6 Basic And Necessary Accounting Terms The Small Business Owners Must Know

by Stuart Iles Partners Tax Consulting

Most small businesses hire accountants for their bookkeeping needs and handling cash inflow and outflow. Now, financial analysis delegation and reporting do not completely indicate the process should be checked out every month or on a quarterly basis. Alternatively, the small-scale business owners in Hobart have to closely work with the hired accountants from the beginning till the end of the year for better understanding and making smart plans for growth and development in the future.

Now regarding the accounting services, the Hobart-based small-scale businesses must have complete information so it is easier while taking decisions and engaging with insightful discussions with clients.

This discussion revolves around the six basic and vital accounting terms that small to medium-scale business owners have to be aware of.

i. Cash Flow:

Is there more cash flowing to your business every month compared to the amount being paid out for covering the costs and expenses? If this is the case, then the accountant is the right one to conclude of you being a "cash flow positive". But if the case is otherwise, and your cash flow statement reveals lesser cash has entered to your bank account compared to the cash utilized for handling the expenses, then you are “cash flow negative”.

When you are having excessive cash flow, then you are better equipped at keeping up with the debt, thus covering the unforeseen expenses and investing in several and appropriate growth opportunities. The accountants will take responsibility for generating the cash flow statement for each quarter for keeping the tabs on the key performance indicators.

ii. Profit and Loss Statements:

The profit and loss statements are even termed as the income statements which is the most vital document the accountants use for determining the business’ profitability.

All the revenues and gains along with the expenses and losses are listed in the profit and loss statements, which take place over the stated time period. Typically, the mentioned time is three months for all the small businesses. It helps in calculating all the vital “bottom lines” for you to be familiar with your operations at a loss or if your campaigns are turning to profits.

iii. Net Vs Gross Profit:

Gross profit means the result derived from the subtracted cost of the sold goods from the total revenues. On the other hand, net profit has its deeper meaning – through net profit the exact dollar earned for per profit sales on subtraction from all the operating expenses that include the cost of the sold goods, interest paid on debt, taxes, and many more.

Both the net and gross profits are profitability ratios – the key to measure the business performance against competitors as well as industry benchmarks.

iv. Balance Sheet:

Through the balance sheet, you can get a snapshot covering your overall financial position at a specific moment in time. In the balance sheet, the listed components are -

Assets – Inventories, Cash, Equipment, and Accounts Receivable

Liabilities – Income Tax, Employee Salaries, and Accounts Payable

Shareholder Capitals

In brief, the balance sheet displays all that you are owning including everything you are owing.

v. Accounts Receivable and Accounts Payable:

In simple words, the money the customer has to pay the business is accounts payable. The business receives payments for the sold goods and services. Accounts Receivable is the asset on the balance sheet. On the other hand, accounts payable is the money the business owner owes to the suppliers and the yet-to-pay bills. That is why the accounts payable is listed as the liability on the balance sheet.

vi. Bad Debt Expenses:

When you are unable to collect any payment from customers, then it is a case of bad debts. The long-term high amount amounts receivables might be listed as bad debts on balance sheets. If they are never collected then they will be labeled as a loss.

The six basic accountancy terms are the stepping stone for small business owners to be acquainted with for better business operations. The expert accountants can handle every detail in the field and ensure you benefit from accounts receivable. So, it makes sense to hire accountants for their flawless accountancy services.