The ABCs of Accounting for Small Business Owners
While not everyone has the opportunity to study finance and accounting, an entrepreneur needs to possess knowledge of all aspects of their business to ensure its continued success. Even if you’ve outsourced your accounting or have a bookkeeper on staff, it’s still important to be aware of basic accounting terms and concepts so you understand what you’re reading when the next financial report lands on your desk.
The “numbers” side of business doesn’t need to be confusing or intimidating. Brush up on your basic accounting knowledge with the following glossary of 12 basic terms every small business owner should know.
Accounting Terms 101
- Accounts Payable: Outstanding debts a business owes to suppliers, contractors, or anyone else it has rendered services from on credit.
- Accounts Receivable: Outstanding debts owed to a business by customers and clients for any services or merchandise delivered on credit.
- Assets: Any wealth and resources accumulated by a business and owned outright. This may include things like cash, investments, inventory, supplies, equipment, property, buildings, and accounts receivable.
- Audit: A systematic review of a company’s financial records. While usually associated with the Canadian Revenue Agency, audits are often conducted internally by a business or third party accounting firm to ensure financial records are accurate and balanced.
- Balance Sheet: A financial report that outlines a company’s assets (what it owns), liabilities (what it owes) and owner’s equity. The balance sheet is used to help calculate the financial health of the business and its net worth at a specific point in time (usually monthly, quarterly or yearly).
- Capital Cost Allowance: A tax deduction a company may claim over a given period of time for the cost of tangible assets (like equipment, vehicles and buildings) that are used to conduct business and professional activities and may wear out or become obsolete over time.
- Cash Flow: The relationship between money moving (a.k.a flowing) in and out of a business during a specific time period. If you’re generating more revenue than what’s being paid out in expenses, your company is in what is called a “positive cash flow” situation. “Negative cash flow” refers to a situation where you’re spending more than you’re earning (not a good position to be in as a business owner).
- Depreciation: An accounting method used to track the aging and use of tangible assets like equipment, vehicles and buildings over a given period of time. As this property wears out, or needs replacing overtime, you are able to deduct a portion of the assets cost (the depreciation).
- Expenses (Fixed and Variable): Fixed expenses stay consistent from month-to-month or year-to-year (things like rent, subscriptions and employee salaries). Variable expenses are tied to a company’s production output and may go up or down depending on how much is sold or produced within a given time period (things like material costs, overhead, and short-term labour needs).
- Expense Report: A report that tracks expenses incurred by an employee while conducting business or performing necessary job functions. This may include things like office supplies, gas, other travel expenses like hotels or meals, or phone and internet charges.
- Fiscal Year: A set time period that a company uses for accounting purposes and in preparing financial statements. The fiscal year often coincides with the calendar year, however some businesses choose to start their fiscal year at other times depending on their specific needs.
- Liability (Current and Long-term): A company's debts or financial obligations incurred during business operations. Current liabilities are debts that are payable within one year (such as money owed to vendors and suppliers) while long-term liabilities are payable over a longer period of time (things like bank loans and mortgages).
We hope this glossary has given you a basic understanding of some of the accounting terms every entrepreneur should be aware of. If you have any questions regarding how these concepts apply to your specific small business don’t hesitate to leave a comment below or get in touch with our team: 289-466-5210
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