10 Basic Accounting Terms Every Business Owner Should Know

If you don't have a background in accounting, the financial side of running a business can feel daunting. But by learning a few basic accounting terms, you can increase your financial savvy and improve your business.

If you'd rather have someone else manage your bookkeeping and accounting tasks, that's fine. But you still need to know what's going on in every part of your business—including finances. Having a simple accounting glossary in your back pocket can empower you to ask better questions about your company's financial health so you can make more informed decisions on trimming expenses, expanding services, projecting cash flow—and investing more in your most profitable products.

Different accounting methods

Understanding different accounting methods is easy because you only have to learn two terms: accrual basis and cash basis.

1 Accrual basis

With accrual basis accounting, you record revenue and expenses when they're earned, not when the money actually changes hands. This means a recent sale would come into your business as taxable revenue, even if a client hasn't yet paid the invoice.

2 Cash basis

As the simplest accounting method, cash basis accounting records revenue and expenses the moment money changes hands. This method can be beneficial for small businesses because it's straightforward, and the income isn't taxable until you receive payment.

Standard financial statements

These basic accounting terms will help you unlock the treasure trove of information in your financial statements.

3 General ledger

If you want to see a complete record of every financial transaction made by your company since its inception, you can refer to your general ledger. A well-kept general ledger is the foundation of a financially sound company. A poorly kept one, on the other hand, is a breeding ground for financial peril.

4 Balance sheet

If you're looking for a snapshot of your company's financials, a balance sheet delivers. In this financial statement, you can see your assets, which are calculated by adding liabilities and equity. A balance sheet can help you decide whether you have the necessary assets available to hire new staff, lease a new building or buy much-needed equipment to scale production.

5 Cash flow statement

If you're wondering where your business receives and spends money, you'll look to your cash flow statement. In this report, you'll find every source of money you bring in, along with all the expenses and liabilities that send money out of your business. A cash flow statement can help you identify top customers, poorly performing products and areas where you might be able to trim costs.

Accounting terms on financial statements

These basic accounting terms are frequently seen on financial statements. Here's what they mean.

6 Accounts payable

Accounts payable is money your company owes but hasn't yet paid, like an invoice from a vendor or internet service bill. These will be recorded on your balance sheet as liabilities.

7 Accounts receivable

Money that's owed to your company is listed as accounts receivable. An unpaid invoice you've issued to a customer would be classified as accounts receivable. If you use accrual basis accounting, accounts receivable are recorded as assets on your balance sheet.

8 Assets

Assets are items with cash value—both tangible and intangible—that are owned by the business. Things like equipment and real estate are tangible assets, while things like patents, copyrights and client lists are intangible assets. Assets are important because they speak to the whole of your company's worth, not just the cash in your bank account.

9 Liabilities

Short- and long-term debts are considered liabilities. They can include installment or revolving debts like credit card bills and mortgages, or short-term debts like payroll and taxes. By knowing your outstanding liabilities, you can make sales, marketing and expansion decisions that can help satisfy your debts while fueling business growth.

10 Expenses

An expense is money you spend to help generate income. This can include your rent, cost of raw materials, shipping fees and employee benefits. Learning how to track your business expenses can help you understand how much it costs to run your business each month, quarter and year. You can even work with a financial professional to identify potential areas to increase revenue and cash flow by reducing expenses.

The power of accounting

While it's natural to view business success as the result of providing excellent service and products, it can take much more than this. In fact, nothing may impact profits more than proper and smart accounting. Any step you take in this direction can bring you closer to financial success.