Starting a business or even becoming a freelancer is fun and exciting. That is until you actually have to start dealing with things like payroll, taxes, loans and so forth. It’s great if you have enough money to hire an accountant or a bookkeeper. However, most often entrepreneurs don’t have the means to afford such a luxury. That’s when it becomes very challenging and can often jeopardize the success of a business. We did a bit of research and have summarized the main accounting terms. Make sure to take note because they can definitely come in handy as you start your path of entrepreneurship!
Expenses and revenues that a company has accumulated over a period of time but haven’t been recorded in their accounts. It can be employee salaries or expected payments from clients.
Anything that can be turned into money. Includes both tangible (physical) and intangible resources that a business owns. Assets are often reported on a company’s balance sheet and can be anything from equipment to trademarks. They usually increase the value of the company.
This is money that is owed to the company by its debtors. It can be clients or customers who haven’t paid yet the company for the goods or services received.
Expenses make the costs of doing business. They may be in the form of cash (such as wages and salaries), depreciation of an asset or loan repayment.
This is the money owed to the creditors. Can often be the suppliers, utilities or banks. This shows as “liabilities” on a company’s balance sheet.
In accounting, it’s the difference between the value of the assets and liabilities owed. This is, for instance, the difference between the vehicles a company owns and the loan that has to be repaid.
Bad debt interprets as debt that a company is not able to pay back to its creditor, hence, it must be written off. This also usually means the company is going into liquidation or insolvency.
A balance sheet shows a company’s net worth at a specific point in time. It lists all the liabilities, assets, equity. It also evaluates the company’s capital structure. Basically, a balance sheet is the main document that helps understand how the company “is doing” generally speaking.
Found in the credit report, it helps lenders and investors to evaluate the risk of lending or investing.
This is how much a business is worth through tangible and intangible resources. It includes, the accounts, assets, and investments of a company.
Bookkeeping means the recording of financial transactions. It’s important to do it but it’s not all a company needs to do to keep it in good financial shape.
When a company has multiple loans to repay, they can use debt consolidation to pay off what they owe faster with one payment instead of several. This process can help them get a lower interest rate and have a better repayment plan.
If a company runs their business solely on their own savings or if they re-invest their profits back into the business to run it, it’s called bootstrapping. The type of entrepreneur who runs their business like that is called “bootstrap.
The total amount of money being transferred in and out of a business.
This is the same credit report an individual has. The only difference is that a company’s credit report also includes aspects like how long the business has been established, legal filings and general credit history. Lenders like banks and investors use it to evaluate the risk of lending or investing.
This is the abbreviation that reads as Annual Percentage Rate. It represents a percentage of the actual yearly cost of funds over the term of a loan. APR helps businesses identify which loan program will be more beneficial for them.
When a company has a balloon loan to pay, it means that at the end of the loan term, they will have a larger amount to pay compared to the previous ones.
The asset a company uses as a security for a loan they take. Lenders require it so they don’t lose out on money and they can seize it if the company can’t repay the loan.
Bankruptcy is when a company realizes that they can’t pay all of their loans back. It’s often considered as a last resort measure since it can harm their credit score tremendously. Bankruptcy can reduce the repayments of debts or even waive them at all. It is usually imposed by court order and initiated by the debtor.
This term usually refers to assets and how they decrease or “depreciate” in value over time. It’s like aging in the business world. Depreciation happens either due to assets damage or the evolution of the assets and the appearance of newer and better models on the market.
It’s the main principle of bookkeeping meaning that transactions require two entries into the company books. They relate to credit and debit entry and should result in the overall balance where “Assets = Liabilities + Equity.”