8 Key Tax Terms Every Business Owner Should Knowby Agro Accounting CPA Accounting for Artists, Freelancers & Creative Com
Taxes are complicated, but tax terms like tax deductions, expenses, and capital can be even more confusing. You might have heard tax authorities using complex tax terms that are difficult to understand. Knowing tax terms helps you get a headstart on business taxes, so that you can file your tax returns properly. To get more help, you can rely on a tax preparation guide. Though there are thousands of tax terms, here we explain a few important terms that matter the most to business owners.
Capital and equity are two similar terms, but they actually have different meanings. Equity is the share of business ownership after all obligations have been met, and it can be expressed as assets minus liabilities. On the other hand, capital is the funding used to acquire assets to run a business.
Now, let's understand “assets.” Materials that a business uses to create economic value are known as tangible assets. Not all assets are sold directly to customers. Some are used to transform other materials into another product that gets sold. This is one example of a business asset but there are more, ranging from cash to goodwill.
Often, companies have to borrow money to purchase assets. So, borrowing money is considered a liability. If the liabilities of a company increase, it affects the business' credit rating.
When companies sell products/services and receive payment (which are called sales or revenues), the company must also take into account the costs associated with offering these products/services. So, when total costs are subtracted from revenues, the remaining balance is called profit.
The money used in producing a product or service that you sell is known as the expense. In other words, the expense is the cost associated with sales.
6. Financial Statements/Reports:
The three types of financial statements are the balance sheet, the income statement, and the cash flow statement. You can hire affordable accounting for freelance workers or entrepreneurs to manage your financial statements.
● The balance sheet is a summary of the book of records that helps determine the company's financial position.
● The income statement is the profit and loss statement produced quarterly or yearly.
● The cash flow statement reports the cash inflow and outflow for a certain period. It is divided into three sections – operating activities, investing activities, and financing activities.
These are the business expenses that can lower the amount of taxes you have to pay. Tax deductions are one of the most interesting elements of taxation for taxpayers.
8. Types of Deductions
The three types of tax deductions are the standard deduction, itemized deductions, and business deductions.
Whether you are a new business owner or a freelancer, you will hear these tax terms frequently during tax season. Also, it's best to hire income tax services for the self-employed for your accounting and tax-related tasks, but a basic understanding of them can make things easier for you. Moreover, whenever you feel confused about any tax term, you can seek help from a tax expert.
Created on Jun 6th 2022 08:27. Viewed 134 times.