Every business owner needs to have a basic understanding of accounting principles and terms in order to manage their finances effectively.
Being knowledgeable about accounting not only helps business owners maintain control and accuracy over their finances but can also prepare them for any unexpected bumps along the way.
Staying on top of accounting helps business owners build more confidence in their financial statements, alleviating stress and making it easier to identify problem areas quickly before they turn into larger issues. Knowing accounting fundamentals is important in order to create a successful business that can stand the test of time!
Here are 8 essential basic accounting terms that every business owner should know:
1. Profit & Loss income statement (P&L)
A profit and loss statement is an incredibly useful tool for any business or individual that wants to know how their finances are doing. It's a way of tracking incoming and outgoing funds over a given period of time, usually a quarter or year so that you can observe both your profits and losses.
This document is essential to gain insights into the financial health of your business so you know where investments should be made or what areas are draining resources. Any business that is looking to be successful needs to understand its profit and loss income statement in order to develop lasting strategies for growth and success.
2. Cash flow
Cash flow is the total amount of money moving into and out of a company over a set period. This includes cash from sales, taxes paid, investments made, loans received and other sources.
Being able to track your cash flow is important for managing your budget and ensuring you have enough cash on hand to cover expenses each month.
3. Assets
Assets are generally defined as economic resources that can provide future financial benefits. Examples of assets people typically have include stocks, bonds, mutual funds, property and cash.
With these assets, individuals have the potential to generate income or build wealth over time with smart investments. Knowing the basics of what an asset is can help investors understand how each type of asset works so they can make well-informed decisions when selecting the right options for their individual financial needs.
4. Liabilities
Liabilities can be an interesting topic to discuss since they are such a vital part of doing financial calculations. Liabilities are the amount an individual or business owes that must be paid either in future instalments or in one lump sum.
Examples of liabilities might include accounts payable, income taxes, lines of credit, loans and mortgages. As you can see, understanding liabilities is important when evaluating your financial situation.
Properly managing liabilities is key to proper bookkeeping and planning for the future so as to maintain your financial security!
5. Accounts receivable
Accounts Receivable is an important financial metric that measures the amount of money owed to a company by customers who have purchased goods or services on credit. This information can provide businesses with valuable insights into how efficiently they manage customer payments and can also help them measure their current liquidity.
When calculating Accounts Receivable, it is important to keep track of any due dates for invoices and late fees that may be incurred if payments are not received on time. Ultimately, accurate Accounts Receivable data helps businesses stay on top of their finances, allowing them to better manage cash flow and make informed decisions about allocating resources.
