15 Accounting terms that small business owners should know

When you start a business, you don’t have to be an accounting expert, most small business owners are not. But you do need to know the basic terms and formulas that accountants use to talk about your business’s finances.

Whether you are a new business owner who multitasks, such as being the “bookkeeper” or helping with the accounting staff, here are some financial terms you should know:

1. Accounts receivable (AR)
Accounts receivable are money that customers owe your company for products or services that have already been delivered or invoiced. In other words, it is money that you will receive.

2. Accounts payable (AP)
Accounts payable is the money your company owes vendors and suppliers for products or services that have already been delivered or invoiced. In other words, it’s money you will pay.

3. Assets (fixed and current) definition: Current assets (CA) are those that will be converted to cash within one year. Typically, this could be cash, inventory, or accounts receivable. Fixed assets (FA) are long-term and will likely provide benefits to a company for more than one year, such as a real estate, land, or major machinery.

4. Balance sheet (BS) definition: A financial report that summarizes a company’s assets (what it owns), liabilities (what it owes), and owner or shareholder equity, at a given time.

5. Cash flow (CF) definition: The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time.

6. Certified public accountant (CPA) definition: A designation given to an accountant who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

7. Cost of goods sold (COGS) definition: The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example, this may include the cost of the raw materials (parts) and the amount of employee labor used in production.

8. Expenses (FE, VE, AE, OE) definition: The fixed, variable, accrued, or day-to-day costs that a business may incur through its operations.

• Fixed expenses (FE): payments like rent that will happen in a regularly scheduled cadence.
• Variable expenses (VE): expenses, like labor costs, that may change in a given time period.
• Accrued expense (AE): an incurred expense that hasn’t been paid yet.
• Operation expenses (OE): business expenditures not directly associated with the production of goods or services—for example, advertising costs, property taxes,  or insurance expenditures.

9. Equity and owner’s equity (OE) definition: In the most general sense, equity is assets minus liabilities. An owner’s equity is typically explained in terms of the percentage of stock a person has an ownership interest in the company. The owners of the stock are known as shareholders.

10. Liabilities (current and long-term) definition: A company’s debts or financial obligations incurred during business operations. Current liabilities (CL) are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities (LTL) are typically payable over a period of time greater than one year. An example of a long-term liability would be a multi-year mortgage for office space.

11. Net income (NI) definition: A company’s total earnings, also called net profit. Net income is calculated by subtracting total expenses from total revenues.

12. Profit and loss statement (P&L) definition: A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues, costs, and expenses during a specific period of time, such as quarterly or annually.

13. Return on investment (ROI) definition: A measure used to evaluate the 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. The result is often expressed as a percentage. 

14. Liquidity: Liquidity refers to how quickly an asset can be converted into cash. Cash is an extremely liquid asset, while tangible assets are less liquid.

15. Conciliation: Conciliation is the process of matching the balances in your accounting records with the corresponding balances reported by your financial institution. In simple terms, it means matching the transactions in your journal entries with the transactions in your bank account and making sure they are consistent.