Accounting terminology every small business owner should know (part 1)

Liabilities, cost of goods sold, ROI … accounting terminology can seem like a different language. And one that you’re perhaps not that keen to learn! But grasping the basic lingo can help you build a more productive relationship with your accountant – and, ultimately, make better financial decisions.

In this article, we’ll define the accounting building blocks.

• Capital: the money used by your business to pay expenses, invest in new projects, buy equipment, and so on. It can also refer to the net worth of the business.
• Assets: any items of value that your business owns or controls. Assets can be physical (such as property or equipment) or intangible (such as intellectual property).

• Liabilities: money that your company owes to an individual or organization. A business bank loan is a good example.

• Revenue: the income your business earns by selling its products/services.

• Cost of goods sold/cost of sales: the costs that go directly into providing your service or product (generally, materials and wages).

• Gross or net profit: gross profit describes the money you make on sales, minus the cost of goods sold, while net profit describes what’s left after factoring in all remaining costs, including rent, debt, and taxes.

• Gross margin: the value of net sales (that is, sales adjusted for discounts or allowances), minus the cost of goods sold.

• Cash flow: the cash coming in and out of your business at any one time.

• Dividends: portions of the company’s profits paid to investors/owners, typically on a monthly, quarterly or annual schedule.

• Break-even point: this shows what level of sales you need to achieve in order to turn a profit. It can be calculated by sales revenue or sales volume.

• Depreciation: some assets (such as computers or other equipment) will decline in value over time. Your accountant will record this declining value in your accounts as depreciation.

• Return on investment (ROI): typically expressed as a percentage, this shows the profitability of business investments – which may include marketing spend, R&D investment, or other forms of business expenditure.

Stay tuned for our next article, where we’ll explore the lingo related to accounting methods and financial documents. In the meantime, why not arrange a chat with Jupp Castle? Let’s discuss how we can help you build a better business.