A business owner or individual needs to understand common accounting terms that are used in their finances and taxes, even when hiring an outsourced bookkeeper. Here are some accounting terms and definitions that are commonly used to help you get started!
Accounts receivable is an important part of any small business’s bottom line. It consists of money that is owed to the company by its customers and represents a key source of revenue. Knowing how accounts receivable works can help small business owners gauge their immediate financial health, allowing them to better understand the amount of cash they have coming in from customers. By properly tracking this information, small business owners are able to use accounts receivable as an indicator for successful operations that can be used to make sound decisions about their businesses moving forward.
Accounts payable is an important part of every business and refers to the money that a company owes to its suppliers.
This money is usually due for payment within a short period, and managing it correctly can make all the difference between being successful and unprofitable. Accurate tracking of accounts payable helps businesses pay their bills on time, assuring reliable relationships with key suppliers. Neglecting this area of the business could result in disruptions in the seamless flow of daily operations and cause serious strain on its finances. It is essential for business owners to be aware of their current accounts payable situation so they can make sound financial decisions in order to keep their businesses healthy and stable.
Assets are incredibly important across businesses of all sizes and types. For example, in accounting, an asset can be anything of value that is owned by a company, such as cash or real estate. Assets are carefully tracked, measured and monitored over time to determine the net worth of an organization. Keeping track of the costs associated with assets is a necessary part of the accounting workflow – understanding how much was purchased and when it needs to be replaced informs decisions around budgeting and financial planning.
Liabilities define a company’s financial obligations – anything it owes to other entities such as creditors or vendors. These debts are measured against the company’s assets and don’t necessarily have to be paid off in one lump sum. Determining a company’s liabilities is an essential part of understanding its financial well-being, as reducing liabilities can open more cash flow space for investment or other operations which in turn create an improved situation for the business. Keeping up with past due payables, setting payment schedule reminders, and making smart financing decisions are all methods of getting better control over a company’s liabilities. Tracking these debts accurately and ensuring payments are made on time could help your business reach its financial goals quicker.
Revenue is the lifeblood of any business, and understanding its importance is key to success. It is defined as the income generated from any activity of a company related to selling goods or services. With different kinds of revenue streams ranging from sales, to profits made from investments, it’s important to understand how each type contributes to a company’s financial standing. Keeping track of revenue can help entrepreneurs identify trends and make decisions that will help their business over the long term.
Expenses are an often overlooked piece of a company’s daily operations, but they are essential to helping generate revenue. Everything from ordering supplies and paying employees, to operating equipment and maintaining technology is considered an expense that directly affects the money coming in. Oftentimes business owners have a difficult time managing their expenses, which can have dire consequences if not kept in check. Even those who have mastered budgeting for expenses should periodically review their procedures to ensure optimal cost management and a healthy bottom line. Keeping track of expenses is a critical part of running a successful business.
Understanding these common accounting terms is essential for anyone who wants to build a successful business. With this foundation in place, you will be able to make sound financial decisions that will help your company grow and thrive. If you need help putting these concepts into practice, we would be happy to assist you. Contact us today to learn more about our services and how we can help you achieve your financial goals.