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Six crucial accounting terms for small business
Appointing an accountant is widely considered best practice for small business owners. But entrusting financial analysis and reporting does not mean detailed checking out the process each month or quarter. On the contrary, it is recommended that business owners work closely with their accountants throughout the year to understand their financial situation better and make intelligent plans for future progress.
Do you want to expand your accounting understanding so you can have more informed with intelligence discussions on your account every quarter?
Mentioned below is the list of six crucial accounting terms for small business owners.
Do you have extra cash flowing into your business each month than you pay out to cover all costs and expenses? If so, your accountant will accept that your cash flow is positive. "However, if the opposite is true, your cash flow statement will disclose that you're "cash flow is negative."
Having excess cash on hand means you are better prepared to keep up with your debt, cover unexpected expenses, and capitalizeon development opportunities. Therefore, your accountant will produce a quarterly cash flow statement to check the key performance indicator.
2 Profit and Loss Statement
The profit and loss statement, also known as the income statement, is one of the best significant documents used by accountants to establish profitability.
The Profit and Loss statement lists revenues and gains and expenses and losses over a specific time period, typically every three months for small businesses. Then, it calculates your all-important "bottom line" so you know if you are operating at a loss or turning a profit.
3 Gross vs. Net Profit
Gross profit variance is when the cost of goods (COGS) is subtracted from the total sales. Net profit, on the other hand, shows in great depth. It exposes your exact dollar per profit of sales after deducting all operational expenses, including COGS, taxes, interest paid on debt, etc.
Gross and Net Profit are required ratios. As a consequence, they are essential for gauging business performance against an industry benchmark and your competitors.
4 Balance Sheet
The balance sheet offers an indication of your overall financial position at a given moment in time. That lists the assets, such as cash, inventory, accounts receivable, equipment, liabilities, accounts payable, income tax, employee salaries, and shareholder capital. In a nutshell, the balance sheet shows what is owed to the business and what the business owes others.
5 Accounts Receivable & Accounts Payable
Accounts Receivable is money customers owe your business for goods or services sold to. Therefore, it is reflected as an asset on the balance sheet. On the other hand, Accounts Payable is money you owe suppliers and any bills you have yet to pay., so this is listed as a liability on the balance sheet.
6 Bad Debt Expenses
Bad debt occurs when you cannot collect payment from your customers. For example, outstanding long-term Accounts Receivable could be listed on the balance sheet as "bad debts," If these amounts are never collected, they may have to be written off as a loss.
Here you have the Six crucial accounting terms to help you build your accounting vocabulary, join in the conversation, and empower yourself with more intelligent decision-making.
While working with us, you can be assured of the day-to-day upkeep of all your accounting transactions. Timely managed reporting. Our main objective at Business Pillars Limited is that customers receive satisfaction. Therefore, we provide outstanding customers the accounting services.
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