The Most Common Accounting Terms Every Small Business Owner Must Know

Deciphering the cryptic language of accounting and finance can feel like navigating a forest without a map. And if the mere mention of terms like ‘debit,’ ‘credit,’ and ‘balance sheet’ makes your head spin, don’t worry; you’re not alone when it comes to trying to make sense of finance vocabulary. 

Think of these accounting terms as your signposts through the world of financial management. It’s not always just about numbers; having a glossary of financial terms in your arsenal can quickly empower the first-time entrepreneur to conquer the uncertain waters of small business ownership. 

Understanding financial terminology isn’t just for survival; it’s to ensure your business thrives amidst the crowd. The secrets of debits, credits, and financial reports are your compass, guiding you toward economic prosperity. This knowledge allows you to make informed decisions, steer clear of financial quicksand, and navigate to the pot of gold. 

Let’s decode the financial terms you will most likely come across. 

Ten basic finance terms every small business owner should know 

Having these financial terms definitions in your entrepreneurial arsenal will help you decode the mysteries of small business ownership. 

1. Accounts receivable 

Accounts receivable refers to the money your customers owe you for goods or services you have provided. Staying on top of your accounts receivable is essential to ensure unreceived payments don’t have you swinging from the vines, financially speaking. 

2. Accounts payable 

Now, the roles are reversed. This time, accounts payable refers to the money you owe suppliers, service providers, or other business-related expenses. It’s usually the short-term debt you accrue while on your financial journey. 

3. Balance sheet 

Your balance sheet is the most accurate compass in the accounting wilderness. It gives you a clear picture of your business’s financial health at various points. Assets (what you own) stay on one side, while liabilities (what you owe) should balance the other. If you still need to, you must look at your finances. 

4. Cash flow 

In the accounting jungle, cash flow is your river of liquidity. Judged by that, you can estimate whether your business will stay afloat or sink. Cash flow is the movement of money in and out of your business, the funds required to run day-to-day. 

5. Gross profit 

Gross profit is the bounty you reap after a great harvest. It’s the revenue from your sales, removing the cost of goods sold (COGS). The bigger your gross profit, the juicier your financial rewards will be. 

6. Net profit

Net profit is the ultimate reward – the money left after deducting all expenses from your revenue. It’s the pot of gold at the end of the rainbow. These profits aren’t just numbers; they’re epic tales of how far along your business has come. 

7. Equity 

In the wild world of finance, equity is the value of what an entrepreneur has built. It’s the value of the business once all liabilities are settled and assets sold. Think of it as the cumulative value of your business’s triumphs and trials. The bigger your backpack, the bigger the gains you’ve made while running your business. 

8. Depreciation  

In the land of assets, ‘depreciation’ is your empire’s silent but inevitable decay. Depreciation is the financial way of acknowledging the wear and tear your business assets suffer through the journey. The cost is spread across these assets over their useful life, ensuring your financial reports reflect their accurate, current value. 

9. Income statement 

The income statement is the journal that records every last detail of your business adventure. It details your business’s revenues, expenses, profits, and losses over a specific period. This dynamic narrative keeps you up to date about your financial escapades. 

10. Accruals 

Accruals are like your financial footprints; they are records of transactions made before the actual exchange of money. That means a company recognizes revenues and expenses as incurred instead of when cash is exchanged. Keeping your accruals tight can prepare you for any challenge your business faces.

Congratulations, business owner! You’re a big step ahead in the jungle of accounting jargon, having these finance terms and definitions in your corner. While there’s a long way to go — arming yourself with a dictionary of finance and investment terms can help you navigate the rivers of cash flow and harvest your gross profit confidently. Remember, finance is not just about numbers of a ledger; it’s about building the narrative of your business journey. 

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.