Starting a business or even becoming a freelancer is fun and exciting until you actually have to start dealing with stuff like payroll, taxes, loans, etc. It’s great if you have enough money to hire an accountant or a bookkeeper, but most often solopreneurs cannot afford that luxury. That’s why we have researched a set of accounting terms that you’ll most probably want to know as you start your small business owner path.
These are both expenses and revenues that your company has accumulated over a certain period of time but they haven’t been recorded in your accounts yet. These can be salaries for employees or payments you expect from your clients by the end of the month.
Asset means anything that can be turned into money to help your business. It includes both tangible (physical) and intangible resources that your business owns. Assets are reported on a company’s balance sheet. They can be anything from equipment to trademarks. They usually increase the value of the company.
This is money owed to you by your debtors. And the latter might be your clients or customers who haven’t yet paid you for your goods or services.
Expenses make the costs of doing business. They may be in the form of cash, such as wages and salaries), depreciation of an asset, or loan repayment.
This is the money you owe your creditors. And the latter might be your suppliers, utilities, banks. This shows as “liabilities” on your company’s balance sheet.
In general business terms, equity is known as a stock or any other security that means ownership in a company. But in accounting, it relates to the difference between the value of the assets and liabilities owed. This is, for instance, the difference between the vehicles you own and the loan you have to repay.
Things are bad for your business if you hear this one so we sincerely wish you to never ever hear it while doing business. Bad debt interprets as debt that you are not able to pay back to your creditor, hence, it must be written off. This also usually means your company is going into liquidation or insolvency.
A balance sheet shows your company’s net worth at a specific point in time. It lists all your liabilities, assets, equity, and evaluates the company’s capital structure. It’s basically the main document that can help to understand how your company “is doing” generally speaking.
Found in the credit report, it helps lenders and investors to evaluate the risk of lending or investing.
This is how much your business is actually worth through tangible and intangible resources, such as its accounts, assets, and investments. However, keep in mind that, for instance, resources used and consumed as part of your production do not qualify as fixed capital.
Many confuse bookkeeping with accounting while it’s just a little part of it. Bookkeeping means the recording of financial transactions. It’s important to do it but it’s not all you need to do to keep your business in good financial shape.
If you have multiple loans to repay, you can use debt consolidation to pay off what you owe faster and more conveniently, with one payment instead of many. The process can help you get a lower overall interest rate and just have a more convenient repayment plan.
If you run your business solely on your own savings or you re-invest your profits back into your business to run it, it means you’re bootstrapping. Also, the type of entrepreneur who runs his or her business like that is called “bootstrap.”
Cash flow is literally the amount of cash or cash equivalents that run in and out of your business. Your business should have a positive cash flow in order to function risk and trouble-free. Companies that have had positive cash-flow for a long time are considered financially stable.
This is the same credit report you as an individual have. However, your company’s credit report also includes aspects like how long the business has been established, legal filings and general credit history. Lenders like banks and investors use it to evaluate the risk of lending or investing.
This is the abbreviation that reads as Annual Percentage Rate. It represents a percentage of the actual yearly cost of funds over the term of a loan. If you add the loan amount to the amount of APR you will get the actual cost of the loan for you. APR helps you identify which loan program will be more beneficial for your business. So keep it in mind and compare wisely once you start looking for a small business loan.
When you have a balloon loan to pay, it means that in your payment schedule, at the end of the loan term, you’ll have a much larger amount to pay compared to the previous ones. It is very important to ensure that your business has this sum by the end of the term.
The asset you use as a security for a loan you take. Lenders require it so they don’t lose out on money and they can seize it if you cannot repay the loan.
When you understand that your company cannot repay debts in full amount, it might be a wise decision to file for bankruptcy. Consider this as a last resort measure though since it can harm your business’s credit score tremendously so you need to consult good lawyers and attorneys to do it right. Bankruptcy can reduce the repayments of debts or even waive them at all. It is usually imposed by court order and initiated by the debtor.
This term usually refers to assets and how they decrease or “depreciate” in value over time. It’s like aging in the business world. Depreciation happens either due to assets damage or the evolution of the assets and the appearance of newer and better models on the market.
It’s the main principle of bookkeeping meaning that transactions require two entries into the company books. They relate to credit and debit entry and should result in the overall balance where “Assets = Liabilities + Equity.”
Keep this list in your bookmarks so it’s always with you when you find something unfamiliar!
Still not sure if your business idea is worth all the work? Check out these 5 Ways To Know You Have A Good Business Idea.