When you run a business, proper financial management can go a long way toward long-term financial success. Though you can always hire an accountant to help with financial and tax issues, knowing some key financial ratios and accounting terms can come in handy.
Here are a few accounting terms every business owner should know.
A break-even analysis determines the amount of revenue you need to make back your original investment. The break-even point is the point at which your total income and total costs are equal. This is a crucial metric because it helps you determine when you’ll recoup your investment and start making money.
A financial statement is a written record of a company’s business activities and financial performance. The main financial statements include:
An accounting period is the time frame for which a business prepares financial statements and reports its financial performance. An accounting period is usually 12 months but could be three, six, or even one month.
An asset is anything your business owns that has monetary value. Assets can be tangible, such as cash and machinery, or intangible, like goodwill or a franchise agreement. They appear in terms of cash value on the balance sheet.
Liabilities are debts your business owes, such as rent, loans, salaries, or income tax. They’re classified as either short term or long term on the balance sheet.
A balance sheet is a financial statement of a company’s assets, liabilities, and capital at a particular point in time. The balance sheet provides a basis for evaluating your capital structure and calculating the rates of return.
Accounts payable are amounts owed to suppliers and vendors for goods or services you’ve received on credit. The total outstanding amount due to suppliers is a current liability, and it appears as the accounts payable on your company’s balance sheet.
Accounts receivable refers to the total amount of money owed to you by buyers for goods supplied or services rendered that they haven’t paid for. The total amounts owed is a current asset, and it appears as the accounts receivable on your company’s balance sheet.
Net income refers to the amount your business makes after deducting all expenses, including the cost of goods or raw materials, salaries, wages, and taxes. For your business to be financially healthy, your net income should ideally be greater than the expenditure.
The accounting method refers to the set of rules and guidelines that your business adheres to when keeping financial records and preparing financial reports for tax purposes. The primary account methods are accrual accounting (generally used for business) and cash accounting (generally used for individual accounting).
Those are the essential accounting terms every business owner should know.
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