It’s no secret that starting a new business comes with its fair share of challenges and keeping track of finances is just one of the many tasks you’re expected to juggle each day.  

While you don’t need to be an expert in accounting jargon, getting to grips with a few key terms is a great starting point. For start-ups and small business owners especially, understanding key accountancy terms will help you make informed decisions and pave the way for long-term success with your finances.  

Clients sometimes tell us that accountancy terms feel like an entirely different language. The truth is, some accountants use language that is more complicated than is necessary. To break down this barrier, we’ve created a guide of key terms to make accounting accessible and help you feel more confident when it comes to tackling jargon. With these essential accountancy terms that every start-up and entrepreneur should know, you’ll feel more prepared to work with investors, partners, and accountants alike.   

1. Balance Sheet 

A balance sheet is a financial statement that gives a snapshot of a company’s assets, liabilities, and equity from the preceding financial period. It’s essential because it helps you understand what your business owns (assets), what it owes (liabilities), as well as the owner’s equity (value of company’s assets that can be claimed by owner/shareholders).  

Balance sheet reports are particularly helpful for investors who need accurate insight into the business’ finances and amounts invested by shareholders.  

2. Profit and Loss Statement  

Also known as an Income Statement, a profit and loss statement is a summary of the business’ sales minus the expenses. This covers your annual accounting period and represents all income earned, expenses spent, and tax due for a year, leaving a figure of any profit or loss made in that year.  

The useful thing about a profit and loss report is that it reflects the sales and expenditure as if the monies have been received or paid out, even if they haven’t been yet. That means you have a clear overview of how the business is operating and can make key decisions based off this information.  

3. Cash Flow 

Cash flow refers to the movement of money in and out of your business. They are invaluable when it comes to budgeting and making future plans for business growth and scaling as they show you what physical cash is actually available. 

Positive cash flow means more money is coming in than going out (crucial for investing in growth), while negative cash flow can be indicative of financial problems and highlight areas you may need to investigate. It’s important to forecast your cash flow to ensure that you always have enough cash available to cover day-to-day operations, such as paying bills and employees. 

4. Revenue 

Also referred to as a business’ ‘turnover’ or ‘top line’, revenue is the total amount of income a business earns from its activities, typically from the sale of products or services.  Revenue is a critical indicator of a company’s performance, however, as expenses haven’t yet been deducted, it does not represent the company’s profit.  

5. Gross Profit 

Gross profit is the difference between your revenue and the cost of goods sold (COGS). It measures how well your business generates profit from its core activities, excluding other expenses like overhead, marketing, and taxes. The formula is: 

Gross Profit = Revenue – COGS 

This metric gives you insight into the profitability of your products or services. 

6. Net Income 

Net income, or profit, is what’s left after all expenses (including operating expenses, interest, taxes, etc) have been subtracted from your total revenue. This figure is often referred to as the ‘bottom line’ because it’s the last item on the income statement. It’s a key indicator of a company’s overall financial health. 

Net Income = Revenue – Total Expenses 

7. Operating Expenses 

Operating expenses are the costs a business incurs as part of its normal operations, such as rent, utilities, salaries, supplies, marketing, etc. These are separate from the cost of goods sold and are crucial for calculating your net income. Managing operating expenses efficiently can help improve profitability so it’s worth keeping an eye on. 

8. Accounts Receivable (AR) 

(Also referred to as Sales Ledgers, Debtors, or Trade Debtors). 

Accounts receivable refers to the money your customers owe you for goods or services purchased on credit that have been delivered but not yet paid for. Once the customer has been invoiced, the sum is then expected to be paid.

9. Accounts Payable (AP) 

Accounts payable is the opposite of accounts receivable and refers to the money you owe suppliers, vendors, or creditors for goods or services provided on credit. Keeping track of accounts payable ensures that you make timely payments, which helps you maintain good relationships with suppliers and avoid late fees. Listed as a ‘current liability’ on your balance sheet, these would be expected to be paid within a year. 

10. Dividends 

A dividend is the amount of money that is paid out to a shareholder in the company in exchange for their investment into the business. Dividends are paid from a company’s profits, usually made annually and in cash but sometimes will come in the form of property or stock shares.  

Conclusion 

Hopefully you feel more confident to tackle your finances now you have some key terms under your belt. We would always encourage start-ups and entrepreneurs to get to grips with the lingo sooner rather than later as it will make a big difference to your efficiency and knowledge. 

What do accountants do? 

Want to skip the jargon and get on with running your business? That’s what we’re here for. Let us handle the complexities of the accounting world – be it changing legislation, complicated language or excessive paperwork – while you get back to doing what you do best. It’s just one of the many benefits of an accountant. 

If you’re looking for expert accountants that are knowledgeable, friendly, and efficient, you’re in the right place. Caroola is here to simplify your financial life. 

Get in touch with our team today to simplify your finances.