13 years ago, we started our first business. Though it was exciting, there were still a few things for us to learn.
During these years we learned a lot and want to share our knowledge with you, but most of all we want to share that it is okay to not know.
It is okay to admit that you don’t understand and asking for help.
Having a small business is daring especially if it is your dream and you are a first-time entrepreneur.
So today I want to say that it is okay to be the person in the room not knowing what a Profit and loss statement is, we didn’t either.
Don’t worry, we are here to break it down for you. Here are 10 basic accounting terms explained for a newcomer in the world of accounting.
Assets (A): Assets are what the company owns. There are 2 types of assets. Current Assets (CA) and Fixed Assets (FA). Current Assets (CA) are assets you plan to convert into cash within the year. A good example would be your inventory or stock that you plan to generate cash flow from. Fixed Assets (FA) are assets that will benefit your company in the long run. This includes machinery you use to produce products and real estate you own.
Liabilities (L): L is debt a company still needs to pay. There are 2 types of Liabilities, Current Liabilities (CL) and Long-term Liabilities (LTL). CL are debts that are payable within one year, such as debt from buying inventory. LTL is debt that is payable over a period longer than a year such as a business loan.
Cash flow (CF): Cash flow describes the in and outflow of cash in a business. CF is used to cover the ongoing expenses of the business every month.
Balance Sheet (BS): A Balance sheet is a financial report that summarises the company’s assets, liabilities, and the owners’ equity.
Income: Income refers to all revenue the company generates before paying any expenses and taxes. It is not to be confused with Net Profit.
Expenses: Expenses are all costs that the business incurred. These costs refer to anything from manufacturing costs to operational costs, delivery fees, inventory supply costs and so much more
Net Profit: Profit refers to all the earnings a business accumulates. Net Profit is achieved by subtracting expenses from your total revenue. The aim is to get your Net Profit as high as possible.
General ledger (GL): A GL is a complete record of all your business’s financial transactions. This includes sales, credit purchases, office expenses, and income losses.
Profit and loss statement (P&L): A P&L statement refers to the financial statement that summarises the company’s financial performance and position by evaluating the expenses and revenues. This is done over a certain period, usually monthly and annually.
Cost of Goods Sold: This is how much it costs you to produce the product that you are selling. This is important and shows you what is the minimum amount you can sell your product to at least break even.
See! It isn’t that difficult.
Please don’t look at learning in a way of “… for dummies” but rather “Accounting for the dreamers and chance takers”.
Have a great day