ACCOUNTING DEFINITIONS

Accurate financial records for a small business are the strongest building blog for future growth that a business needs. Financial records are often talked about but seldom understood. Today’s blog will include a basic definition of the most common terms:

• Profit and loss statements: Shows how much money a company is making. It is especially useful for potential investors, obtaining bank loans and in the selling of your business.
  • Outlines revenues and gains minus expenses and losses of operating costs.
  • Informs a company if a profit warning is needed.
• Balance sheet: Gives a snapshot of how much a business is worth at a certain time and is a good indication of its long-term health.
  • Balances company’s assets against its equity and liabilities.
  • Lists different types of assets, including tangible fixed assets and current assets.
• Cash-flow statement: Reveals a company’s liquidity by tracking the flow of cash – money or short term investments in and out of the company.
  • Shows if a company can sustain itself, grow, and pay debts.
  • Details cash flow from operating, investing, and financing activities.
• Depreciation: Accounts for the decrease in value over time of tangible fixed assets in order to spread the cost of assets over their economic life.
  • Tangible fixed assets include building, plant, and machinery.
• Amortization and depletion: Account for the decrease in value over time of a range of intangible assets, loans and natural resources.
  • Intangible assets include patents, trademarks, logos and copyright.
  • Natural resources include minerals and forests.

As a small business owner you should understand the basic definition of these five items and make sure that they are incorporated into your financial review of your company, regardless of the size.