Accounting Jargon Simplified for Business Owners
Running a business is already challenging without having to decipher complex accounting terms. If phrases like “accruals,” “depreciation,” or “amortisation” make your head spin, you’re not alone! This guide will break down some common accounting jargon into plain, simple language so you can focus on what matters—growing your business.
1. Revenue
What it really means: The money your business earns from selling products or services.
Example: If you sell 50 pies at $5 each, your revenue is $250.
Why it matters: Revenue is the starting point for understanding your business’s financial performance.
2. Expenses
What it really means: The costs of running your business. These can include rent, utilities, wages, and supplies.
Example: If you pay $70 for ingredients and $30 for electricity, those are your expenses.
Why it matters: Keeping track of expenses helps you understand where your money is going.
3. Profit (or Net Income)
What it really means: What’s left after you subtract expenses from revenue.
Example: Revenue of $250 minus $100 in expenses = $150 profit.
Why it matters: Profit shows whether your business is actually making money.
4. Assets
What it really means: Things your business owns that have value, like cash, equipment, or inventory.
Example: Your commercial oven, delivery van, and bank balance are all assets.
Why it matters: Assets represent your business’s resources.
5. Liabilities
What it really means: Money your business owes to others, like loans or unpaid bills.
Example: A $15,000 loan for new kitchen equipment is a liability.
Why it matters: Too many liabilities can make it hard to grow your business.
6. Equity
What it really means: The value left in your business after subtracting liabilities from assets. It’s often called the “owner’s share.”
Example: If your business has $50,000 in assets and $20,000 in liabilities, your equity is $30,000.
Why it matters: Equity shows how much of your business you truly own.
7. Depreciation
What it really means: The decrease in value of assets over time due to wear and tear.
Example: A $10,000 vehicle might lose $2,000 in value each year.
Why it matters: Depreciation affects your taxes and overall asset value.
8. Accruals
What it really means: Expenses or income that are recorded when they happen, not when cash changes hands.
Example: If you receive a $1,000 bill in March but pay it in April, it’s recorded as an accrual in March.
Why it matters: Accrual accounting gives a more accurate picture of your finances.
9. Cash Flow
What it really means: The movement of money in and out of your business.
Example: If you earn $5,000 this month but spend $4,000, your cash flow is $1,000.
Why it matters: Positive cash flow means you can pay your bills and invest in growth.
10. Amortisation
What it really means: Spreading out the cost of an intangible asset or loan over time.
Example: If you take out a $100,000 loan to be repaid over 5 years, you amortise $20,000 per year.
Why it matters: It helps you manage large expenses more easily.
11. Gross Margin
What it really means: The percentage of revenue left after subtracting the cost of goods sold (COGS).
Example: If you sell a pie for $5 and it costs $2 to make, your gross margin is $3 or 60%.
Why it matters: Gross margin shows how efficiently your business is producing goods or services.
12. Break-Even Point
What it really means: The point where your revenue equals your expenses, and you’re not making a profit or a loss.
Example: If your expenses are $10,000 and you sell products worth $10,000, you break even.
Why it matters: Knowing this helps you set sales goals.
13. Accounts Payable (AP)
What it really means: Money your business owes to suppliers.
Example: If you buy supplies on credit, that’s accounts payable.
Why it matters: Managing AP ensures you pay bills on time and maintain good relationships with suppliers.
14. Accounts Receivable (AR)
What it really means: Money owed to your business by customers.
Example: If a customer buys on credit and promises to pay later, that’s accounts receivable.
Why it matters: Tracking AR helps you ensure customers pay on time.
The Bottom Line
Accounting doesn’t have to feel like a foreign language. By breaking down the jargon, you can better understand your finances and make smarter decisions for your business.
Feeling a little lost or just want someone to take the hassle out of managing your accounts? We’d love to help! Whether it’s breaking down the numbers, providing advice tailored to your business, or handling the tricky stuff so you can focus on your goals, we’re here for you. Let’s chat—your business’s success is just a conversation away with DAD Accountant!
30 December 2024