Demystifying essential financial jargon.
Do you know the difference between current and fixed assets? Or gross profit margin and net profit margin?
If the distinctions between the finance terms have foxed you, you’re not alone.
Statistics indicate that 60% of small business owners feel they need more knowledge of finances and accounting.
Accounting is rife with jargon and confusing terms. However, understanding financial terminology is crucial to accurately picture your business’s financial health and make informed decisions.
We’ve compiled a handy guide to help you navigate the differences between some essential finance terms and definitions.
Here are five pairs of accounting phrases explained.
1. Accounts receivable vs. Accounts receivable turnover ratio
Accounts receivable is the amount customers owe your company for products or services rendered.
On the other hand, accounts receivable turnover is an efficiency ratio that measures the number of times your company can collect its average accounts receivables over a given period.
2. Current assets vs. Fixed assets
Current assets are short-term assets that can be converted to cash within a year. They are used to facilitate a company’s day-to-day operational expenses and investments.
On the contrary, fixed assets are those that the business cannot convert into cash easily but are tangible items that a company owns. They are long-term assets and have a life of more than one year. Common examples of fixed assets include equipment, machinery, buildings, and land.
3. Break-even point vs. Break-even units
The break-even point is the production level at which the total costs equal the revenue generated for a product. It is where any additional sales will be profitable for a company.
Break-even units, on the other hand, are the number of units of a product that a company must sell to make enough money to cover the cost of making the product.
4. Current liabilities vs. Long-term liabilities
Current liabilities are the short-term debt payable within one year, such as accrued expenses, short-term loans, and accounts payable.
Conversely, long-term liabilities are financial obligations due over a longer time horizon. Long-term liabilities include mortgage loans, bonds payable, and long-term loans.
5. Gross profit margin vs. Net profit margin
Gross profit margin remains after subtracting the cost of goods sold (COGS) from revenue. It expresses the relationship of profit to income as a percentage.
On the other hand, the net profit margin remains after subtracting both the COGS and operating expenses from revenue, giving you a better idea of your final gain after removing all business costs.
The final word
As a business owner, you’re involved in many important financial decisions for your company. Whether you track your company’s finances or outsource to an expert professional, you’ll still benefit from understanding the distinction between these basic accounting phrases.
Want to know more about finance and accounting? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours, too. Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.