Net Income, Assets, Capital Management… Do You Speak Accounting?

Every successful business depends on a strong accounting element – financial records need to be properly recorded and analysed and you need to know the state of your business from a financial standpoint at any given time. That’s why you’ve hired a professional bookkeeper and/or accountant – or why you should.

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Hiring someone to manage your financial affairs doesn’t mean you can now leave it all to them – as a business owner and taxpayer, it’s important that you understand your business’ finances. To start, it helps to understand certain key accounting terms. Take a look at the table below, listing some of the most commonly used accounting terms.

And, next time you meet with your financial team don’t be afraid to ask for an explanation or clarification on any element of your finances you don’t understand.

Accounts receivable The amount of money owed to you by your customers after goods or services have been delivered
Accounts payable The amount of money you owe creditors (e.g. suppliers) in return for good and/or services they have delivered.
Assets Fixed assets are items owned by the business that will be used within a year, including cash, inventory or accounts receivable. Fixed assets (non-current) are more long-term, for example, premises, land, or machinery.
Balance sheet A financial report that summarises a company’s assets, liabilities, and owner’s equity.
Capital A financial asset and its value, such as cash or goods. Working Captial is calculated by taking your current assets subtracted from your current liabilities.
Cash flow The cash expected to be generated through business activities over a period of time. Having a positive cash flow is essential for business survival.
Credit (CR) An accounting entry that may either decrease assets or increase liabilities and equity on the company’s balance sheet, depending on the transaction.
Debit (DR) An accounting entry where there is either an increase in assets or a decrease in liabilities on a company’s balance sheet.
Expenses The fixed or variable day-to-day costs that a business may incur through its operations.
General Ledger A complete record of the financial transactions over the life of a company – no longer kept in an actual ledger but most often recorded electronically in an accounting programme such as QuickBooks.
Liabilities A company’s debts or financial obligations. Current liabilities are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities are typically payable over a period of time greater than one year, for example, a bank loan.
Net Income A company’s total earnings, also called net profit. Net income is calculated by subtracting total expenses from total revenue.
Owner’s equity The percentage of stock a person has in company ownership.
Payroll The way a company pays its employees.
Profit and Loss statement (P&L) A financial statement that is used to summarise a company’s performance and financial position by reviewing revenue, costs, and expenses during a specific period of time.
Return on Investment (ROI)  A measure used to evaluate the company’s financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment.