5 Common Bookkeeping Terms And Concepts For Small Businesses

There are several bookkeeping terms and concepts that small business owners should know. Often times, bookkeeping requires an understanding of specific terminology and acronyms to track financial records. Using these terms, companies can implement functional accounting software, systems and processes within the organization. As a business professional, you can make better business decisions, meet financial obligations and increase profits overall. Further, you can better communicate with your bookkeeping and accounting professionals. In this post, we’ll cover some of the most common bookkeeping terms and concepts for small business. 

Assets

Assets is a bookkeeping term that you should know as a small business owner. Overtime, your business will compile many resources that have value, known as assets. Typically, assets are owned without debts or liens. These items include cash, goods for sale, and property. Furthermore, the company may own other assets such as business investments, equipment and materials. Plus, other valuable assets may include claims for payment through accounts receivable or rights to patents through intellectual property. Ideally, you should use your assets to generate more cash flow in the future. Definitely take the time to know this bookkeeping term as a small business owner. 

Liabilities

Liabilities is another bookkeeping term you should know as a small business owner.  The liabilities of a company are any unpaid debt, obligations or bills. Usually, your company will accumulate many debts and obligations to other companies. Of course, you must keep track of debts and payables to keep your company in good standing. Typically, your loans and unpaid bills will add up to total your liabilities. All of your short-term debts, or current liabilities, will have to be paid back within a year. Meanwhile, your long-term debts, or non-current liabilities will have a longer term and are not due until after a year. Certainly, you should take the time to know what liabilities are as a small business owner.

Cost of Goods Sold

The cost of goods sold (COGS) is another common bookkeeping term to know as a small business owner. COGS are any direct or related expenses to produce goods for sales in a company. It’s basically like the cost of living but for your business life. These expenses include the cost of both raw materials and employee labor related to producing goods. To calculate COGS, subtract the production expenses and ending inventory from the existing inventory. Depending on the goods or products, this calculation may include additional material, inputs and labor. This term is crucial to knowing your costs and inventory throughout the bookkeeping process. Surely, the cost of goods sold is a common term to know as a small business owner.

Income Statement

Income statement is another common bookkeeping term you should know as a small business owner. The income statement is a financial statement that includes your financial activity over a particular period. Using this statement, you can keep track of monthly, quarterly and yearly statements. These reports show total revenues and expenses to determine the total net profit or loss. To calculate your income statement, take your gross revenue and subtract any expenses and COGS. This term is crucial to knowing your net profits or losses. While maintaining bookkeeping records, the income statement should regularly be updated to track profits. Certainly, income statement is a common bookkeeping term to know.

Cash Flow

The last common bookkeeping term you should know as a small business owner is cash flow. Cash flow is the amount of capital moving in and out of the company during a specific time frame. At any given time, cash will be coming in and out of your business either through sales or being spent on operations, investments and financing. A good cash flow is necessary to keep your running, no matter how profitable you are. Keep an eye on your cash flow by reviewing your monthly and annual reports to assure you have enough cash to cover all of your business expenses. Pay attention to trends, set goals and make predictions for the future of your company. Additionally, consider using revolving credit to improve your finances. Surely, cash flow is an important bookkeeping term to know for your small business.

There are several common bookkeeping terms that you should know as a small business owner. First, know what your assets are to assist your company in generating more cash flow in the future. Next, know what your liabilities are to keep track of what you owe. Also, know the cost of goods sold to keep track of your earnings and inventory throughout the bookkeeping process. Definitely consider consistently updating your income statement to keep track of profits. Lastly, pay attention to your cash flow to time your expenses. These are common bookkeeping terms all small business owners should know.