If you’re just starting off with your small business or tackling it alone as a self-employed individual or sole trader, there’s a wealth of complicated accounting terms which can be difficult to get your head around. Here at Accountancy Solutions, we want to make your life easier which is why we’ve created this guide to our key accounting and financial terms to help get you off on the right track.
Accounting and financial terminology
From accruals to variable costs, here’s our top 17 accounting terms every small business should know:
1. Accruals
Accruals are a list of sales or expenses that have been incurred but haven’t been paid yet.
2. Balance sheet
A balance sheet is a financial statement which lists all of your company’s assets, as well as any liabilities or equity your business might have. To ensure the balance sheet is balanced, you can use the following equation: assets = liabilities + equity.
3. Cash flow
Cash flow is a key accounting term that refers to the difference between the money that’s available at the beginning and end of an accounting period. This cash will come from any money your business makes such as investments and sales, and will go out through purchases, debts, etc.
4. Dividends
Dividends are any company earnings (this could be in the form of cash, shares or even property) which regularly get distributed to company shareholders. The amounts and percentages will be decided by the board of directors.
5. Equity
Equity is a financial term which refers to the amount that’s been invested in the company by any owners. If your business is only small with just a few owners, it may be called ‘owners’ equity’. It works a bit differently for larger companies with many different owners or where the business is divided up in stocks, as then the equity refers to the ownership which is held by the shareholders as a whole.
6. Fixed cost
Fixed cost is accounting terminology which means that a certain cost won’t change even if the company sells/makes more money. These costs stay consistent and aren’t influenced by production rates or the current market. Examples of fixed costs can be things such as rent and salaries.
7. General ledger
A general ledger is a complete record of your company’s financial transactions over the entire company’s lifetime.
8. Income statement
An income statement is a key accounting term which refers to a financial statement that displays revenues, expenses and profits over a certain period of time. These statements may be generated monthly or annually and are used to calculate net income.
9. Journal
A journal is where any transactions, updates or changes are recorded. In a journal they get recorded as they occur, before they get transferred to the general ledger.
10. Liquidity
This financial term means how quickly something can be converted into cash. An example of this is the fact that stocks can be sold faster than houses – making stocks more liquid.
11. Net profit
The net profit is your businesses profit, minus all expenses. This might also get called net income, net earnings or the bottom line.
12. Net margin
This financial terminology determines the profitability of your business. The net margin takes all expenses into account, you need to simply divide your revenue by your net income in order to work it out.
13. Overheads
Overheads are any ongoing expenses that your business needs to operate. This could refer to things such as rent, salaries, etc.
14. Profit and loss statement
A profit and loss statement is an accounting term which refers to a report that lists all earnings, expenses and net profits. This can give you a view of any profits or losses over a certain period of time.
15. Revenue
Revenue is the money your business makes by selling things such as services or products.
16. Trial balance
A trial balance is a method of confirming final figures before creating financial statements. It will list all accounts in the general ledger with the balance amount, and the total debits must equal the total credits.
17. Variable cost
As the name suggests, variable costs are the opposite of fixed costs. These can change with the amount of sales; it will increase when production volumes go up and vice versa.
These are just our top 17 accounting terms that every small business should know, but there’s plenty more out there! If you’re still struggling with the financial lingo, don’t worry as we’re here to help. At Accountancy Solutions we have a team of dedicated accountants that can help break down the various financial terms and get all your accounts in order. Get in touch today or call us on 01633 288299 to find out more.