The 13 Accounting Terms an Entrepreneur Should Know Before Starting Their Business

May 29, 2022 | Written by: Sohail Afzal

The 13 Accounting Terms an Entrepreneur Should Know Before Starting Their Business

Starting a business is no easy task. There are many things to think about – from the product or service you’ll offer to the branding and marketing strategy you’ll use to get your name out there. But one of the most important aspects of any business is its accounting. Without good accounting practices in place, it can be very difficult to make informed decisions about your company’s future. In this article, we’ll discuss 13 accounting terms that every entrepreneur should know before starting their business!

Why Do You Need Accounting Skills as a Business Owner?

As a business owner, accounting skills are critical for several reasons. First and foremost, accounting is essential for making sound financial decisions about your company. It can be very difficult to understand where your business makes or loses money without accurate financial information. Additionally, good accounting practices can help you keep track of important deadlines and tax obligations. Finally, strong accounting skills can better understand your customers’ spending habits and help you make more informed pricing decisions. Knowledge about accounting terms however is also very important.

What Is Accounting?

At its most basic level, accounting is the process of tracking and recording financial transactions. This includes everything from sales and purchases to expenses and revenue. By keeping track of all incoming and outgoing money, businesses can clearly picture their overall financial health.

There are two main types of accounting: financial accounting and managerial accounting. Financial accounting is focused on providing accurate financial information to external parties, such as investors or creditors. On the other hand, managerial accounting is focused on providing decision-makers within the company with the information they need to make informed decisions about the business.

What Is Bookkeeping?

Bookkeeping is a critical part of accounting that systematically tracks all of a business’s financial transactions. This includes recording ledger transactions (like digital or physical journals), categorizing them, and then reconciling them with bank statements. By keeping track of all money coming in and going out, businesses can get a clear picture of their financial situation at any given time.

Bookkeeping is usually done on a daily, weekly, or monthly basis. However, some businesses choose to do it more frequently to stay on top of their finances. Many businesses outsource their bookkeeping to accounting firms or other professional bookkeeping services.

What Is Double-Entry Bookkeeping?

Double-entry bookkeeping is a system that records each financial transaction twice to reduce errors and ensure accuracy. Under this system, each transaction is recorded in two separate accounts (also known as ledger entries). For example, when a business makes a sale, it records the sale in both the “sales” and the “cash” accounts. This helps businesses keep track of their income and expenses in one place.

Double-entry bookkeeping is the most common accounting method used by businesses today. However, it can be quite complicated, so many businesses outsource their accounting to professional accounting firms.

What Is Accrual Accounting?

Accrual accounting is an accounting method that recognizes revenue when it is earned and expenses when they are incurred, regardless of when the money is received or paid. This means that accrual accounting businesses will record revenue as soon as a product or service is delivered, even if the customer has not yet paid for it. Similarly, expenses will be recorded as soon as they are incurred, even if the business has not yet paid.

Accrual accounting is the most common accounting method used by businesses today. However, it can be quite complicated, so many businesses choose to outsource their accounting to a professional accounting firm.

What Is Accounts Receivable?

Accounts receivable is the money that a business is owed by its customers for products or services that have been delivered. When a business makes a sale on credit, the customer becomes an accounts receivable. This means that the business has earned the revenue but has not yet received the payment. Accounts receivable are recorded in the “accounts receivable” ledger account.

Businesses usually send invoices to their customers detailing what they owe and when the payment is due. Customers then have a certain amount of time to pay the invoice, typically 30 days. If the customer does not pay within that time frame, the business can charge interest or late fees.

What Is Accounts Payable?

Accounts payable is the money that a business owes to its suppliers for products or services received. When a business purchases something on credit, the supplier becomes an accounts payable. This means that the business has incurred an expense but has not yet paid for it. Accounts payable are recorded in the “accounts payable” ledger account.

Businesses usually have a certain amount of time to pay their invoices, typically 30 days. If they do not pay within that time frame. They may be charged interest or late fees.

What Is a Balance Sheet?

A balance sheet is a financial statement that shows a business’s assets, liabilities, and equity at a specific point in time. Assets are anything of value that the business owns, including cash, inventory, buildings, and equipment. Liabilities are anything the business owes to others, including loans, credit cards, and accounts payable. Equity is the difference between assets and liabilities; it represents the owner’s investment in the business.

The balance sheet equation is: Assets = Liabilities + Equity. This means that all of a business’s assets must be financed by either liabilities or equity. A balance sheet is an important tool for businesses to track their financial health over time.

What Is Cash Flow?

Cash flow is the movement of money in and out of a business. It includes all cash receipts (money coming into the business) and all cash payments (money going out of the business). Cash flow is important because it shows how much cash a business has available to pay its bills.

There are two types of cash flow: operating cash flow and investing cash flow. Operating cash flow is the cash generated by a business’s normal operations, such as sales and expenses. Investing cash flow is the cash generated by a business’s investments, such as buying new equipment or selling old equipment.

What Is an Income Statement?

An income statement is a financial statement that shows a business’s revenues, expenses, and profit for a specific period. The income statement equation is: Revenue – Expenses = Profit. This means that a business’s revenues must be greater than its expenses to make a profit.

An income statement is an important tool for businesses to track their financial performance over time. It can also be used to compare the financial performance of different businesses.

What are Debits and Credits?

Debits and credits are accounting terms that describe the two sides of a financial transaction. A debit is an entry on the left side of an accounting ledger, which indicates an increase in assets or a decrease in liabilities. A credit is an entry on the right side of an accounting ledger, which indicates a decrease in assets or an increase in liabilities.

In double-entry bookkeeping, every financial transaction must be recorded as both a debit and a credit. This ensures that the books always stay balanced.

What is Trial Balance?

A trial balance is a list of all the accounts in an accounting system and their balances. The trial balance is used to check that the debits and credits in the accounting system are equal. This ensures that the books are balanced and there are no errors.

The trial balance is an important tool for businesses to prepare their financial statements. It allows them to check that their accounting records are accurate and complete. It is also one of the most important accounting terms for an entrepreneur.

What are Financial Statements?

Financial statements are accounting reports that show a business’s financial health. The three most important financial statements are the balance sheet, the income statement, and the cash flow statement.

The balance sheet shows a business’s assets, liabilities, and equity at a specific point in time. The income statement shows a business’s revenues, expenses, and profit for a specific period of time. The cash flow statement shows money movement in and out of a business.

Financial statements are important tools for businesses to track their financial health over time. They can also be used to compare the financial performance of different businesses.

What is Depreciation?

Depreciation is an accounting method used to allocate the cost of a long-term asset over its useful life. Depreciation is important because it allows businesses to write off the cost of an asset over time instead of all at once. It is one of the most important accounting terms of all time.

There are two main types of depreciation: straight-line depreciation and declining balance depreciation. Straight-line depreciation allocates the cost of an asset evenly over its useful life. Declining balance depreciation allocates more of the cost in the early years and less in the later years.

Final Thoughts

As you can see, accounting is a complex and important part of running a business. By understanding these accounting terms, you’ll be better equipped to make informed decisions about your company’s finances! Contact an accounting firm today to keep your business finances in order.

Sohail Afzal CPA Toronto

Sohail Afzal, CPA, CMA, MBA

Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.

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