Accounting 101 Financial Terms

The 3 Things Every Business Must Know

With accounting 101 financial terms, the best way to understand the most important bookkeeping and accounting definitions is to look at the three main financial statements.

Work your way through each of these statements, understand the terms in bold and you will understand accounting 101 and know how to keep score in your business.

You win when there is profit at the end of the month or year and long term equity value when you are ready to cash out. That is small business accounting 101.

Accounting 101 Financial Terms - B/S

Accounting 101 The Balance Sheet shows the value of your company as of a specific date such as the end of a month, quarter or year.

A comparative balance sheet compares one period to another and this is a way to monitor your progress.

The formula used to prepare the Balance Sheet is Assets -Liabilities = Shareholders' (Owner’s) Equity

Assets (Cash, Accounts Receivable, Inventory, Land, Building & Equipment) – What you own

 - Liabilities (Notes Payable, Accounts Payable) – What you owe

= Owner’s Equity (Retained Earnings + Capital Stock) - What you keep

Accounting 101 Financial Terms - P&L

Accounting 101 The Income Statement shows the aspect of accounting 101 where you keep track of what is coming in and going out of your business during a period of time like a month or a year.

Income/Revenue or Sales (Cash vs. Accrual Accounting determines when Income is recognized)

  • Cost of Goods Sold – What it costs you to make your product or service
  • Cost of Sales – Sales salaries, commission and expenses

Gross Profit – Profit before expenses – You want this to be a positive number or it is a Loss

  • Expenses (Rent, Heat, Payroll, etc.) – What it costs to operate your business

= Net Earnings before Taxes (NEBT)

  • Taxes (Income Taxes)

Net Profit - AKA The Bottom Line – This is why you are in business.

Accounting 101 Financial Terms - Cash Flow

The Cash Flow Statement or Cash Forecast or Source & Use of Funds is the final statement in small business accounting 101.

You use the cash flow statement to understand where your cash comes from, where it goes and to forecast how much cash you need to run the business. 

Beginning Cash – Money in the bank

+ Accounts ReceivableMoney owed to you by customers that has been Invoiced

+ Forecasted Sales – What your sales team expects to convert into cash

  • Expenses – Forecasted expenses as shown on the income statement

= Ending Cash – What you have to work with to run the business

Recurring Revenue This is the Holy Grail of business.  Revenue you can count on every month like rent, maintenance, licenses, subscriptions, etc. It is one of the most important aspects of accounting 101.

Long Term Legacy Value – This is another way of saying retained earnings and it is the ultimate goal of a business owner. How much is your company worth.

Accounting 101 Financial Terms - Summary

So accounting 101 financial terms is all about knowing how to keep score in your business.

You win when there is a positive number on the bottom line of the Income Statement - Profit and when the Retained Earnings continues to grow and your Long Term Equity Value increase over time. 

Use these terms and the financial statements as your guide to understanding accounting 101 as the way to keep score.  

Related Products

More Small Business Accounting 101

Please subscribe to my monthly newsletter, Bookkeeping Basics E-zine. It tells you every month about the new information that I have added, including some great tips and advice from myself and other Bookkeeping Basics readers.

Enter Your E-mail Address
Enter Your First Name (optional)

Don't worry — your e-mail address is totally secure.
I promise to use it only to send you Bookkeeping Basics E-Zine.


New! Comments

Have your say about what you just read! Leave me a comment in the box below.