Business

What are the Most Important Bookkeeping Terms?

In this article, we’ve compiled a list of the most important bookkeeping terms a small business owner should know. As a small business owner, it’s important that you understand basic bookkeeping terms. Do you think this is a strange thing to do because you hired a top tax agent in Craigieburn? However, knowing some basic tax terms can help you be a more flexible business owner.

Most Important Bookkeeping Terms

How to Trade receivables and trade payables?

Accounts receivable simply means that you owe someone money. Accounts payable, on the other hand, means that you owe someone money. Sounds simple, doesn’t it? However, these two terms can often be confusing for small business owners. When you need to talk to a customer about accounts payable, do you ask them about accounts payable or accounts receivable? What should you do if you need to discuss an invoice payable to a business partner?

Read: Basic Accounting Terminology and Concepts

Basic bookkeeping terms

The easiest way to understand these basic bookkeeping terms is to remember that one is accounts payable and the other is accounts receivable. When you call a customer because they owe you money, you should talk to their accounts payable. When you call a supplier to discuss the terms of an invoice, you should talk to that supplier’s accounts receivable.

Burn rate

This is an important bookkeeping term to know for your small business. The burn rate of your business is how fast it spends money. As a small business owner, you need to know this term.

How to Calculate Burn Rate?

Calculating your business’ burn rate is simple. Just pick a period of time, usually, a quarter or more, subtract your cash reserves at the beginning of the quarter from your cash reserves at the end of the quarter, and divide the result by the number of months in the period.

  • For example, let’s say you have $12,000 in the bank at the beginning of the quarter and at the end of the quarter, after some deductions, you have a balance of $6,000. If you subtract $12,000 US from $6,000 US, the result is $6,000 US. This means that you have spent $6,000 in three months. Then divide US$6,000 by 3 months and the burn rate is US$2,000 per month.
How to Manage Your Cash Flow?

When managing your cash flow, it is important to understand how fast your business is spending money. In fact, for all businesses, a negative burn rate indicates that you are increasing your cash reserves. This rule does not apply if you are investing to grow your business.

Chart of accounts

The chart of accounts is a filing cabinet in which all the financial transactions of the company are stored. It is a complete and exhaustive list of all the accounts in the bookkeeping system.

Organize Accounts

The chart of accounts helps organize the data in the general ledger (see below) so that the financial statements make sense. Business owners should work closely with their accountant or bookkeeper to prepare the chart of accounts.

Conclusion

Cost of sales is one of the most important concepts in management bookkeeping. Cost of goods sold (COGS) or cost of sales (COS) is the direct cost of producing a product or providing a service. COGS or COS is an important step in determining your gross profit margin.

Abstracts

Even if you don’t fully understand bookkeeping jargon, your accountant or bookkeeper will be able to explain your business finances in simple terms. However, if you are familiar with certain bookkeeping terms, you will be able to better understand the specifics.

Final Thoughts

For example, if you are travelling to another country. If you were to travel to Craigieburn and didn’t speak English, you’d want to have a few phrases ready, right? Also, it’s a good idea to know some basic small business bookkeeping terms before you meet with your financial advisor. This will help avoid misunderstandings and make the meeting more productive, efficient and enjoyable.

Read: Bookkeeping Services: How to Manage Small Business Successfully?

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