Running a small business comes with its own set of challenges. It might be useful to comprehend the fundamentals of each department like bookkeeping, marketing, accounting human resources etc. Even though you might be hiring specialists to handle the jobs it is suggested that you be familiar with the fundamental concepts and jargon to make sure your company has access to reliable resources. One of the most important area you should familiarize yourself with is accounting services.

Knowing these accounting terms will help you understand and manage your business better.

1. Income Statement

A company’s net profit for a specific time period, calculated by deducting all expenses from all revenues, is shown in an income statement. It serves as an effective performance indicator and profit indicator.

2. Burn Rate

Burn rate is the amount of time you may go without making a profit while still covering your operational expenses. According to Stephens, this is a crucial metric for firms who are self-financing or that get venture money to expand their operations. It indicates how long you can exist before being self-sufficient or before you need to hunt for further cash.

3. Cash Flow

The flow of cash within your company is referred to as “cash flow” in accounting. Including both incoming and outgoing cash flows. A positive number represents a positive cash flow, whereas a negative number represents a negative cash flow. A snapshot of the timing and volume of cash entering and leaving a business at any one time is called cash flow. It is an accounting of all funds received and used for finance, operations, and investments.

4. Overhead

The costs associated with running your firm are referred to as overhead in accounting. This excludes costs associated with producing your good or service. As an illustration, your overhead might consist of rent, power, and payroll but not material costs. The flow of cash within your company is referred to as “cash flow” in accounting. Including both incoming and outgoing cash flows. A positive number represents a positive cash flow, whereas a negative number represents a negative cash flow.

5. Accounts Receivables

The accounting term “accounts receivable” or “A/R” is used to refer to the money that a company is due from its clients for the goods or services sold. You may read more about the necessity for receivables in small businesses here.

6. Accounts Payable

Accounts payable, or A/P, is the term used to refer to all of the costs that your company has incurred but has not yet settled. Accounts payable are those with unpaid balances.

7. Liquidity

The accounting concept of liquidity describes how quickly something can be turned into cash. Stocks, for instance, may sell more quickly than real estate or land.

8. ROI (Return on Investment)

Return on Investment, or ROI, is the profit your company makes divided by the investment needed. Instead of as a whole, ROI can also be computed for each project or goal. ROI is frequently determined as a percentage.

9. Business Entity

Your business entity is important to several areas of your bookkeeping. Each entity has its own specifications, legal restrictions, and tax ramifications. The LLC, S-Corp, C-Corp, Sole Proprietorship, and Partnership are the most popular types of business entities.

10. Equity

The amount that remains after obligations are subtracted is referred to as equity. You add up your assets and liabilities to calculate your equity. The remaining share of your company—also known as equity—is owned by investors and owners.

11. Revenue and Loss Report

Your cash flow is summarized in a financial statement called a profit and loss statement, commonly referred to as an income statement. Revenues, costs, and profits for a predetermined time period are included in your P&R statement.

12. Asset

Anything that your company owns and has a monetary value is considered an asset. Usually, assets are listed from cash to land in decreasing order of liquidity.

13. Liability

Any debt that your company has not yet paid is a liability. Accounts payable typically handles and includes liabilities.