Outsourcing accounting services for small business is becoming more popular. Did you know that the biggest challenge small businesses faced in 2020 was cash flow? If you struggled, you’re not alone: 66% of small businesses faced financial challenges, and 43% claimed that the most significant challenge was paying operating expenses. While passion is at the core of successful small businesses, positive cash flow and healthy finance management is just as important for lasting success – and that’s where your CPA or accountant comes in.
If you’re not a numbers person, don’t worry. Accounting might be a field rife with jargon and financial terms, but it’s your accountant’s job to be able to explain them in layman’s terms. Even so, unfamiliar terms could be a major obstacle to bookkeeping with accuracy and confidence. It’s a good idea to have a basic understanding of concepts you will encounter over and over again as a business owner. After all, without healthy accounting practices, businesses generally don’t survive for too long.
The following glossary contains basic accounting terms, definitions, and industry acronyms that business owners can use to better understand their financial records.
Outsourcing Accounting Services for Small Business: Why Business Owners Need this Guide
A general understanding of accounting terminology and principles can help the biannual meetings with your accountant or CPA run smoothly – and you’ll likely get a greater benefit out of the service. Giving yourself the information to analyze your business’s financial information is one of the smartest things you can do as a business owner.
This comprehensive guide can help busy professionals choose the right accounting method for their company and select which financial records to maintain to meet their legal and financial needs. If you’re consider outsourcing accounting services for small business, a cursory glance over these common accounting terms might even help you realize that you definitely need a professional CPA to streamline your finances!
Accounts receivable (AR) is the balance of money that customers owe you for services rendered but not yet paid for. AR is considered an asset to your business.
Similar to accounts receivable, Accruals are a recognition of an expense or revenue that has occurred but has not yet been recorded.
The acid test ratio, or “quick ratio” measures the ratio of liquid assets (assets which can readily be converted to cash) to current liabilities. It is used as a measure of a company’s ability to pay its short-term debts, but it may not necessarily give an accurate picture of a company’s financial condition, especially if you are behind on collecting accounts receivable.
Assets are any tangible or intangible items that you own that are expected to have value in the future. These could include stocks, cash and accounts receivable. Fixed assets are purchased long-term and won’t be quickly converted into cash: this includes buildings, property, vehicles, or equipment.
Bad debt is any accounts receivables (account, loan, or note receivable) that you cannot collect for any reason. For example, if the client is unable to pay due to bankruptcy or if they do not respond to communication attempts.
All accounting systems can get behind keeping a balance sheet. A balance sheet is a statement of your assets, liabilities, and capital for a given time period. It should detail the balance of income and expenditure, and can be an essential first step to organizing your finances.
Sometimes referred to as “working capital,” capital is the money your business has readily available to pay for day-to-day operations, necessary items, and future growth. For example, you might set capital aside for purchases like laptops or equipment.
Cash Flow Statement
A cash flow statement reflects the movement and availability of cash in and out of a business over certain time parameters. This statement aids in your ability to monitor and predict whether or not you will have enough cash to pay for your regular expenses and necessities.
Depreciation is an accounting method that can greatly affect profits if not taken into consideration. Essentially, depreciation represents the decrease in value of an asset over time. Assets such as equipment or vehicles can be expensive, and depreciating the asset allows companies to spread out that cost and generate revenue from it.
Equity is the amount of money that would be returned to the company’s shareholders if all assets were liquidated (and the company’s debt was paid off in case of the liquidation). This number represents the book value of the company.
For accounting purposes, expenses are divided into different categories:
- Fixed expenses are costs that stay the same even with changing sales or production. For example, rent, wages or utility bills are considered fixed expenses.
- Variable expenses are costs that do vary according to conditions, such as number of sales; for example, an eCommerce store will experience higher postage costs if its sales suddenly increase.
- Accrued expenses are single expenses reported for accounting purposes – but they have not yet been paid.
- Operational expenses are the expenses necessary for you to conduct business. For example; insurance, office supplies, legal fees, repair costs, depreciation, accounting fees and software subscriptions.
Fiscal year is the time period for which the company has prepared financial statements for accounting. Companies can designate their own fiscal year regardless of their federal tax year. Small business or digital businesses may prefer to coincide with the federal tax year since bookkeeping may be relatively simple, but larger companies might choose time periods based on the length of time it takes to close out their books for federal tax returns.
Just like the weatherman forecasts, or predicts, the upcoming weather trends, forecasting in accounting uses your business’s past financial data to predict future trends. For example, an average increase of sales of 3% per month could be used to estimate what your sales might look like in six months or a year.
The general ledger is a master collection of documents: it is a complete recording of your business’ financial transactions over its lifetime.
Liabilities are debts you are responsible for paying in the short or long term.
Net profit is your total profit after expenses are subtracted from revenue.
Profit and Loss Statement
This document gives an overall picture of how well your business has performed in its trading activities. It includes earnings, expenses, gross profits and net profits.
Revenue is the total amount of money the company brought in from the sales of goods or services before any expenses are subtracted. To put it into context, net profit minus expenses equals revenue.
Working capital is the money you have readily available to run your business after current liabilities are subtracted from current assets. It may be more or less than what is actually required to fund the business.
Accounting can be a confusing world full of jargon, but that doesn’t mean you can’t get the hang of it over time. Hopefully this glossary can be a reference point for the terms that will most often be thrown at you.
Next time you meet with your accountant, we hope you are better prepared to understand and even ask a few questions of your own! Getting involved with your business’s accounting and finances can help you develop data-backed strategies to keep your business open and thriving.