Resources | 10 common accounting terms explained

10 common accounting terms explained

April 5, 2021

If you’re running a business, unless of course it’s an accounting firm, perhaps some finer details relating to the keeping of financial records eludes you. This is ok. In fact, this is perfectly normal. However, deep down, you know that you might fare better understanding a thing or two about accounting so that you can be better equipped with essential tools that help you grow your business. 

Accountants and financial advisors like Dillon Partners offer insights, critical support and tidy everything up for you, so you do not need to be encumbered with additional burdens as you focus on providing your product or service to your customers, but if you’re looking to be a little bit more informed and empowered whilst seeking to control more elements of your business, perhaps these ten common accounting terms explained can help. 

1. Assets

Assets can be cash, investments, buildings, vehicles and so forth that are needed for daily operations. It is wealth accumulated by a business and is owned outright. 

2. Liabilities

These are amounts owed by a company. Think business loans, amounts payable, tax liabilities and credit cards, for example.

3. Equity

Basically, this is your total assets minus your total liabilities. It is the amount of actual money you have invested into your business minus the expenses you have paid. Ideally, this is a positive number.

4. Balance Sheet

A basic accounting formula of assets = liabilities + equity at any given length of time – be it quarterly, monthly or yearly. 

5. Capital

This broad term defines anything that offers value to a business or benefits the owner. It is a critical aspect of financing and determining growth.

6. Revenue

The total amount of all of your income or money gathered at any one moment in time.

7. Gross Margin

This is a fundamental concept to grasp and one that all business owners should have a firm understanding of. It is the total amount of sales made, minus all of the associated costs, such as manufacturing, materials and supplies that went into it.

8. Net Margin

This is a percentage amount that can be calculated by dividing the Net Income by the Revenue. The Net Income is an amount in dollars that is a profit. So basically, the Net Margin shows us the yield of a business concerning the Revenue.

9. Overhead Expenses

This is the cost of doing business. It does not need to be directly related to bringing in Revenue, so it differs slightly from other terms. It can include expenses such as insurance and phone bills. They are otherwise known as fixed costs, something that is unavoidable in a business.

10. Cash Flow

A term that describes the money that goes in and that goes out in a company.

Although it can take a bit to wrap your head around, by discussing a few terms that are confusing to you with our team of accountants, you can gain better control over your knowledge and enjoy the confidence that this brings with it. Call us on (03) 9696 1788 or fill out our contact form to know more.