As a business owner, it’s important to be able to understand various financial terms. You’re going to be hearing certain terms a lot and you should be familiar with them so that you don’t make mistakes due to misunderstanding a phrase. Read on to examine some of the basic financial terms that you should familiarize yourself with.
Accounting is a term that you probably know already, but this refers to counting your income and expenses. There are two subcategories of accounting known as cash accounting and accrual accounting. With cash accounting, income isn’t added up until you’ve received money and expenses won’t be deducted until they have been paid. Accrual accounting is different because it counts income and expenses when they occur.
The term assets refers to things that your company owns that are worth something. There are various types of business assets and they can be split between two categories. Fixed assets are ones that are intended for long-term use that you won’t likely be selling anytime soon. Current assets are ones that will likely be converted to cash within one year.
Bookkeeping is a term that goes hand-in-hand with accounting. Businesses use bookkeeping as a way to keep a chronological log of your transactions. Some people use software to help with bookkeeping responsibilities, but you can also do this by hand.
Depreciation is a term that refers to an asset losing value over time. For example, a vehicle is going to depreciate in value as it gets older. The same can be said for technology assets such as laptop computers.
A general ledger is what you use to track your daily or weekly account balances. Businesses need to track account balances, credits, and debits very carefully.
Income is the money that is coming into your business through sales. You might have cash income and you could also extend credit to customers who will pay you at a later date. All of this money that is coming into your business is income.
Liabilities are the debts that you have to pay. This will include multiple things such as business loans and the wages that you are obligated to pay out to your employees.