Accounting Terms

What is net income?

Net income is the total amount of profit your business makes after subtracting expenses. In other words, start with revenue and take away any expenses. Expenses may include:

  • Cost of goods sold
  • Operating expenses
  • Depreciation
  • Taxes

This number is great to help understand how profitable your business is year to year.

What is a general ledger?

A general ledger is the complete record of a company’s financial transactions. It is used to prepare all your statements.

What is a cash flow statement?

A cash flow statement shows where your money is coming from and where it is going in your company. It is also called a statement of cash flows. The three main categories that money can flow from are your company’s:

  1. operations,
  2. investments, and
  3. financing.

How do I calculate gross profit?

Calculate gross profit by taking the dollar amount of sales and subtracting from it the cost of buying or making your product. In equation form:

Total Sales – Cost of Goods Sold = Gross Profit

If your company made $10,000 in sales, and it cost you $6,000 to make that amount of product, your profit would be $4,000:

$10,000 total sales – $6,000 cost of goods sold = $4,000 gross profit

How do I send an invoice?

An invoice is another term for a bill. Your business sends an invoice because a client owes you money for goods or services you provided.

An invoice can be sent through the mail on paper, or digitally via email or an online accounting software.

Remember when sending an invoice to include the name of the person, name of the company, and a description of the invoice.

What is a balance sheet?

Balance sheets are created to find the financial standing of a business at a specific point in time. They are composed of three components:

  1. Assets
  2. Liabilities (Debts)
  3. Owner’s Equity

The sheet is normally created at the end of each month.

Here is a breakdown of some of the components:

Assets = Liabilities + Equity

An Asset is anything the company owns with monetary value. These are listed in order of liquidity, from cash to land.

Accounts Receivable includes sales your company has made that you have not yet collected. This is shown on the Balance Sheet as an asset that will probably convert to cash soon.

Book Value As an asset depreciates, it loses value. Book Value is the original value of an Asset, minus accumulated depreciation.

Liabilities (such as Accounts Payable, Payroll and Loans)

Accounts Payable includes the expenses you have incurred but not paid yet. This account is recorded as a liability because it is a debt owed by the company.

An Accrued Expense is another name for accounts payable: an expense that hasn’t been paid.

Equity = Assets – Liabilities

Equity is the value left after liabilities have been taken out. If you take your Assets and subtract your Liabilities, you are left with Equity, which is the portion of the company owned by the investors and owners.

What is a fixed cost

A fixed cost is one that does not change with your sales volume. Rent and salaries, for example, won’t change if you sell more.

What is a variable cost?

A variable cost is the opposite of a fixed cost. It includes things like machine depreciation, commissions, production, etc.

What is present value?

Present value is the value of an asset now, as opposed to a future point in time. Cash today, for example is assumed to be more valuable than cash next year, due to inflation.