Is your small business into human resources accounting? How is your P&L?
Many businesses start loose and get tighter with rules and structure over the years. Human error and workarounds can create challenges over time that affect your ability to grow your business.
Small business finance is a challenge for some because numbers and spreadsheets don’t appeal to everyone! Others enjoy the work but put it off because financial upkeep is so time-consuming.
Most small businesses get to a point where financial organization becomes a priority. It’s ideal to start early, but expectations and plans can change every day once you open for business!
There’s a lot to learn, and one challenge is accounting vocabulary. You know the vocab for ecommerce, and for your niche. But accounting vocabulary is tough, because even when you have the basics down, some terms vary by accounting platform.
With all that in mind, we’ve pulled together useful accounting vocabulary so you can optimize your small business for growth.
So, let’s launch Bookkeeping 101— the accounting vocabulary you need to succeed. We’ll cover who, what, when, where, why and how for your small business, so let’s get started.
A bookkeeper handles the financial records of a business. Bookkeeping tasks usually include:
- Financial data entry, including bills from vendors and sales invoice preparation
- Bill payment
- Mailing statements to customers
- Processing payroll
Bookkeeper vs. Accountant
An accountant uses the information from the bookkeeper to do advanced financial analysis.
This may include, but is not limited to:
- Adjusting or double-checking financial data
- Preparing financial statements for your business (more on this below)
- Helping leadership understand the financial impact of business decisions
What Does a Controller Do?
A controller does many of the same tasks as an accountant, usually for a business that is generating a large amount of revenue.
In addition to financial analysis, this person might manage a team of accountants. They may also collaborate with other managers and stakeholders. Your business needs a controller when you are growing rapidly or if you need extra support for tax compliance.
Do I Need a CFO?
The Chief Financial Officer’s role is to determine and prepare for the long-term financial future of a business. The CFO may manage one or more controllers and is usually part of the leadership team of a business. Your CFO could also be responsible for investments, operational costs, bonds or loans. A CFO is responsible for the current and future financial success of the business.
For some small businesses, these tasks fall to the business owner. As your business grows, hiring a CFO can help you focus on other aspects of business growth.
So, now you have an idea of who you might want to help with your finances, and what they will do.
Accounting Vocabulary: General Terms
First up, let’s look at some general bookkeeping vocabulary terms that come up most often.
A business depends on assets to keep the business running.
Any debt owed by your company. Liabilities include unpaid bills, small business loans and mortgages.
Also called: Owners’ Equity, Capital
This is the money invested in the company by owners or stakeholders. If a business is publicly traded, equity takes the form of stocks.
Equity can also be a formula that looks like this:
Total Assets – Total Liabilities = Equity
Fun fact: The term equity comes from England in the Middle Ages as commercial activity grew.
Next, we’re going to go over a few more accounting terms that you’ll frequently hear in bookkeeping.
Bookkeeping 101: Frequently used terms
This term can be confusing because it has more than one meaning in the finance world. The word receipts is also sometimes used in place of sales, which also has multiple meanings!
Receipts are the total amount of money a business takes in over the course of one day.
Receipts are also the written statement of a transaction.
Receipts can include:
- Cash register tapes
- Deposit information for cash or credit sales
- Receipt books
- Credit card receipts and statements
- Petty cash slips
Also called: Income
This is the total amount of income at one point in time. This includes both money taken in (Receipts) and guaranteed income that hasn’t come in yet.
What your business is spending.
Also called: Gross Margin
This is the total income from sales. To determine profit, take the total revenue and subtract operational costs like manufacturing costs, materials and supplies.
This happens when the income from a product is less than the operational costs it takes to make that product.
The revenue you take in selling products and services.
The supplies you purchase for your business.
Types of Bookkeeping
Next, we’re going to go over the accounting vocabulary for different approaches to bookkeeping.
Single entry bookkeeping is probably what you do for your personal finances. It is a record of your income and what you are spending from one single account.
For example, if you pay $200 for Google Ads this month, you’ll subtract it from your account.
This type of bookkeeping isn’t recommended for small businesses, because it makes it difficult to create financial statements that meet the expectations of investors and other stakeholders.
Tip: Separate your business and personal finances from the beginning. Even if you have a limited budget, this will make tax time easier and give you more opportunities for tax deductions. It will also better prepare your business for the long term.
In this type of bookkeeping, you will keep two separate accounts. One is for debits, the other is for credits. Both accounts should be in balance at all times.
For each entry in your debit account, you will add an equal and opposite entry to your credits account.
For example, if you pay $200 for Facebook Ads this month, you’ll add $200 to your debit account and subtract $200 from your credit account.
Check out this article to learn more about double-entry bookkeeping.
The most important part of business finance is accuracy. If your bookkeeping isn’t accurate, it can have a horrific impact on your business and your team.
It’s vital to understand accounting vocabulary and fundamentals so that you can double check what your bookkeeper or accountant is doing for you. If you’re managing finances on your own for your small business, you might be so passionate about your equity that you take it all on yourself.
While it’s best to use a bookkeeping integration when you’re just getting started, it’s essential to make use of bookkeeping integrations if you want your business to grow.
Accounting integrations that connect directly to your ecommerce platform and point of sale system can save you from the errors that come with manual data entry. These integrations can also organize your data into helpful charts and dashboards that make it easy to see patterns and trends in your finances that you might miss otherwise.
Selz offers direct accounting integrations with these popular accounting integrations:
You may want to look at accounting training or hire some help to get your accounting integrations set up, but over time you can feel confident managing your finances until you’re ready to make any permanent hires.
Now that you’re more comfortable with bookkeeping, let’s go over some accounting fundamentals.
Types of Accounting
By this point it’s easy to see why bookkeeping and accounting get smooshed together for some new business owners. Before you start using this list of accounting vocabulary terms, let’s go over the most common types of accounting, and the statements you’ll most likely see on a regular basis.
Also called: Cash-Basis accounting, Cash based accounting
This is a form of accounting where you record receipts when you get them, and record payments when you pay them.
Also called: Accrual based accounting
This type of accounting is where you record receipts and payments when the transaction happens rather than when you send or receive payment.
Also called: Business accounting, financial reporting
Financial accounting usually. uses accrual accounting practices to provide information for stakeholders outside your business on the state of your business finances.
Also called: Management accounting
This type of accounting helps managers and other stakeholders in the business make financial decisions in line with your business goals.
A form of managerial accounting that focuses on the total cost of production by looking closely at both fixed and variable costs.
Also called: Human resource accounting
This form of accounting identifies and tracks HR costs and investments that do not overlap with other traditional accounting formats.
It examines what a business spends to recruit, hire, train and retain members of your business team.
Accounting vocabulary for financial reports
This is where you’ll record your assets, liabilities and equity to be sure that your finances are in balance.
Most businesses will update their balance sheet once a month and it is important that this record is accurate and up to date.
Also called: Journal, General Journal
Your general ledger contains all of the information on your balance sheet, but it has more details and organizes transactions in a different way.
Entries in the general ledger are usually tracked in 5 categories instead of the three categories on your balance sheet:
Also called: Profit and Loss Statement, P&L
This report shows your business’ profitability over a set period of time.
This report will show you at a glance whether your business is making or losing money and can help your team project upcoming sales or expenses.
Cash Flow Statement
This report is also looking at profit for your business, but more specifically it helps you understand how your daily operations are impacting your overall financial picture.
Learn more about how to use a cash flow statement for your business in this article from Xero.
More Basic Accounting Vocabulary
Chart of Accounts
This is an overview of all the accounts in the general ledger of your business.
The chart of accounts makes it easier to understand your business’ financial health at a glance.
Also called: Reconcile accounts, reconciling account, bank reconciliation
Accounting process that compares two data sets to make sure the numbers are correct. This process also confirms that the general ledger is accurate and complete.
Regular reconciliation can help your business prevent errors and avoid fraud. It will also make things easier if your business has to deal with an audit.
Money that your customers owe your business. For example, if you offer installment payments to your customers and they have an outstanding balance.
This is the money your business owes to vendors or suppliers
This covers staff salaries and wages, as well as taxes, healthcare or other benefits.
The profits your business has earned up to this point, minus any funds paid to investors.
We hope this accounting vocabulary has been the Bookkeeping 101 you were looking for!
If you’re ready to get started, improve your financial business process with a Selz accounting integration today.