Are you struggling to understand what your accountant is telling you?
Here are some common finance terms and their definitions to help you figure out your business:
Jan 1 to Dec 31. The year that is defined by the Gregorian Calendar.
A one year period which a company reports their financial information. The US government’s fiscal year runs from October to September. Most non-profits run a fiscal year from July to June.
A thing you own. Can be both tangible such as a building and intangible such as a patent.
An item of value used to back a loan for a lender. If a loan isn’t paid, the lender can take the item and sell it to get their money.
A thing you could owe to a third party. Loans, vendors, salaries, taxes, and dividends are liabilities. Balance Sheet Assets and Liabilities are reported on the Balance Sheet.
Interest Rate + Fees. Equity The percentage of a company someone owns.
The amount of money made.
The amount of money spent.
Revenue minus expenses. Gross Profit is your business total revenue minus cost of goods sold. Net Profit is your bottom line: it is your total revenue minus cost of goods sold and all overhead costs, taxes and interest. A net profit margin is the net profit divided by the total revenue. A higher net profit margin indicates a greater percentage of revenue is profit. Taxes A percentage of profit owed to the government for operating. Can be anywhere from 12% to 37% based on your income tier.
Assets lose their value over time. How much value is lost and in what timeframe is calculated as depreciation.
Accrual Basis Accounting
Recognizes revenue when earned and expenses when billed. For example a job is recorded as “earned revenue” in the books when the job is booked not when the job is performed. Similarly an expense would be recognized when the bill was received not when the bill was paid.
Cash Basis Accounting
Recognizes revenue when received and expenses when they’re paid.
Profit and Loss Statement/Income Statement
Two terms for the same thing. A report that lists out the revenue streams, the costs that have to be paid, and the net income/profit.
Cash flow is not the same thing as profit. It’s the money that comes in and out of the business due to operations, investments, and other financial activity. If you use Accrual Basis Accounting you could have negative cash flow but show positive on the income statement as the money has been recognized but not physically received. The cash on hand is reported in the Cash Flow Statement.