For many business owners, managing finances can feel overwhelming. From maintaining accurate records to handling transactions and staying up to date with tax laws, there is a lot of ground to cover – including complex and sometimes confusing language. Learning these small business accounting terms can help you better understand the financial side of your business. 

Financial Statements and Reporting

• Balance Sheet: A balance sheet is a financial statement that takes a financial snapshot of a business at a specific moment in time. It records assets, liabilities and equity in the company and is an important tool for evaluating a business. 

• Income Statement: An income statement is a financial report that details the company’s revenue, expenses, gains and losses for a given period. 

• Cash Flow: Put simply, cash flow is how money is moving in and out of a business during a certain period of time. This net cash flow can be negative or positive depending on the inflow compared to outflow.  

• Trial Balance: The trial balance is a report/worksheet that lists the balances of all ledger accounts separated into debit and credit columns. It is used to check for accuracy and can also be used as the first step in an audit.

• General Ledger: A general ledger is the detailed record of all financial transactions for a company, including assets, liability, equity, revenue and expenses.

Assets, Liabilities and Equity

• Assets: An asset is a resource owned or controlled by a business, individual or entity with economic value that is also expected to provide more value over time. These can either be tangible assets (physical, such as a building) or intangible (non-physical, such as copyright) or financial (an investment, such as stocks). 

• Liabilities: Liabilities are debts, either money, goods or services, owed by a company.   

• Equity: If a company’s assets are liquidated, equity is the residual interest left over after liabilities have been deducted. This is also called shareholder’s equity.

• Current Assets: Current assets are assets that are expected to be converted to cash within one year. 

• Fixed Assets: Fixed assets are long-term, tangible assets used to operate a business (such as buildings and vehicles). On balance sheets, they may appear as PP&E, or property, plant and equipment. 

• Current Liabilities: Current liabilities, as listed on a balance sheet, are short-term liabilities that are due to be paid within one year. 

• Working Capital: Working capital is the difference between a company’s current assets and liabilities, also known as its day-to-day cash flow, used for general operations.

Transactions and Accounting Methods

• Accounts Payable (AP): Accounts payable is the amount of money a business owes to a current account, supplier or creditor. When recorded on a balance sheet, it is listed as a liability because it has not yet been paid. Managing, recording and paying outstanding invoices is sometimes referred to as the AP process. 

• Accounts Receivable (AR): On the other side of this coin, accounts receivable is the amount of money a business is owed by a vendor, customer or other debtor on a current account. It represents goods that were given on a line of credit that have yet to be paid. It is shown as an asset on a balance sheet because it represents cash that the business can expect to receive within the current year. 

• Accrual Accounting: Accrual accounting is a type of accounting where transactions are recorded when a revenue or expense is accrued – not when it is actually paid in cash. This differs from cash-based accounting, which records these expenses only when the cash is exchanged.   

• Chart of Accounts (COA): A chart of accounts is an organized ledger of a company’s’ accounts sorted into categories. It’s an important tool to demonstrate a company’s financial health.

• Debit: In accounting terms, debit is a bookkeeping entry that increases assets and decreases liability. 

• Credit: In accounting terms, credit is a bookkeeping entry that increases liability and decreases assets. The inverse of a credit is a debit. In broader terms, credit is the practice of acquiring a good or service with the obligation to repay the lender at a later time, often with interest added. 

• Depreciation: In accounting, depreciation is a method of calculating the upfront cost of an item divided by the number of years it will be used to spread out a large expense over time. In broader terms, depreciation is the reduction in the value of a tangible asset that occurs over time.

Profitability and Financial Analysis

• Revenue: Revenue, also referred to as sales on an income statement, is the total amount generated by a business for services or sales made. 

• Cost of Goods Sold (COGS): Cost of goods sold, also referred to as cost of sales, is the amount of money spent to produce a product. This direct cost can include materials and labor. It does not include indirect costs, such as the cost of marketing the product.

• Gross Profit: Gross profit is calculated as the total revenue minus the cost of goods sold, which includes the cost of producing and marketing a product. This is also called sales profit.

• Net Income: Net income, also called net earnings, is a calculation of profit after expenses have been deducted from the revenue. This term can also be applied to an individual’s earnings after taxes have been deducted.

• Break-Even Point: The break-even price is the amount of money an asset or business must be sold for to cover the cost of acquiring it. In manufacturing, this same term refers to the amount a product must be sold for to cover the cost of production. 

• Dividends: Dividends are a payment made to shareholders in a company as a percentage of their profits. This payment is typically made quarterly. 

Small Business Accounting Terms Checklist

Download a printable copy of these terms to keep them handy.

Expert Accounting Solutions

While accounting terms and processes can be complex, there’s good news – you don’t have to navigate it all alone. At Harvard & Associates, CPA, we provide expert accounting solutions tailored to your needs, helping you save time, reduce stress and maximize your financial potential. Our team of CPAs are experienced, knowledgeable and dedicated to providing financial guidance, strategic tax planning and reliable accounting solutions. 

With offices in Tallahassee, Florida and Thomasville, Georgia, Harvard & Associates can provide you with the bookkeeping, tax and financial services you need. Whether you're an individual, a small business or a growing enterprise, we're here to help. Call us at (850) 224-9008 or contact us online to start a long-term relationship with the local accounting expertise and service you expect.