Understanding accounting terminology isn’t just for accountants — it’s a critical skill for every entrepreneur. By becoming more familiar with key financial terms, you can more clearly communicate with financial professionals (think lenders and bankers as well as your CPA) as you strategically manage your financials.
Here’s a list of 12 accounting terms you should know:
Assets. One of the most basic accounting terms, assets are any resources owned by your business that carry economic value. This can include cash, equipment, inventory or intellectual property. Your assets are part of your business’s overall valuation, so you want to clearly identify what they are and how much they’re worth.
Liabilities. These are the financial obligations or debts owed by your business, such as mortgage loans, lease agreements or pension obligations. They represent financial commitments that can influence your credit ratings and borrowing capacity.
Working capital. Working capital is the difference between current assets and current liabilities. It’s indicative of your company’s short-term financial health and operational efficiency. Knowing your working capital can help you asses your business’s ability to meet short-term obligations and fund operations.
Accounts receivable. This refers to the money that is owed and paid to your business by clients and customers for services or products received. It’s a key metric for understanding your cash flow and customer payment patterns.
Accounts payable. On the other hand, accounts payable is money that your business owes to suppliers or vendors, including outstanding bills and short-term debts. It’s important for managing business relationships and credit.
Balance sheet. This comprehensive financial statement is s snapshot your company’s financial position at a specific point in time. It includes your assets, labilities and any shareholders’ equity.
General ledger. A general ledger is your business’s accounting record containing all financial transactions and company financial activities. It’s typically organized into different account categories, including assets, liabilities, equity, revenue and expenses.
Trial balance. A trial balance is an internal accounting report that lists all general ledger accounts and their balances to ensure accounting records are mathematically correct. This report verifies that total debts equal total credits before financial statements are prepared.
Gross margin. This measures the percentage of revenue retained after direct production costs. A critical indicator of production efficiency and pricing strategy, a higher gross margin generally correlates with better profitability and operational efficiency.
Diversification. Diversification is a strategic approach to spreading investments across different assets or business areas. It reduces financial risk and helps protect against a volatile market by not concentrating resources in a single investment.
Depreciation. Depreciation is a strategic approach to allocate the cost of your tangible assets over their lifespan. It reflects the reduction in value of business assets, including gradual wear and tear.
Break-even point. This financial calculation determines when total revenue equals total expenses. In other words, it indicates the point where your business becomes profitable, helping to understand the minimum sales required to cover costs.
Turning financial language into business strategy
By speaking the language of finance, you can transform financial complexity into actionable insights. Apply these terms to your business, and use these concepts to guide your strategic and tax planning.
The CPAs at Magone & Company can support you in making the most informed financial decisions for your business. Give us a call today at (973) 301-2300 to learn more.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.