7 Essential Accounting Terms All Business Owners Need to Know

When running a business, you’ll likely encounter a variety of accounting terms. While you may already know some of these terms, others may cause confusion. And if you don’t know the definition of an accounting term, you won’t be able to effectively use that term when keeping track of your business’s finances. Below are seven essential accounting terms you need to know when starting or running a business.

7 Essential Accounting Terms All Business Owners Need to Know

#1) Cash Flow

Cash flow refers to the amount of money and assets that “flow” through your business during a short period of time. It includes both revenue and expenses, and it may be positive or negative depending on the ratio of revenue to expenses.

#2) Capital

Not to be confused with cash flow, capital reflects the amount of money you have to invest in your business’s operations. You can use capital to cover expenses such as payroll, equipment, advertising, rental payments and more.

#3) Assets

In the world of business, assets are tangible or intangible items of value owned by your business. While money is the most common asset owned by businesses, others may include real property, equity shares, equipment and vehicles.

#4) Liabilities

The term “liability” is used to describe a debt incurred by a business. Liabilities can be short or long term, and they can be secured or unsecured. Regardless, all liabilities are debt that you are required to pay back to the lender or creditor.

#5) Accounts Receivables

Depending on what type of business you operate, you may need to track accounts receivables. Basically, accounts receivables is an outstanding balance in which a customer or client — or any other party associated with your business — owes your business money. Because accounts receivables are considered an asset, you’ll need to track them to gain a better understanding of your business’s total value or worth.

#6) Balance Sheet

Perhaps the most important financial document for businesses is the balance sheet. This essential accounting document contains an overview of your business’s finances, including its assets, liabilities, capital and more.

#7) Depreciation

Depreciation occurs when the value of an asset decreases over time. While tracking depreciation may sound pointless, it can carry tax implications. To ensure you aren’t overpaying on your business’s taxes, you should keep track of how much your assets depreciate over time.

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