A rundown of crucial accounting terms for entrepreneurs.
Accounting terminology can be challenging, but this knowledge benefits business owners. Being familiar with the terms and their meaning will prepare you for the challenges you will inevitably encounter on your entrepreneurial journey.
Understanding financial terminology can help you maintain a sharp focus on costs and simplify cash flow measures, which are critical in maximizing a business’s chance of survival.
Additionally, this knowledge will help you better understand your firm’s financial state and facilitate more informed business decisions. Lastly, familiarity with the primary finance terms also makes you better able to deal with accountants and other finance professionals, consequently saving time and money.
Here is an easy reference guide of finance terms and definitions to help you build your financial vocabulary.
Amortization is the accounting practice of spreading the cost of an intangible asset over its useful life. Some examples of intangible assets that can be amortized include trademarks, franchise agreements, copyrights, and patents.
2. Accounts payable
Accounts payable are short-term debts your company owes to creditors and suppliers. Some examples include raw materials, products, services, and transportation expenses.
3. Accounts receivable
Accounts receivable refers to money customers owe your company for services or goods provided. It is typically recorded as an asset on the balance sheet.
Assets are items of value that your company owns. These can include tangible and intangible property, such as machinery, inventory, stocks, cars, and patents.
5. Balance sheet
The balance sheet summarizes your company’s assets (what you own), liabilities (what you owe), and owners’ or shareholders’ equity. It gives a snapshot of your company’s financial position at a given time.
6. Cash flow
It refers to the net cash and cash equivalents moving in and out of the business at a specific point. A positive cash flow means you have enough money to fund your overhead costs and meet your short-term financial obligations.
7. Cash flow statement
It is a financial statement that provides a detailed analysis of how your company utilizes cash during a given period. This document illustrates how your business generated and spent money by including a rundown of cash flows from operating, financing, and investing activities during the reporting period.
This acronym is for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is a metric used to evaluate a firm’s operating performance.
Liabilities are the opposite of assets; they are what your company owes other parties. They are recorded on the right side of the balance sheet and include accounts payable, loans, mortgages, deferred revenues, and accrued expenses.
10. Net worth
When you subtract your company’s assets from its liabilities, the result left is the net worth. It provides a helpful snapshot of your company’s current financial position.
11. Working capital
It is the difference between a company’s current assets and current liabilities. Working capital helps determine an organization’s operational efficiency and short-term financial health.
The final word
Mastering these crucial finance terms can help you gain a more holistic view of your business. At the same time, it can also help you analyze the performance of your specific teams and understand the impact of your business decisions.
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.