Efficient accounting and bookkeeping are the best advantages that a small business can have. A firm grasp of financial management at this stage in your business’s growth journey will allow you to optimise your resources. This is why it’s essential to take the time to master the fundamentals of accounting and bookkeeping. You can start to make better business decisions if you understand how to keep accurate records of your business’s transactions.

In this blog, we give you a crash course on all the accounting terms you’ve heard people using and how they are applied to a small business.

Accounting terms explained

The following are just some of the accounting terms you will encounter as you become familiar with small business financial management:

Asset – Any resource of value owned by the business.

Balance sheet – A summary of a business’s assets, liabilities and equity.

Capital – Assets such as money or goods that are used to start or maintain a business.

Cash flow – A summary of money coming into – and leaving – a business.

Credit – An accounting entry that increases liabilities or decreases assets.

Debit – An accounting entry that increases assets or decreases liabilities.

Expenses – The costs that a business incurs through its operations.

Equity – Assets minus liabilities or the percentage of shares a person owns in a company.

General ledger – A complete record of all the business’s transactions.

Liability – Money the business owes to its suppliers or creditors.

Net income – The business’s total earnings calculated as revenue minus expenses.

Revenue – Money received by the business from business activities.

The balance sheet

The balance sheet is the first and most fundamental accounting principle you need to understand. It is a record of your business’s assets, liabilities and equity. There’s a simple formula you can use to put this into practice called the accounting equation. It is:

ASSETS = LIABILITIES + EQUITY

This formula is the backbone of your business’s balance sheet. Recording all business that affects the assets, liabilities and equity of your business is called “balancing the books”. Assets include cash, land, buildings, vehicles and equipment. Liabilities are usually the accounts that are payable to suppliers, creditors and the bank. Equity is everything that would be left if all liabilities were paid from the business’s assets.

The income statement

The income statement, also known as the profit and loss statement, shows the profitability of a business over a certain period of time. It covers the revenue, expenses and costs of the business in that given period.

It begins with your business’s revenue (i.e all the money the business received from business activities) in that period. Then your costs, which is what you pay to produce your goods or services, are listed and deducted. And finally, your expenses – which is what you pay to run the business – are listed and deducted. In the end, you will have your business’s net income for that period.

The cash flow statement

Cash flow statements are the last of the three essential accounting documents for a small business. They show how much cash your business had in hand during a certain period of time. The cash flow statement includes all the records relating to the business’s operational, investment and financing activities and is an intuitive measure of the business’s liquidity over that period.

Cash from operating activities includes all transactions from the business’s main business activities. Cash flows from investing include cash spent on land and equipment and changes in capital expenditures. Cash from financing activities includes any transactions between the owners, the business and its creditors.

Now that the basics are out of the way, let’s dig a little deeper. Get in touch so we can help you make sense of your accounting and plan strategically for the next few months.