One of the great ironies of being a small business owner is that you have to become an overnight expert in every aspect of running a business — in addition to being an expert in the business of your business. Put another way, it’s not enough to be a great architect or chef or home builder — now, you also have to be an expert accountant, human resource officer, commercial real estate professional, business attorney, purchasing manager, payroll clerk…
Editor’s Note: This article is the first in an ongoing series designed to provide small business owners with a clear understanding of essential accounting terminology. To read the second article in the series following this one, please visit:
To overcome this challenge, you can hire experts in each of these areas to fill in the gaps of what you don’t understand, and oversee some of these processes for you. Nonetheless, taking a step like this doesn’t absolve you of the ultimate responsibility for your business.
If you’re going to hire outside experts (such as a CPA) to help your business, then one thing is for sure: You need to understand what they’re saying.
To better understand what your small business accountant is saying, suggesting or asking, you should take time to learn some of the key terms that your CPA will use as they communicate with you. Here are some of the most essential ones, beginning with those terms starting with the letters A through C:
- Accounting – The financial examination and statement of a business based upon an analysis of the information gathered through the bookkeeping process.
- Accounting Period – The period over which profits and losses are calculated. The vast majority of businesses track accounting on a monthly basis, therefore the common use of the term is that one period equals one month.
- Accounts Payable (A/P) – The account used to track and record all outstanding bills from contractors, vendors, consultants and other companies or individuals from whom the enterprise purchases goods or services.
- Accounts Receivable (A/R) – The account used to track and record all sales that are made in which payment will be received or collected at a future date (i.e. funds are owed after the date of sale).
- Accrual Method – The accounting method in which revenues and expenses are recorded based upon the time when the actual transaction takes place. For example, if you sell a product on November 15th but the customer pays you 30 days later, you will record the sale on November 15th, rather than on the day in mid-December when the customer’s funds arrived.
- Assets – The items that a business owns which are necessary to its successful operation. These typically include buildings, land, equipment, tools, vehicles, furniture, technology and other products. In addition, cash is included as an asset.
- Audit – An audit is a formal, structured examination of the financial records of a business or individual. There are different kinds of audits, including an audit performed by a CPA (attestation audit) and an audit that is sometimes required by the IRS (tax audit).
- Balance Sheet – The statement of a business at a particular point in time (snapshot), which presents the company’s assets and liabilities. In a solvent business, the assets will at least equal (balance) the company’s liabilities, at a minimum.
- Bookkeeping – The process of accurately recording all of your business financial transactions, such as revenues and expenses.
- Break-Even Point – The point where revenues exactly equal expenses in a business. The value of this is that it can be used to analyze and identify the level of sales necessary to achieve profitability.
- Capital (or Working Capital) – The funds that a business has available to invest or spend on items necessary for the business. Capital is money that can be accessed, but does not include company assets or liabilities.
- Cash Method – The accounting method in which revenues and expenses are recorded based upon the date when funds are received or disbursed, rather than the date of the actual transaction. In the cash method, revenues are recorded when funds are actually received, and expenses are recorded when payment of a given bill is actually made. For example, if you sell a product on November 15th but the customer pays you 30 days later, you will record the sale on December 15th when the funds are received, rather than on November 15th when the customer actually purchased the product.
- Cost of Goods Sold (COGS) – The total amount of funds spent to produce or purchase the product or services that a company sells to its customers.
Want to learn more about these terms, or explore additional terms relevant to your business? Stay tuned for future installments in this series, and the meantime, speak to your small business CPA today.
- Business Accounting Terms You Should Know
- 24 Accounting Terms Every Business Owner Needs to Know
- Basic Bookkeeping Terms and Phrases