3 Common Accounting Terms Explained

3 Common Accounting Terms Explained

Many business owners rely upon the knowledge and expertise of their accountant or bookkeeper to stay informed on the daily operations and financial standing of their business. It is essential to have a financial professional involved to help you understand the health and direction of your business. However, it is necessary as business owners and entrepreneurs to be able to navigate topics related to corporate finances.

Regardless of if you are beginning to work on a business plan, or you have been working in your industry for a while, a growing understanding of accounting terms and concepts will help you to build a successful business with an accurate outlook on what does and doesn’t work for you. Without receiving a formal education on these topics, terms can get confusing and will, therefore, go avoided. However, if you have been working in the business industry for any amount of time, you may have heard some phrases that sound complicated at first impression but have a simple explanation.

Capital

This widespread term can have multiple meanings when it comes to business. Financial capital simply defined refers to assets required in order to provide a company’s product. Capital is referred to in respect to debt or equity because it involves financial coverage. You can identify financial capital in your business strategy through where you are investing in your organization, whether that be equipment or materials. Rather than these items simply being resources, they are being used to produce gains in the future of your organization.

Financial capital already exists in your business, especially if it’s growing. Understanding this concept will help you to have conversations centered around where investment capital is best placed with business partners and investors. 

Cost of Goods Sold

The Cost of Goods Sold often referred to as COGS, is the direct costs incurred by an organization related to the production expenses. Meaning these are the costs that are required of your organization to produce your output.

It is crucial for all business leaders to understand the cost of goods sold as it relates to the capacity of their business. With a limited comprehension in this area, it is possible for growth to exceed what is feasible for your company. This is an area of your finances that requires careful consideration and documentation, meaning it is a good idea to have COGS evaluated by your accountant or bookkeeper. However, as the leader of your business, knowledge in this area is required to make educated decisions related to product pricing and inventory.

Profit

Profit is a well-circulated term, and although it is a small accounting term, it certainly has a large impact on your business. Many business owners have the misconception that profit is accurately portrayed in a monetary value found in a bank account. A limited understanding of this concept leaves an unsettled feeling when financial statements with an accurate record of profit amount to much higher or lower than a bank account balance.

Net profit also referred to as the “bottom line,” is the difference between several variables. These variables consist of income, cost of goods sold, operating expenses of the business, interest expenses, and depreciation. If any of these terms are unfamiliar to you, inquire with your bookkeeper or accountant to develop a better understanding of what variables are influencing your profitability.

Understanding this topic will also help you to be mindful of how profits will impact future liabilities. For instance, depending on your tax structure, you or your business are eligible to be taxed on net profit. If needed, seek professional expertise to avoid unpleasant surprises during tax season.

Be a Better Business Owner

These terms are an important part of running a business, but only provide a working understanding of the knowledge needed to be successful. Continue to seek out explanations to areas of accounting you are unfamiliar with; doing so will help make conversations with financial planners and other professionals easier to follow.

If you want to get your business’ finances organized, but are not sure where to start, I would love to get in touch with you! Visit my website or email me at heidi@hlabookkeeping.com; you will certainly never regret investing the time to finally feel in control of the direction your business is taking.

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