30+ Important Basic Accounting Terms for Small Business

It is quite normal for a startup business not to get success. There are several challenges to this failure. Keeping accounting in the right way is one of them. It is easy to start a business but it is hard to keep the record in your business book.

Hence every business owner needs to learn some basic accounting rules that will help them to run their business in the long run. Knowing basic accounting terms will help the owner the actual state of the business.

It also helps to calculate the actual profit or liabilities of the business. But we don’t recommend the owner of those who are not familiar with accounting to go to school and learn to account from any course, rather if they know some basic terms they can be able to analyze their business in a professional way.

The owners can run their business if they know basic accounting terms. So Here we go to give you some clarification of basic accounting terms.

Important Basic Accounting Terms for Business Owners

1. Entity:

Business is itself is an entity. Owners should separate the business from their own liabilities and profits. For example, a business might get a loan from the owners and in accounting, this is the liabilities of the business, not the owner and the same treatment is on the profit side.

2. Debit and Credit:

Owners should know that every transaction is recorded in two parties, one is called debit and the other is credit. And the sum of the amount will be the same for each transaction.

3. Assets and liabilities:

Every business has the same amount of assets and liabilities. Business assets cannot be used for the owner’s personal use.

4. Interest:

Interest is the term that can be either expense or income. An owner should know which interest is the income or expense.

5. Salary:

It is often practiced that owner does not get a salary from the business rather they take money from the profit. This practice makes a dilemma when calculating profits and distributing them to the owners if there is more than one owner.

6. Cost of goods sold:

In the income statement, it is found that the cost of goods sold is deducted from the sales. It is recorded because business profit should be calculated for the specific financial year.

7. Gross profit:

Gross profit is the profit that is calculated with the amount of tax and interest.

8. Net income:

This is the income that the business earns for the year after deducting tax and interest expenses.

9. Fiscal year:

Every business should be evaluated for each year. Businesses can start its business year from January to December or June to May or any other alternative way.

10. Income Statement:

Income statement is the financial statement where income and expenses are recorded and Net income is calculated.

11. Depreciation and amortization:

Depreciation and amortization is crucial factor in accounting. Depreciation is calculated on fixed assets such as machinery, premises, and so on.

12. Balance sheet:

In this statement, owners will get a total overview of business progress. The sum of the assets and the sum of liability & equity should be equal.

13. Cash flow:

Cash flow is an accounting statement where cash transaction is recorded and thus liquidity of the business can easily be observed.

14. Accounts receivable:

In accounting accounts receivable is calculated when sales have been done but the cash received has not been yet received.

15. Accounts payable:

Accounts payable is recorded when a purchase has been done but cash payment has not been done yet.

16. Inventory method:

Raw materials and goods on hand that is remaining unused in production or unsold refer to inventory. The inventory methods are FIFO, LIFO, etc..

Businesses can use any of the systems but cannot be mixed up with different methods because that will cause unbalanced inventory on hand and in the record.

17. Withdrawal:

the Business owner can take money from the business and in that case, it will be recorded as withdrawal from a business.

18. Reserve or Provision:

Business set aside an amount to the estimated bad debts is reserve or provision. Actual bad debts will be fixed from this reserve.

19. Outstanding / Accrued expense:

It refers to the expense that has been made but not paid until the date of the statement is outstanding expenses.

20. Present value:

It is one of the critical factors that should be taken into consideration. Present value means the value of how much a future amount of money is worth today.

21. Purchase:

In accounting purchase is two types; one is a cash purchase and the other is a credit purchase. It refers to the cost of raw material.

22. Pre-paid:

The income has already earned but not get the cash is known as pre-paid or paid in advance.

23. Yield:

In accounting, yield means market interest rate, or current return or effective interest rate.

24. 2/10, n/30:

It is a potential term that should be known to the business owner. For example, 2/10 means discount percentage is 2 and the buyer is will get an invoice within 10 days. But if it is n/30, that means if the buyer does not pay the amount within10 days then the number of sales will be due for the 30 days after the sales invoice date.

25. Turnover:

It is related to the inventory. It means the sales of goods after the production process.

26. ROI:

It means the return on investment.

27. ROE:

It means the return on equity.

28. Operating activities:

The business activities are related to the production of goods or services.

29. Investment activities:

It is related to the sales or purchase of an asset or investment.

30. Financing activities:

It is related to the borrowings or sale of shares.

There are lots of accounting terms that business owners should know for the progress of the business. Accounting is one of the success factors of a business. The list is not limited by these numbers but these are the basic accounting term. This knowledge will definitely help the owner to analyze the business and sustain in the industry.

These accounting terms are found in every activity of the business. If purchase occurs then the owner gets to know whether they get any discount or not by 2/10 terms which will be written in the invoice. Thus knowing accounting terms will help the business to grow or succeed in the long run.