For businesses, when it comes to liquidity, it is a measure of how quickly a business can absorb short-term and immediate financial obligations and debts.

12. Return On Investment

The strict definition of this term refers to the overall profit that a business makes—the return—which is divided by the business’ investment. However, ROI can also be used a bit more loosely to describe how successful short-term projects and objectives have been.

Profit And Loss Statement Terms

When it comes to your company’s profit and loss statement terms—also called income statement terms—you will likely encounter more of these words when using accounting services. To help you stay in the loop when discussing your business’ financial status, here are some of the most common profit and loss statement terms.

13. Income Statement

Let’s start by defining what an income statement is when applied to your business. This financial statement will cover the expenses, revenue, and business profits for a set period of time.

It starts by displaying the company revenue at the top of the statement, then the expenses are displayed to show how much was subtracted. That way, you have a clear idea of where the money was spent. Finally, the income statement displays the net income at the bottom of the report.

14. COGS

COGS—costs of goods sold—is used to refer to the expenses that relate to the creation of your business’ service or product. This term does not describe operating costs; rather, the labor involved in your business’ provided service or the cost of the materials used to make your product.

15. Gross Profit

The profitability of your business in terms of dollars is described by gross profit. This number is reached without taking into account the overhead costs but is subtracted the COGS from the revenue.

16. Gross Margin

After the gross profit has been assessed, the gross margin is next. The gross margin is a percentage of the gross profit. You find this percentage by taking the gross profit and dividing it by the revenue to find the gross margin.

17. Depreciation

This term describes the loss of asset value over time. It does not describe low-dollar value items. An example of a depreciable business asset would be a company van. A depreciating asset is often shown on an income statement as a non-cash expense as it doesn’t directly affect your business’ cash.

18. Net Income

The net income (NI) is the actual dollar amount of profit your business earned. You can find the net income by subtracting the expenses from the revenue for a set period. These expenses should include your taxes, overhead, depreciation, and COGS for that given period.

19. Net Margin

Another term for the profit of your business, the net margin is the percentage of profit as it relates to the revenue. The net margin is found by having the net income divided by the revenue for a set earning period.

20. Expense

When your company incurs a cost, the term for this is an expense.

21. Revenue

Simply put, any money that is earned by your company is considered revenue.

Bookkeeping Terms

Some of the accounting terms that you will run into regularly as a business owner are bookkeeping terms. Many of these terms describe financial matters that concern the day-to-day operations of your company, so it is critical that you understand them.

22. Balance Sheet

A balance sheet is a term that encompasses your business’ financial report that shows all the liabilities, equity, and assets your business has currently. This report shows the balance of this equation: Assets = (Liabilities + Equity).

23. Accounts Payable

This term describes all of the business’ expenses that have not been paid yet. On a balance sheet, account payable is listed as a liability, since the business owes others.

24. Accounts Receivable

To describe the revenue of a business has but hasn’t received the payment, you would use the term accounts receivable. On a balance sheet, accounts receivable is listed as an asset that should become cash soon.

25. Payroll

Considered a standard business liability, payroll is an account that displays the payment of employee wages, salaries, deductions, and bonuses. On the balance sheet, you may see if there are any unpaid wages or accrued paid vacation time.

26. Inventory

A business asset that is meant to be sold to customers is considered inventory. Once inventory items are sold, the account tracking the inventory assets will lower so that businesses can track when they need to restock.

27. Asset

An asset is a term used to define the things owned by the company which hold monetary value. When you see your assets listed, they will be in order of liquidity, with assets like cash as the most liquid, to difficult to dispose of assets like a building being one of the least liquid.

28. Book Value

While you may have depreciating assets—like the example company van—there is a term to describe the original value of that asset, which is when the term book value is used.

29. Liability

A business financial liability refers to the unpaid debts that a company has accrued. Often, your business liabilities will be things like business loans, accounts payable, and payroll.

30. Equity

After the liabilities have been subtracted from the assets of your business, the leftover value is called the equity.

To start working with our accountant concerning your business accounting needs, contact us today to set up a consultation. He will provide you with a tailored accounting plan that will suit the unique needs of your business.

As a startup, it is important for your business to make smart financial decisions in those first couple of critical years. This need can leave you unsure whether or not you can really afford to outsource your bookkeeping to an accounting firm. But the real questions it, can you afford to not have your bookkeeping taken care of by experienced hands?

If you have been considering whether or not a bookkeeping service is necessary for your startup company, here at AA Tax & Accounting Services, we’ve got 10 essential reasons why you should outsource that essential work.

1. Protect Your Business From Financial Errors

One of the major reasons why startups go under within the first five years of their existence is due to financial errors. These financial errors can be tied into a number of things, ranging from clerical errors that led you to believe that the company was doing better than it really was, to just being too disorganized with your financial records and not truly understanding where your business stands financially.

With a bookkeeper, especially an experienced accountant acting as a bookkeeper, your business is far better protected from the common financial errors that have toppled many other entrepreneurial dreams.

2. Assist In Setting Company Budget

Once you have precise records on your company’s cash flow, current balance, and other key financial factors, your ability to set a practical budget for your company rises up significantly.

Consider this scenario—say you launch a small custom eCommerce jewelry startup. You bought a custom engraving machine for $15,000 and have $10,000 in inventory. While the orders pour into your online storefront, if you have no way to track your accounts payable, accounts receivable, shrink from mistakes or order redos, shipping prices, and other costs, you can end up bleeding money from a business that can outwardly look successful.

But with a bookkeeper to track these things, you can more easily set a company budget and see if you can safely expand, bring on employees, buy more equipment and more.

3. Keep Important Financial Information Organized

As you can see in our budgeting example, having financial organization is critical to the success of your startup company. Not only can it help you budget, but frankly, keeping your financial records in order with the help of a bookkeeper can benefit your business in a number of ways.

For one thing, with the proper organization offered by a bookkeeper, you can put your hands on your startup’s financial information and be able to quickly grasp how your company is doing. That way, whether you are going into a potential investor meeting or just want to check up on your business, you can do it easily with the help of a bookkeeper.

4. Prevent Future Frustration During Tax Time

That organization also plays a huge role during tax season. Many startups are left scrambling for receipts, invoices, inventory records, and more once tax season rolls around, with little idea where to find most of the information that they need.

But with a bookkeeper on your side, you can have all that information ready to go. Also, by working with our accountant as your bookkeeper, he can also file your taxes for you. If for some reason the IRS performs an audit after your taxes are submitted, having accurate records is critical to satisfying the requirements of the auditor.

5. Free You Up For Other Tasks

When you act as the bookkeeper for your startup, you are chained to the responsibilities of both business owner and bookkeeper. In the early phase of your business, this may work to a certain extent, but the object is to develop your startup to the point where your attention is taken up with growth and other opportunities. But if you neglect the bookkeeping while pursuing company growth projects, your business can crumble.

By having a bookkeeper to take over your duties as company bookkeeper, you can free yourself and your ingenuity to develop your business beyond its current place without worrying that things will fall apart.

6. Help With Projecting Future Business Growth

Your startup’s day-to-day bookkeeping can be used as a road map to future success and growth, but only if it is kept up accurately.

With accurate bookkeeping, you can track buying trends, inflation on purchased inventory, see if your business has a holding pattern of staying in the green without any dips into the red, and other key financial indicators. Some bookkeepers can create these reports for you, though if you want to be sure that they can, you can always work with AA Tax & Accounting Services. Our accountant can create the reports you need to help you visualize future business growth projection.

7. Ensure Vendors And Employees Are Paid On Time

No one wants to become known as that kind of business owner. You know the kind, the one that always has a million excuses why payment is late. But, whether it is late payments to vendors or late payroll for employees, it is best if your startup stays on top of its financial obligations.

Once you have a bookkeeper to take care of these tasks, you won’t have to stress about whether or not the appropriate payments have been made. Instead, you can safely leave that task in the hands of your bookkeeper.

8. Work To Prevent Conflicts Of Interest And Embezzlement

If your startup is a partnership or has other invested parties, it can be considered a conflict of interest if you handle the bookkeeping personally. No matter how good a relationship you and your business partner had prior to opening a business venture together, the stress of owning and operating a business can put cracks in that relationship.

And if you even make an innocent mistake on the bookkeeping, that stress can lead to suspicion and a permanently damaged relationship, even the dissolution of your shared startup company. Also, if you are not the one in charge of the company bookkeeping and your business partner is, there will often be the shadow of embezzlement hanging over your relationship.

To prevent financial wedges coming between you and your business partner, bringing in a third-party bookkeeper is an ideal solution. With a bookkeeper checking the cash flow and the rest of the financial records, both partners can relax and work together more easily.

9. Attract And Keeps Company Investors

A bookkeeper who provides you with organized and detailed company financial records can be invaluable when it comes time to look for investors. In general, investors are looking for clear records of success so that they don’t back businesses that are doomed to fail. But with the financial records that a great bookkeeper can provide you with, you can prove to potential investors that your startup has legs to stand on.

Also, investors often require regular updates on the progress of their investment. You can keep these investors satisfied with their choices to back your startup company as you can provide them with the clear financial records of your success.

10. Provide You With Greater Peace Of Mind

Last, but certainly not least, having a bookkeeper like our experienced accountant can provide you with a great deal of peace of mind. Operating a successful startup can be stress while it is rewarding, and by having an accountant manage the many financial tasks behind the scenes, you can at least relax knowing that your company’s financial needs are being properly met.

Choose AA Tax & Accounting Services As Your Bookkeeping Service

To provide your startup with flexible bookkeeping to suit your business’ needs as well as an experienced hand when it comes to taking care of the bookkeeping, AA Tax & Accounting Service is who you need. If you would like to discuss your company’s bookkeeping needs with our accountant, feel free to contact us to set up a consultation.

30 Accounting Terms All Business Owners Should Know