It's no secret that small business accounting can be complicated. And it can be especially mystifying if you're new to managing money for a business and don't know all the lingo. This post will help you get a handle on twenty-eight words and phrases every small business owner should know and understand.
Basic Terms for All Business Owners
1. Fiscal Year:
Businesses use a fiscal year calendar to manage their accounting. Many companies choose to have their fiscal year coincide with the calendar year and fiscal performance is typically tracked on a quarterly bases. In a standard calendar year, quarter 1 (Q1) is January through March, Q2 is April through June, Q3 is July through September, and Q4 is October through December. Companies with complicated finances sometimes use a different fiscal year (ex; October to September), to allow extra time to close out the annual books and prepare tax documents.
Forecasting business performance is similar to forecasting the weather. Companies looking back at historical data and trends and use past metrics to make projections on future performance. This allows business owners and staff members to adjust budgets and predict expenditures and revenue on an ongoing basis. In highly seasonal businesses, this can also help predict supply and demand.
The act of systematically organizing and recording business transactions on a daily basis. Good record keeping practices help businesses maintain accurate books and simplify the process of identifying and resolving errors.
4. Accounts Receivable (AR):
AR is essentially a credit line that businesses offer to customers. It consists of money due for goods or services that have been delivered but have not been paid for yet. An AR balance is money that has been promised to a company, therefore it counts as an asset.
5. Accounts Payable (AP):
AP is the opposite of AR. It includes any money a company owes to vendors or suppliers for goods or services rendered. AP balances count as liabilities.
6. Assets: Put simply, assets are everything a company owns. Most assets are tangible, but some can be intangible. Examples of tangible assets include property or land, tools, and cash. Intangible assets are things like patents, trademarks, stocks, and copyrights.
7. Liabilities: This is a broad category that includes any debt or financial obligation a company is responsible for. Common liabilities include but are not limited to accounts payable, salaries, wages, interest, and taxes.
Often referred to as 'working capital' - this is the amount of money a company has to invest in or spend on items that are necessary to run the business. This only includes accessible money, so capital does not take assets or liabilities into account.
Revenue is the total amount of money a business brings in within a specific time frame. Expenses are not subtracted from revenue.
This is the amount of money that owners have invested in the company. If you're a small business, there's a good chance you only have a couple of equity partners. However, as you work to grow, you may solicit additional funding (and guidance!) from investor partners in exchange for equity in your company.
11. Fixed Expenses: Often referred to as fixed costs, these expenses stay consistent from month-to-month and year-to-year because they are not affected by sales, production, or market fluctuations. This typically includes things like salaries, rent and so forth.
12. Variable Expenses: Often referred to as variable costs, these expenses are not consistent because they go up and down based on sales, production, and market fluctuations. Common variable expenses include but are not limited to material and production costs, commissions, and freight costs.
13. Operating Expenses (OPEX):
Essentially, these are costs all companies incur to keep their business running. This often includes things like rent, inventory, payroll, necessary job equipment, insurance, and marketing or research and development funds.
Profit is a positive financial gain. It's calculated by subtracting expenses (including OPEX, liabilities, and taxes) from revenue. If you have a positive number, that's considered profit.
A company with negative earnings owes more than they have earned, has no profit, and is said to be in the red. A company that generates a profit is in the black. Many retail establishments operate in the red until the holiday season, which is why the biggest shopping day of the year earned the nickname Black Friday.
Performance Indicator Basics
15. Balance Sheet: A general summary of how much money a company has on hand at any given time. This financial document serves as an account ledger, similar to the one you see online when you review your bank or credit account. The report shows assets, liabilities, and capital at a point in time.
16. Profit and Loss Statement:
Commonly referred to as a P&L, this more detailed report lists earnings, expenses, and net profits for a specific time period and is often broken down into various categories. Retail and restaurant managers examine P&L's on a regular basis and use them to measure performance and to help them make informed sales projections and inventory decisions.
These are earnings distributed to company shareholders on a regular basis. Dividends can be made up of cash, stock shares, and other property - or any combination of the three.
Sales Tax Basics
18. Sales Tax:
Certain goods and services are taxable, and when a customer buys a taxable item or pays for a taxable service, they have to pay sales tax. Rates vary by location and are calculated based on percentages set by state and local tax authorities.
It's up to the seller to accurately calculate, collect, and remit sales tax to state and local taxing authorities.
19. Use Tax:
Use tax is the responsibility of the buyer. If a business buyers items from an out-of-state vendor that does not collect state sales tax, the buyer must then report and pay use tax on the item.
Nexus is a legal term that refers to the requirement for companies doing business in a state to collect and pay tax on sales in that state. If you have nexus in a state, you must register to do business in that state and must also collect and remit all applicable taxes.
Wait, I have nexus in Texas? Find out how the South Dakota v. Wayfair ruling impacted nexus laws in 2018.
21. Sales Tax Compliance:
Consists of following all applicable laws, rules, and regulations as it relates to registering in nexus states, collecting and remitting sales tax to state and local tax authorities, and so on.
22. Exempt Sales:
Certain necessity goods, such as food and medication, are typically exempt from sales tax. Some purchasers, including the federal and some state and local goverment entities, 501(c)3 nonprofit organizations, and other recognized charitable, religious or educational groups - can make tax exempt purchases with a valid exemption certificate. Resellers are also able to buy tax-expempt goods if they will be combined for resale in certain circumstances. Check local laws in states you do business in to get the details on exempt sales regulations and how they impact to your business.
It's important to document all tax-exempt sales purchases. Be sure to keep copies of your receipts and of your buyer's tax exemption certificate on hand in case any issues come up.
The decrease of an item’s value over time. Depreciated value comes up at tax time because large pieces of equipment can be written off based on their depreciated value.
24. Special Tax:
Special taxes are taxes that apply to specific products (tobacco, gasoline, etc). A 2/3rds majority of qualified voters must approve all special taxes.
A systematic review of your financial records. Though the IRS is the most common agency associated with audits, states often pose a much higher risk to small business owners.
26. Audit Evidence
If you ever receive notice that your business is being audited, you'll quickly learn about audit evidence. Essentially, audit evidence consists of records, statements of fact, observations, documents, and other verifiable data that is relevant to an audit.
27. Allowable Spillage and Spoilage:
Businesses that serve food and beverages have a specific volume of permissible spillage and spoilage. An example of spillage is liquor lost in the transfer when a bartender pours a drink. An example of spoilage is meat that has gone bad and was purchased, but cannot be served for safety reasons.
Shrink is a term regularly used in a retail setting. It refers to product lost to theft (shoplifting or internal employee theft) and other inventory errors.
Now you have a firm grasp on small business accounting terminology. Being comfortable with common lingo gives you a solid foundation that takes the stress out of managing money for a company. It also gives you the confidence you need to speak to your company's performance - and that's something you can take to the bank!