Accounting is a necessary and important part of running a small business, especially if you’re not using an accountant. It comes with its own lingo, and while total immersion might be a great way to learn Italian (who wouldn’t love a 3-month trip to Italy?), it might not be the best approach for accounting. We’ve put together some of the most common and essential terms you’ll need to know if you’re going to tackle your books (you can and you will).
accounting period: The span of time reported in financial statements.
accounts receivable: The money a business is owed, even if they haven’t paid you yet. Sales you’ve made, invoices you’ve sent—however your business makes money.
accounts payable: The money a business owes. If you have a stack of invoices from vendors, suppliers, etc., piled on a desk somewhere, those are your accounts payable.
allocation: The procedure of assigning funds to accounts or periods. In the case of accounts, funds may be distributed to specific departments. In the case of periods, you may spread funds over several months (you might do this for loan or insurance payments).
asset: Anything a business owns. Land, office buildings, furniture, computer equipment, machinery, copyrights, trademarks, etc. An asset is pretty much anything of value that can be converted into cash, whether in the short or long term.
accounting: The practice of keeping records of what a business has spent and earned. Like balancing a checkbook (remember that?) but for a business.
account: See journals.
accruals: This is essentially your company’s money-related to-do list. It encompasses invoices that have not yet been paid (accounts payable to-dos) and sales that have been completed but not yet billed (accounts receivable to-dos).
accruals based accounting: An accounting approach that logs expenses and sales when they take place rather than when they are paid, which allows for some flexibility in accounting. This method has its own rules for when expenses are and aren’t recognized for a reporting period.
accrued expenses: Expenses being reported that have not yet been paid.
amortization: The process of distributing the cost of an intangible asset over time. (For a small business loan, this is the process of spreading a loan out over a specified period of time and a specified number of payments.)
appreciation: When the value of an asset or investment grows.
balance sheet: An overview of a business’s assets, liabilities, and equity.
book value: Shows the original value of an asset, minus any depreciation, amortization, or impairment costs.
bookkeeping: Keeping a record of a business’s earnings and expenses.
capital: See working capital.
capital expenditure: Money a business spends on acquiring a fixed asset like land, equipment, or a building.
cash basis accounting: An accounting approach that logs expenses and sales when they are paid. It’s simple, straightforward, and particularly useful for small or new businesses.
cash flow: The money coming into a business (income, sales, investments) and the money going out (business costs).
cash flow statement: A financial statement that covers a business’s cash flow for a given period of time. Also called a statement of cash flow.
Certified Public Accountant (CPA): A professional designation earned by an accountant who passes the CPA exam and fulfills the requirements for education and work. CPA requirements vary by state.
close the books: Balancing a business’s accounts in order to prepare a statement (say, for taxes) or report.
costs: See expenses.
cost of goods sold: The costs that are directly related to the making of a product or service. Let’s say you’re making a shoe. Leather and labor for the creation of the shoe are included in the cost of goods sold. Marketing? Not included in the cost of goods sold.
credit: An entry made in an account that increases equity, liability, or revenue accounts or decreases an asset or expense account.
debit: An entry made in an account that increases an asset or expense account or decreases equity, liability, or revenue accounts.
deferrals: In accruals accounting, when you push back recognizing certain revenues or expenses (taxes, income, annuities) until a future accounting period when they occur.
depreciation: When an asset or investment loses value. Common examples of assets that depreciate include automobiles and computer equipment (when will someone invent a car that appreciates in value already?).
diversification: Allocating capital across different assets to reduce risk.
Enrolled Agent (EA): A professional accounting designation for professionals who have completed tests that demonstrate expertise in business and personal taxes.
equity: The difference between the value of assets and liabilities.
expenses: The money spent on something related to the operation of a business. Also known as the inspiration for the saying, “You have to spend money to make money.” In accounting, you’ll see 4 types of expenses: accrued, fixed, operational, and variable. Also known as costs.
financial statements: Income statements/P&L (profit and loss), balance sheets, and statements of cash flow.
fiscal year: The 12-month period a business uses for accounting purposes, preparing financial statements, and paying taxes. The fiscal year can vary from business to business, and it depends on how long it takes a company to close out the books and prepare financial statements by tax due dates.
fixed cost: An expense, like salaries, that stays the same, regardless of sales volume.
fixed expenses: Expenses that are consistent over a long period of time. These generally include payroll, office rent, car payments, etc.
forecasting: Using a business’s past financial performance to make predictions about future financial performance. This is often used in the process of creating budgets and sales goals for the next year.
general ledger: The ultimate authority on the financial history of a business. This holds every transaction a business has ever made over the lifetime of a business.
generally accepted accounting principles (GAAP): The sworn oath taken by all accountants in the moonlight (no, not really). These are the rules that all accountants follow when performing accounting tasks. It’s like the accountant’s version of the Hammurabi Code.
gross margin: Shows the general profitability of a business, accounting for the cost of goods sold. This is calculated by taking your revenue and subtracting the cost of goods sold over the same period of time. This results in a dollar amount that shows your gross margin. Also known as the gross profit.
gross margin percentage: The gross margin divided by the net sales, then multiplied by 100.
gross profit: See gross margin.
impairment: A permanent reduction in the value of a company asset—usually a fixed asset.
income: See revenue.
income statement: See profit and loss statement.
interest: The amount owed on a business loan or line of credit that exceeds the principal amount borrowed.
inventory: The goods you have available to sell.
invoice: A document that outlines payment due in exchange for goods or services rendered, along with the payment terms—aka how long the recipient has to make that payment.
journal: Like a holding pen for records of transactions. Transactions are recorded here before they are added to the official accounting record. Also called an “account.”
journal entry: Changes and updates made to a business’s financial records.
liabilities: The debts that a company must pay. Could be tomorrow (short term). Could be 3 years from now (long term). If a business owes a debt, it’s a liability.
liquidity: How quickly something can be converted into cash.
material: Whether or not something matters for decision-making. Trivial amounts (think $0.50) are not material. Larger amounts are material, and according to GAAP, any material considerations must be disclosed.
net sales: See revenue.
net income: Revenue minus all expenses (overhead, depreciation, taxes, cost of goods sold) in the same period.
net margin: The net income divided by the revenue for the same period. This shows a company’s profitability in relation to its income.
operational expense: The cost necessary to conduct business.
overhead: Expenses that relate to running a business like rent, employee salaries, and anything that’s necessary to keep the lights on (like the electricity bill).
past due: When payment has not been made by the due date, as specified in the terms. If your invoices set terms of “net 30 days,” that means the payment is due 30 days after receipt of the invoice. Invoices that are past due can incur additional fees. If you’ve got one of those, you might want to take a break from this glossary and go pay it now.
payroll: The money paid to employees through salaries, wages, bonuses, and deductions.
profit and loss statement: Also known as a P&L (now you can look cool in front of your accounting friends). This report lists a business’s earnings, expenses, and net profits.
receipts: A document that proves payment was made.
revenue: 🎵Money, money, money.🎵 This is the total amount of money a business collects in exchange for goods or services. What it includes: credits and discounts for returns. What it doesn’t include: expenses that reduce the total profit. Also known as income.
statement of cash flow: See cash flow statement.
trial balance: Double-checking your work. This is like a practice round before you generate financial statements. Debits and credits are entered on a worksheet to ensure that the current balances are correct. It gives you a chance to catch anything you might have overlooked.
variable expenses: Expenses that fluctuate based on a business’s performance. They may change depending on sales or production. Think commissions, production supplies, credit card fees, etc.
working capital: Cash money you can use. This is the amount of money a business has on hand to make purchases, pay employees, and invest in business growth.