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The basics of accounting and financial terms
Are you a crafter and you have zero knowledge of accounting? When becoming an entrepreneur, financial management and accounting procedures are of great importance, otherwise you cannot ensure that you can gain profit from your sales. Of course, you will need an accountant; you should be able though to at least communicate with your accountant. Imagine being able to manage the finances of your business on your own.
When phrases that we use in daily transactions have distinct meanings in a financial environment, the language of accounting can at first seem confusing. You can talk about and manage money with confidence if you are familiar with basic terminology. This section aims to introduce some basic terms of accounting and finances that will help entrepreneurs better manage the finances of their business. The following table can be your dictionary when communicating with your accountant.
| Term | Definition |
| Accounting | The procedure for monitoring and planning financial activity. You are keeping track of each transaction, or monetary event, that takes place. Data and reports generated by accurate accounting can be used to create well-informed corporate decisions. |
| Accounts | A record that compiles related types of transactions, such as liabilities or assets. Financial accounts can be divided into five categories: assets, liabilities, equity, revenue, and expenses. |
| Assets | Benefits to the economy now or in the future that an entity controls. This could be something tangible, like money, tools, or real estate, or something intangible, like copyrights, patents, or brands. |
| Liabilities | What you owe; the sum of money or other financial responsibilities that an organization owes to another party. This covers money owed and unpaid services. Liability accounts are often those that finish in “payable.” |
| Revenue | Financial benefits derived from commercial operations like selling products or rendering services. |
| Costs | The monetary value of expenditures for supplies, services, labour, products, equipment and other items purchased for use by a business or other accounting entity. |
| Equity | When a company is a sole proprietorship, equity is the worth of the company that belongs to the owner or shareholders (if a business is a corporation). Equity is the amount of value a person has in a personal asset. |
| Accounts Payable | Money that a company owes. When an entity makes a transaction but does not immediately pay cash, this account is frequently utilized. |
| Accounts Receivable | Amounts owing to a company. Although the goods or service has been delivered and accepted, payment has not yet been made. |
| Balance Sheet (Statement of Financial Position) | A record of all the assets, liabilities, and equity of a company. A balance sheet is a record of a certain financial period. The components of a balance sheet are reported in the order that they appear on the sheet since the basic accounting equation is assets = liabilities + equity. |
| Basic Accounting Equation | Assets = liabilities + equity
The basis for both double-entry bookkeeping and accounting itself is this formula. Making sure this equation is balanced is one of financial recordkeeping’s core objectives. The graphic depiction of this equation is a balance sheet. |
| Cash | A class of assets that includes both traditional financial instruments like cash and digital ones like the amount in bank accounts. It is the most liquid asset. |
| Credit (Cr) | The right column of a T account, at its most basic. Using the fundamental accounting equation, the following occurs when recording a transaction on the credit side: Assets and costs decline, Increases in Revenue, Liabilities, and Equity |
| Debit (Dr) | The left column of a T account at its most basic. In the fundamental accounting equation, the following occurs when recording a transaction on the debit side:
Assets and costs both rise, Revenue, liabilities, and equity all decline. |
| Double-Entry Bookkeeping | A fundamental accounting technique that calls for the dual recording of each transaction. Every increase has a corresponding reduction, and every debit has an equivalent credit. This “double-check” aids in finding mistakes and maintaining the stability of the fundamental accounting equation. |
| Financial Statements | Documents that detail the financial position of a company. The balance sheet, profit and loss statement, and statement of cash flows are the three primary financial statements. |
| Profit | Profit describes the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question. Profit = Revenue – Costs
Net profit is the amount of money your business earns after deducting all operating, interest, and tax expenses over a given period of time. It is the actual profit after working expenses not included in the calculation of gross profit have been paid. |
| Invoice | A record of the specifics of a sale or purchase between a buyer and a seller. Typically, this comes with a demand for payment by a certain future date. |
| Inventory | Current assets waiting to be sold, for example crafted products. |
| Operating Cycle | The amount of time it takes for a company to convert its inventory into cash. |
| Payroll | The money owed to employees of a company in wages, salaries, and other forms of remuneration. Payroll taxes and other taxes that are withheld are also included. |