Must-Know Accounting Terms for Individuals and Businesses
Whether you are running a small business or just managing your household finances, understanding some key principles and terms of the accounting world can help you make smarter financial decisions.
This is important for anyone who wants to be successful in their money management and growth activities. Whether you are an individual, a small business owner, an entrepreneur, or the manager of a large corporation, understanding the language of accounting is essential. Accounting terms not only help us to better understand financial statements, but they also drive smarter decision-making as well as determine how our businesses are performing financially and how we can improve them. This way we can make informed decisions on investments and other financial matters that will benefit our businesses—and our bottom lines.
From Balance Sheet to Tax Deductions—Terms to Know
There are some simple, yet important, accounting terms you need to know as you focus on your personal or business finances. They will help you better coordinate with your accounting team or certified public accountant in creating a more stable, sustainable financial future. Let’s get started:
Your balance sheet is one of the most important financial statements affecting your business—one that shows exactly what your company is worth, also known as its “book value.” It provides a look at your assets, your liabilities, and the value of assets claimed by owners, also called “owner’s equity.” A balance sheet helps you create a better strategy, and adjust departmental processes to target organizational goals. It can also assist potential investors in determining whether your company is a good investment.
An income statement—also known as a profit and loss (P&L) statement—is an important part of your business plan. In a nutshell, your income statement details how much profit your business made during a specific—or projected—time period. Typically, these statements include details of revenue, cost of sold goods, credit card costs, and finally, gross profit. Usually they don’t include the kind of cumulative losses or profits that are shown on balance sheets.
Cash Flow Statement
A cash flow statement measures how well your business is generating cash to pay debts and fund future operating expenses. It shows cash movement arising from operating, investing, and financing activities. Cash flow can be calculated using both direct and indirect accounting methods. In the former, all cash payments and receipts are calculated. The latter shows cash flow calculated through the adjustment of net income by the addition or subtraction of differences resulting from non-cash transactions.
Your general ledger combines your income statement accounts and your balance sheet. It is a bookkeeping strategy where you can record all transactions from sales and credit purchases to operating expenses and income losses.
Gross and Net Profit
Gross profit comprises the money you have left after you subtract the direct costs involved with producing your product or service. For example, if you make widgets for $10 and sell them for $15, your gross profit is $5. Net profit is what you have left after all other expenses have been paid, including your operating costs such as salaries, rent, loan payments, and others.
Cash Flow Forecast
When you compare these statements from the past against your projected income and expenses moving forward, you can estimate the amount of money—or cash flow—that your business will experience during a future time period. This way your accounting team can assist you in forecasting cash flow projections based on new projects, new investments, debt repayment scenarios, and more.
Your assets are the mainstay of your financial health. They represent all of the wealth that an individual or business has amassed without being encumbered by a loan or a lien. While this may include cash and investments, it also includes items such as land and buildings, warehouse inventory, vehicles, supplies, equipment, and your accounts receivable.
Accounts Receivable vs. Accounts Payable
Accounts receivable refers to any unpaid client invoices—in other words, what your clients owe you. On the other hand, accounts payable signifies the amount of money you or your business owes to vendors and other service providers. Both of these line items help you get a more accurate view of your cash flow and your overall financial standing.
Cukierski & Associates Can Help You Better Understand Your Financial Outlook
Navigating through complicated accounting scenarios can be hard to do, especially during tax season. At Cukierski & Associates, we make complex accounting processes easier to understand by offering the kind of one-on-one assistance that helps our clients gain clarity and make better, more profitable decisions. If you want a true partner to assist you or your business, contact us today!
The Ins and Outs of Estate Planning: How to Protect Your Assets
One of the key reasons why estate planning is important is to have control over who receives your assets. Without a clear plan in place, the distribution of your estate may be subject to interstate laws, which vary by jurisdiction. This could result in unintended beneficiaries receiving a portion of your assets or leaving loved ones without the resources they need.Read More
Differences Between IRS Forms 1120 and 1120-H
Throughout our various engagements with Community Associations, and our ongoing conversations with Board Members and management personnel, some of the most common questions pertain to income taxes. These include:Read More
How to Avoid Becoming a Victim of Personal Financial Fraud
Financial fraud and financial statement fraud can be a major threat to your personal finances. It is important to be aware of the potential red flags that may indicate fraudulent activities...Read More