10 Basic Accounting Terms Business Owners Should Know

Updated: Sep 21

For a business to be operational, you will need a lot of effort to understand the operating process of the entire company. It can be said that the accounting sector is a big challenge for small business owners to deal with. Why? The financial issue is always a big topic for you to fully understand, such as managing accounts receivable, cash flow, payroll, bookkeeping, and tax preparation, paperwork. There will be accounting terms and concepts you need to know, and if you are not a financial expert, you will have difficulty managing a business.

Therefore, we will help you understand some of the basic accounting terms that you need to know. It will also help educate you, so you’re not flummoxed when you meet with an accountant or financial advisor.

1. Cash Flow

Cash Flow (Cash Flow) is understood as the movement of money in and out (Receiving and spending) in a store, business, project, or financial product.

Example: When a customer buys a shirt at the shop and pays money, the money is the cash inflow. When you import the goods, pay the utility bills… it is the cash outflow.

The goal of businesses is to create a positive cash flow (Positive Cash Flow), which is how to receive more money than to spend money. This may sound simple, but a lot of businesses have problems with their cash flow. If the revenue is not stable, the payment of regular expenses such as salary, electricity, water ... is also difficult. Many businesses generate Negative Cash Flow (Negative Cash Flow), is spend more than receive.

2. Cash flow statement

The cash flow statement also referred to as Statement of Cash Flows is one of three main financial reports that are generated regularly. It is used to show how much cash the company has on hand during a specific period of time. The cash flow statement provides all cash inflows and outflows of the company through 3 main areas operations, investment, and financing. By analyzing this statement, the company’s stakeholders such as investors, banks, shareholders, even potential staff could have a more accurate picture of the health of the company.

3. Financial Statements

Financial statements (financial statements) are a form of documents showing quarterly and annual business results of a company. The indicators on the financial statements have been standardized according to the general standards and regulations so that the readers can comprehensively grasp the financial statements of each company.

4. Accounts Receivable

Account Receivable is the balance of money due to a firm for goods or services that were delivered or used but not yet paid for by customers. This term is additionally used to represent the outstanding invoices a company has or money owed by customers to the company. This money is typically collected within a few weeks and is recorded as an asset on the company’s balance sheet. Account Receivables is recognized as a part of accrual basis accounting.

5. Account Payable

Accounts Payable is the money your business owes. Your business needs lots of things to be in business: inventory, office supplies, services like phone and internet, the list goes on. And when you accept delivery of these things and you have a term to pay for it, that’s a debt you owe. That debt is a pending outflow of cash and thus an Account Payable. You still have the cash in hand, but you already owe it to someone else.

6. Asset

An asset is a resource, like equipment or inventory, that will provide a future benefit to your company. There are two basic assets: short-term assets and long-term assets.

  • Short-term assets are assets that are converted into money within one year (or one business cycle). Short-term assets of a business usually include cash and cash equivalents, short-term investments, short-term liabilities, inventories, and other short-term assets.

  • Long-term assets are assets that have the time to convert into money over one year (or one business cycle). Long-term assets of an enterprise usually include tangible fixed assets, intangible fixed assets, long-term investments, and long-term prepayments.



Statement of Cashflows - Definition and Detailed Explanation

7. An expense

Anything that your company spends money on that keeps it up and running. An Expense is a rent, phone bills, website hosting fees, office supplies, accountant fees, trash service, janitorial fees, etc. These things do not generate any income for your business, but they do keep your business running.

8. An Item

Anything that your company buys, sells or resells in the course of your business. An Item could be products, goods, services that you purchase from others, such as an Estimate, an Invoice, a Sales Order, or even a Purchase Order.

9. ROI (Return On Investment)

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.

10. Bookkeeping

Bookkeeping is the process of keeping full, accurate, up-to-date business records. It involves making a record of the monies received by a business from providing services as well as the monies paid out to vendors, employees, tax agencies, contractors, lenders, and any other individual or entity. Equally, accurate records of amounts owed to a company by outside individuals and organizations are also recorded in a company's books.

If you are not confident with your bookkeeping skills, our certified bookkeeping experts can help! Catch Up Accounting can keep your business finance right on track. Get in touch with us for a free quote!

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