The often intimidating, but critical, part of starting a small business is learning about the "numbers" side of the business. You may have a great product, unique concept, and personality in abundance, but if you can't get your head wrapped around basic accounting, the business may be doomed before it has a chance to get off the ground.
Having an accounting glossary of terms in your head before you start the business is important so that you can write a coherent business plan, both for yourself and to presentat to potential investors or lenders. The following glossary of accounting terms should help get you started.
Bookkeeping is the actual recording of all business transactions, including sales, expenses, and revenues.
Accounting is essentially a financial statement of your business that is done by analyzing the information from your bookkeeping (accounting encompasses bookkeeping—you need to keep good books in order to have a proper accounting). Accounting tells you your current financial situation and can forecast where the business is headed financially.
Accounting periods are the regular periods over which profits and losses are calculated. Typical periods are monthly, quarterly, and yearly.
A ledger is the physical accounting record (now largely done on computer software) of a business. It will include assets, liabilities, revenues, expenses and profits and losses. The ledger serves as the basis for various financial reports regarding the business.
Double entry bookkeeping is a system of accounting where every transaction is recorded twice—as a debit and as a credit.
A balance sheet is a statement of a business' at any particular time, which lists the company's assets, liabilities, and capital. The assets should at least equal (balance) the company's liabilities and capital.
Fixed costs are costs which do not change as the business goes up or down. Fixed costs include rent, salaries that aren't performance or volume-based, and interest.
Variable costs are costs which change according to changes in business volume. Examples of variable costs include cost of labor, material, or overhead.
The cash method is an accounting method where expenses are recorded when you actually pay the bill and revenues are recorded when you actually receive the money. For example, if you make a sale January 1 but don't receive the payment until March 1, under the cast method, it is recorded as revenue on March 1.
The accrual method is an accounting method where expenses and revenues are recorded at the time of the actual transaction. So if you make a sale January 1, you record the transaction on that day (the date the sale accrues), no matter when you actually receive payment.
Accounts payable are amounts that the business owes to vendors and suppliers for anything the business has purchased from them.
Accounts receivable are amounts that are owed to the business by customers.
A business plan is a written document that lists a company's assets and liabilities and outlines a company mission statement as well as includes a specific plan for the creation and growth of the business. It can be used to lure investors and lenders as well as a guide for the business owner as the company gets off the ground.
The breakeven point is where the revenues equal exactly the expenses. It is part of a business plan and tells the owner and prospective investors how many sales it will take to become profitable.
An audit is a systematic review of your financial records. Though audits are associated (not pleasantly) with the IRS, they are often conducted internally or by a third party to check for accuracy.
Equity is the owner's share of a business.
A write-down is a reduction in the valuation of an asset. It's done when an asset has lost some but not all of its value.
A write-off is a complete reduction in valuation of an asset. It's done when an asset has lost all of its value.
Speaking to a Business Lawyer
Now that you've read our glossary and understand the various different accounting terms for small businesses, you will likely have questions regarding how these definitions apply to your specific situation. Contact a qualified business and commercial law attorney today to learn more.