Accounting can be a total minefield for small business owners, especially if this is their first time being fully exposed to all the different terminologies accounting garners.
It’s quite intimidating to get your head around but it’s also crucial to running your business and getting it off the ground.
To reduce the feeling of ‘accounting anxiety’ it’s helpful to familiarise yourself with some basic accounting terms. Once you get comfortable with these terms, you’ll start to feel more confident when talking about accountancy-related matters and looking for finance/loans to grow your small business.
Here’s a glossary of 39 accounting terms every small business owner, sole trader and freelancer should be aware of.
Keep this list saved in your bookmarks if you ever come across a term that you need to check up on:
This is money you’re owed by clients or customers for any services and/or goods.
Money that you owe clients, suppliers or utilities. Anyone that can provide you with a bill for services comes under this category. This is listed as “liabilities” on a balance sheet.
These are expenses that have been built up but not yet recorded in the books. An example could be wages for employees.
Also known as Annual Percentage Rate – this is the true cost of a loan inclusive of interest. If you’re looking for a small business loan, then the APR is something you need to keep an eye on when comparing rates.
This is anything of value that is either tangible (physical) and intangible (non-physical) that belongs to your business. This includes office equipment, buildings and anything else that can be turned into money.
Debts that will not be paid and must be written off.
A balance sheet shows your company’s net worth showing you all your assets and liabilities.
This is when small businesses have a schedule of payments, followed by a much larger payment at the end. They must ensure they’re able to make the last “balloon” payment as this sum is generally quite large.
A last resort/plan of action that reduces the repayments of debts over time due to serious financial difficulties. Bankruptcy can negatively affect a business credit score and should be thought through carefully.
Bookkeeping is a type of accountancy that involves keeping records of all financial transactions
This involves using your own money to grow or finance your business. If your business is already running, then bootstrapping involves using your profits to reinvest back into the business.
Also known as fixed capital – this refers to the wealth of the business through its accounts, assets and investments. Capital can be both tangible and intangible.
For any business to function there needs to be positive cash flow. Cash flow is the amount of cash that ‘flows’ through the business and affects the liquidity of the business. Keeping an eye on cash flow, especially at the beginning of a small business venture is incredibly important.
Much like a personal credit report, businesses also have their own credit reports. The report questions aspects like how long the business has been established, legal filings and general credit history.
These reports are used to help lenders and investors evaluate the risk of lending cash.
A business credit score is worked out based on the findings in the credit report. The score is used by lenders and investors to evaluate the risk of lending cash.
Any asset of yours that you use as security for a loan is known as collateral. It is often required by lenders to ensure they don’t lose out on money. When pledging collateral, the lender can seize this if you fail to keep up with repayments.
If you have multiple payments coming out for several loans, debt consolidation allows you to combine your loans into one so that you make one monthly payment. It can potentially decrease your monthly payments due to a lower interest rate, and there are various comparison tools that can help you work this out.
Debt consolidation is a common route for improving.
Assets can lower or “depreciate” in value over time. This can be due to wear and tear or newer, better models of some assets you own being released.
As the name implies, transactions require two entries into the company books. This is in the form of credit and debit entry. All entries must be double-checked to ensure the accounts are balanced.
This refers to costs incurred by the business that are both fixed or variable (the latter being dependant on sales, production and level of business activity).
Equity has many meanings but in terms of accountancy, this is the difference between the value of the assets and liabilities owed. For example, if you own business premises, but also owe a loan against the property, the value at the end is the difference between the two – which is the equity.
Financial statements are important for a loan application as it supports your business and shows it’s a good credit risk to take. Loan companies will want to see that your business is well-balanced between cash flow, assets and proof that you’re able to keep up with repayments.
This is an asset that is tangible and has long-term use for the business with no intention of being sold or converted into cash. Fixed assets are items like office equipment or office space (both traditional and virtual).
Fixed interest rate
This is an interest rate on a loan that is fixed from the beginning and does not alter throughout the repayment timeline. Fixed interest rate loans can be appealing to small businesses as they’ll be reassured that repayments will be a consistent rate.
Floating/variable interest rate
This is the opposite of a fixed interest rate in that the rate fluctuates in conjunction with the market. This can be appealing as the rates are generally lower to begin with, especially if the market is trending downwards.
Gross profit is calculated on total sales minus expenses. Expenses can include but are not limited to transport, labour costs and marketing.
Guarantors are usually required if you’re just starting out and don’t have enough credit history. The guarantor agrees to cover all balances if a
A journal is a record of all financial transactions by the date they were made. Records are kept before being transferred to the appropriate accounts in the ledger (such as “accounts receivable” or “accounts payable”).
This is a legal obligation to repay/settle debts. These are generally listed in business balance sheets and include things like wages, taxes and accounts payable.
A lien is a person’s right to retain possession of a property until the owner pays what is owed.
This shows the value of your small business, which is determined by your total current assets minus any liabilities. Generally, this is calculated by subtracting liabilities by your total assets.
This is a journal/digital file containing all transactions related to a company’s accounts. This includes payments, expenses and other assets during the business’s lifetime.
Also known as a profit and loss statement. This is a record of your business’ profits and losses over a period (monthly or quarterly, for example).
As the name suggests, these are profits that are retained in the business.
Most small businesses will make use of single-entry accounting. This involves recording transactions with a single entry into your company books (e.g. with Quickbooks)
A term loan provides a business with a sum of cash upfront which has to be paid over a set period of time. Small businesses tend to go for term loans as they’re often used for start-up expenses or for expansion.
Credit cards are examples of unsecured loans as they are not backed by collateral. They are generally more high risk as the interest rates are higher and have a shorter repayment time frame.