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Sep 16

Ten basic accounting terms you need to know

Accounting and business, like any discipline have their own language and jargon. If you don’t speak the language it’s hard to communicate with other professionals.

When I started working I came from a science and teaching background so accounting was not my strong suit. I had to work at it by asking questions, talking to the accounting staff and getting them to walk me through reports, volunteering to be on local committees where there was a need to read balance sheets and financial reports and buying second-hand accounting textbooks and reading them.

If you’re just starting out as a freelancer, take the time to learn a little bit about accounting. You don’t need to enrol at a university and get a degree but you do need to get your head around some basic terms and practices. My local council offers short courses for small business operators so that can be a good place to look as well.

Whichever approach you take, make sure that it’s in your personal development plan. Remember, if you don’t write it down, it won’t happen.

Here are ten key terms you need to understand for your business so that you can work with your financial advisor or accountant.

Accounting is a critical part of your business and all of these are important as they have implications for the day to day operation of your business as well as ensuring that you keep up with your legal obligations. I’ve avoided anything to do with tax as this will vary widely depending on where your business is based. I’ve also left out anything to do with salaries and payroll for the same reason.

Accounting Terms You Need To Know

TermDefinition
DebtorA person or company that owes you money.
RevenueA person or company that you own money to.
RevenueThe amount of money that comes into your business before any expenses are taken out.
Cash-flowThe movement of money in and out of your business. If cash-flow is positive the amount of money coming out of your business exceeds the amount of money going out to cover expenses, salaries and other costs.
Profit/lossThe amount of money remaining once you’ve paid all all your creditors and operating expenses.
AssetSomething tangible that is of value to your business. For example, office furnishings, computers, cars and tools could be assets for your business.
LiabilityAn amount of money that you pay to a creditor.
Capital ExpenseThe purchase of an item of relatively high value that you will keep in the business for an extended period of time. The precise definition of the value and period will vary depending on the nature of the asset and local laws. A typical rule of thumb is that the asset is valued at over $1000 and is kept for three or more years.
Operating ExpenseA recurring expense, like a monthly bill, or an item that falls under the financial value of a capital expense.
Balance SheetA statement that shows the assets, liabilities, and capital that your business holds at a specific point in time that details the balance of income and expenditure over the preceding period.

 

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2 comments

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  1. Hamish

    In order to improve cash flow, you must reduce working Captial by billing your client up-front.

    This is helpful. http://www.equiteq.co.uk/equiteq-equity-club/DisplayArticle.asp?ID=17045

    1. Anthony Caruana

      Thanks Hamish, great advice. That’s another thing that many freelancers forget to consider – how to get paid punctually.

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    […] strategy, getting smarter about finances (something I’ve blogged about previously with my 10 accounting terms you need to know) and being taken […]

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