Accounting Terms You Should Know as a Business Owner
While I believe that all business owners should have a very good grasp of what their business is doing how it's performing its financial reporting function, there are some cases where the business owner may not have the time to be involved in all the accounting. To ensure that you understand the accounting for your business, here are some common terms that business owners should know so they can have an effective conversation with their accountants.
Breakdown point - the point where total revenues equal total costs, and net income for the company is zero. This is after taking into consideration any guaranteed salaries, but before considering any distributions or draws.
Accrual basis accounting - reporting revenues and expenses as they are incurred, not necessarily when they are paid. This creates accounts payable and accounts receivable on the financial statements.
Payable - when your company owes money to another company or person. These occur when you arrange to pay money after a company provides you services. Sometimes you get a discount for paying early!
Receivable - when your company is owed money by another company or person. This can be a core concept to a growing business because extending your customers some leeway with their payments will allow you to grow your business faster.
Capitalized costs - Costs that represent an asset (generally fixed assets) on the balance sheet when purchased. These costs are expensed over time and are not considered an expense on the income statement immediately when purchased.
Depreciation / amortization - the process of expensing capitalized costs and assets over time (generally a few years) instead of expensing everything immediately.
Limited liability - when the liability of your business is limited to the business assets. This is a particularly important concept for those who want to separate their business from their personal property.
Apportionment - the process of splitting income and expenses across different states for tax reporting purposes.
Debit/credit - represent the movement and amounts in your company's accounts and financial statements. Debits are not necessarily good, and credits are not necessarily bad, they just drive the movement of accounting information for your business.
FICA taxes - social security and Medicare taxes, which are paid both by the employer and the employee. Many business owners neglect to consider this when hiring their first employees. For many companies it's an additional cost of 7.65% that should be considered.
Your business may have more key terms due to the nature of its operations, be sure to talk to your accountant and ask for their opinion so you can stay up to speed with everything you need to know!