Business Accounting Terms to Know

These 10 terms will create the foundation on which you’ll build your knowledge of business accounting. While some of these terms might not apply to your business right now, it’s important to develop a holistic understanding of the subject in case you expand or move into another type of business.

1. Accounts Receivable & Accounts Payable

Accounts receivable is money that people owe you for goods and services. It’s considered an asset on your balance sheet. This can also be referred to as debtors or the customers.

Accounts payable is money that you owe other people and is considered a liability on your balance sheet. This can also be referred to as creditors or the suppliers.

2. Accruals

Accruals are credits and debts that you’ve recorded but not yet fulfilled. These could be sales you’ve completed but not yet collected payment on or expenses you’ve made but not yet paid for.

3. Assets

Assets are everything that your company owns — tangible and intangible. Your assets could include cash, tools, property, copyrights, patents, and trademarks.

4. Cost of Sales

The cost of sales or cost of goods sold is to the cost of producing your product or delivering your service.

5. Depreciation

Depreciation refers to the decrease in your assets’ values over time. It is important for tax purposes, as larger assets that impact your business’s ability to make money can be written off based on their depreciation.

6. Equity

Equity refers to the amount of money invested in a business by its owners. It’s also known as “owner’s equity” and can include things of non-monetary value such as time, energy, and other resources.

Equity can also be defined as the difference between your business’s assets (what you own) and liabilities (what you owe).

7. Expenses

Expenses include any purchases you make or money you spend in an effort to generate revenue. Expenses are also referred to as “the cost of doing business”.

There are four main types of expenses, although some expenses fall into more than one category.

1. Fixed expenses are consistent expenses, like rent or salaries. These expenses aren’t typically affected by company sales or market trends.
2. Variable expenses fluctuate with company performance and production, like utilities and raw materials.
3. Accrued expenses are single expenses that have been recorded or reported but not yet paid. (These would fall under accounts payable, as we discussed above.)
4. Operating expenses are necessary for a company to do business and generate revenue, like rent, utilities, payroll, and utilities.

8. Liabilities

Liabilities are everything that your company owes in the long or short term. Your liabilities could include a credit card balance, payroll, taxes, or a loan.

9. Profit

In accounting terms, profit — or the “bottom line” — is the difference between your income, and expenses.

10. Revenue

Your revenue is the total amount of income generated in exchange for your goods or services before any expenses are taken out.

Again, these 10 terms are merely an introduction to business accounting. However, they will help you better understand how to do accounting for your small business.