Whether you own a business or are attempting to do your own taxes for the first time, there are some accounting terms that you will most likely run into. These accounting terms can be confusing, but it is important to understand them so you can file your taxes properly. Let’s define some common accounting terms to help you out for tax season.
Cash flow refers to the total amount of money being transferred in and out of your business. Cash comes in from clients or customers who purchase your products or services. It flows away from your business in the form of payments for expenses, such as monthly loan payments or rent.
Assets include everything that a business owns that holds monetary value. This can be in the form of cash, property, vehicles, etc. A business’s assets can be determined by the equation: Assets = Liabilities + Equity
A balance sheet is a crucial element of a business’s financial records. The balance sheet reports all of a company’s assets, liabilities, and equity. The basic formula for calculating the balance sheet is Assets = Liabilities + Equity.
The definition of equity is the value of the shares issued by a company. To measure equity, a company should subtract its liabilities from its assets by referring to the previous equation.
Conversely, the term liabilities refers to any debts a business owes, whether it be to the bank or investors. This most commonly comes in the form of loans, payroll, or accounts payable. Remember to use that handy equation to calculate your liabilities.
The terms income and revenue can be used interchangeably. Revenue is comprised of the total amount of all income collected at one point in time. This can include cash sales, credit purchases, subscription fees, and interest income.
The general ledger contains the balance sheet and the income statement accounts. This is where all business transactions are recorded, including sales, credit purchases, office expenses, and income losses.
Also known as a profit and loss statement, this is a financial statement that summarizes a business’s revenues, expenses, and profits over a specific period of time.
Payroll is the account that shows the payment of employee wages, salaries, deductions, and bonuses. This can appear on the company balance sheet as a liability if the business owes unpaid wages.
Receipts are the total dollar amount of cash collected in business transactions over the course of one day. It does not include other revenue collected.
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Bowman & Company CPA, PC provides all of our individual and small business customers with experienced, accurate, and affordable financial services. Our financial services aim to decrease your taxes and increase your net worth through responsible, timely, and accurate record keeping. We offer our services to clients throughout the Washington, D.C., metropolitan area, including Maryland and Baltimore County, Columbia, and Howard County. For more information on our offerings, contact us online or call us at (410) 381-8121. You can also find us on Twitter, Linkedin, Facebook, and Youtube.