Your Growing Business needs to understand these tricky Accounting terms.
In our last post, we started the discussion on basic accounting terms every business owner should know. Some months ago, I heard friends discussing how a business they knew had a lot of revenue but still failed on the grounds of “low income”. “Fraud definitely” one of them muttered, “someone must have stolen all the money” another joined in. Well, they were all wrong. In business, income is not just the money you receive.
In this post, you’ll learn the meaning of some accounting words you are familiar with as well as others that are a bit tricky. Triift Africa exists to demystify myths around doing business and also to make it easy for small businesses to safely navigate the African entrepreneurial landscape.
Are you making a profit or Loss? These Words Help you Understand your Income Statement
6. Revenue: This is all the money you get from selling your products or services or any other business activity that brings in money.
7. Expenses: Expenses mean every amount of money you spend in the course of business. Rent, electricity and transportation to meet a client are examples of expenses you may incur in your small business.
8. Net Income: In business, income ( or Net profit) is the amount you have left after deducting your expenses from your revenue.
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9. Cost of Goods Sold (or cost of sales): this is the total amount you spend on buying the goods or products you sell. Cost of sales should include the delivery cost of buying.
10. Gross Profit (or Gross income): when you deduct your cost of sales from revenue, what you get is your gross profit. This is different from net income. Gross profit minus expenses give you net income which is your real profit.
11. Bad debts: Have you ever made some sales, provided a service or borrowed someone some money and they just can’t pay back, that’s what bad debt is — a debt that cannot be paid.
What Does Depreciation mean Anyway? These Terms Explain How much your Business is Worth
12. Assets: An asset is any resource that belongs to your business that either has monetary value; brings in a stream of income, or consistently reduces expenses. Assets can be tangible e.g. car (used only for business); building, machine, land, etc. Or intangible e.g. investments, copyrights, patents, etc.
13. Depreciation: Your assets won’t last forever, especially the tangible ones. The amount by which your assets reduce in value every year is called depreciation. This makes it useful for a limited number of years.
14. Net Book Value: You want to make sure that you’re not deceiving yourself with regards to how much your business is worth. The Value of your asset after depreciation is the net book value.
15. Accounts Payable: A simple word for this is “creditors” It is the amount of money your business owes people.
16. Liabilities: This is the opposite of assets. They are “resources” that take money out of your business or increase your expenses. For instance, if Triift Africa has taken out loans, overdrafts, etc. we would record it as a liability because we have to pay interest on the loans and that takes out money from the business.
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17. Accounts receivable: (or Debtors) The amount of money people owe your business.
18. Drawings: Every time you take money out of your business for your personal needs. It’s called “drawings” and it reduces the worth of your business.
19. Inventory: This is for businesses that either sell goods or make them for sale. All the goods that you have bought or made (finished goods) or still making (work-in-progress) or yet to make (raw materials) and have not sold yet are called inventory.
20. Capital: This is how much money you put into the business or assets minus liabilities.
Do you feel like an accountant already? Give us some credit for bringing you this superpower by hitting the clap button as many times as you want! Do you still have questions, reach out to us on Twitter, Facebook or Instagram. We want to hear from you!
