8 Accounting Terms Every Entrepreneur Must Know

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Woman sitting at a desk working on a laptop.

As an entrepreneur, accounting is one of the tasks you’ll have to deal with, especially when starting out.

Even though accounting is boring and no one likes it, it helps to know a little about accounting to be successful.

We’ll help you understand some common accounting jargon to make you feel less like a deer in the headlights when you’re with your bookkeeper.

Although you might still be bored, you’ll likely find it’s not as confusing as you may have imagined.

Accounting Jargon You Need To Know

Balance Sheet

A balance sheet shows you what your business owns (assets) and what it owes (liabilities).

Assets are anything of monetary value that your business owns and can be:

●      Tangible: land, buildings, cash, vehicles, or equipment

●      Intangible: brand names, copyrights, goodwill, intellectual property rights, patents, franchise agreements, and client lists

Liabilities are the financial obligations your business owes, which can be:

●      Short term/current: paid within one year of incurring them and include employee salaries/wages, and accounts payable

●      Long term/noncurrent: paid over a period longer than one year and includes mortgages, deferred taxes, or other loans lasting more than one year

Income Statement (AKA The P&L)

Financial document laying on a desk next to blue and orange pens

Remember the accountants in the TV series The Office? One time, $3,000 went missing from Dunder Mifflin, and it was up to them to figure out what happened.

With an income statement, they could’ve traced it back to find out at what point it got lost.

An income statement is a snapshot of your business that shows your revenues, expenses, and profit for a particular period. It shows whether you’re making or losing money.

With a P&L, you don’t have to spend more than you can afford or repeat mistakes like recording depreciation twice, as The Office accountants did.

Depreciation

You probably own business assets like equipment and vehicles that are worth a lot of money and are expected to last more than a year.

Over time, these assets decline in value due to wear and tear. This process of losing value is known as depreciation.

Other assets you can depreciate include buildings, furniture, and computers and software.

You can’t depreciate land, though, because it usually doesn’t lose value.

Bookkeeper vs. Accountant

Two men sitting at a desk reviewing tax documents.

If you don’t have time to keep your books, a bookkeeper is a numbers wizard who usually has ninja-like skills with Quickbooks, Xero, or Wave (AKA, account reconciliation software). They help you:

●      Collect documentation for each financial transaction

●      Invoice customers

●      Process payroll

●      Balance the general ledger

An accountant is an even nerdier numbers guru and helps you make sense of your financial information by:

●      Analyzing operation costs

●      Generating financial statements and reports and explaining them to you

●      Helping with year-end business tax planning and filing

●      Advising you on the most financially savvy strategies

Tax Credit vs. Tax Deduction

Tax credits and tax deductions trim your tax liability but in different ways. Tax credits are generally more valuable than deductions.

A tax credit:

●      Gives you a dollar-for-dollar reduction in your tax bill. For instance, if you have a $15,000 federal tax bill and are entitled to a $5,000 tax credit, the credit slashes your tax bill by $5,000 to $10,000.

●      Examples of a tax credit include the work opportunity credit, FMLA tax credit, or small employer health insurance tax credit.

A tax deduction:

●      Lowers the amount of your taxable income

●      Includes most normal business expenses, such as depreciation, wages, and rent

Decipher Accounting Acronyms

Two women reviewing documents.

CPA (Certified Public Accountant)

A certified public accountant is the nerdiest of all accounting professionals. They:

●      Completed at least 150 hours of secondary education and a specific number of annual continuing education hours

●      Has at least two years of public accounting experience

●      Passed the CPA Exam

●      Performs financial audit services that confirm your financial statements and disclosures accurately adhere to generally accepted accounting principles (GAAP)  

●      Prepare income tax filings and perform tax audits

H3: EA (Enrolled Agent)

An enrolled agent or EA is a federally licensed tax professional representing taxpayers in IRS-related matters, including audits, collections, or tax appeals. Specifically, an EA:

●      Has sufficient experience and passed a rigorous IRS examination

●      Advises, represents, and prepares tax returns for individuals, businesses, or anyone else that reports to the IRS

●      Must complete 72 hours of continuing education every 36 months

●      Are subject to a code of ethics and rules of professional conduct

COGS (Cost of Goods Sold)

Cost of goods sold or COGS is the cost of producing a product or service (i.e., direct labor costs and material costs).

COGS doesn’t include indirect costs like marketing and distribution expenses, utilities, or rent/mortgage interest.

The COGS formula is: Beginning inventory + Purchases - Ending Inventory.

Say you had a beginning inventory of $10,000, purchases during the period of $5,000, and an ending inventory of $3,000.

Your COGS would be: $10,000 + $5,000 - $3,000 = $12,000.

Build Your Accounting Vocabulary

Whether you started your business out of necessity or genuine interest, knowing these accounting terms can help you get a handle on small business accounting basics and contribute to your business’s success -- now and as it grows. You may still find it boring, though.