By understanding these terms, you will be better equipped to handle your finances and stay in compliance with the law.
As a business owner, you must be well informed about the different accounting terms that apply to you. If you are unfamiliar with these terms, you could make costly mistakes. This article discusses five of the most important accounting terms that all business owners should know.
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Accrued expenses are expenses that have been incurred but have not yet been paid. For example, if you purchase office supplies on credit, the cost of those supplies would be an accrued expense. Once you receive the bill and pay for the supplies, the expense would then be recorded as a “paid expense.” As another example, if you pay your employees every two weeks, any wages that have been earned but not yet paid would be considered an accrued expense.
Liabilities are predominantly financial obligations of a company that may arise during the course of business. They are debts that need to be settled. In other words, any amount that is due but not yet paid is considered a liability. For example, if you buy goods on credit from a supplier, the outstanding balance you owe them would be classified as a liability. In the same vein, if you have borrowed money from the bank in the form of a loan or line of credit, the amount outstanding would also be considered a liability.
Revenue is the total amount of money that a business earns from sales. This can include sales of goods, services, or both. Revenue is typically reported on a monthly or yearly basis. To calculate revenue, you must keep track of all your company’s sales. This information can be found in your sales invoices or receipts.
Deductibles refer to expenses that can be deducted from your taxes. Common deductible expenses include business travel, retirement contributions, office supplies, etc. You’ll need documentation to support your expenses to claim a deduction. For example, if you’re claiming a deduction for business travel, you’ll need receipts for your air ticket, hotel, and other travel-related costs. Similarly, if you’re claiming a deduction for office supplies, you’ll need receipts or invoices showing the amount you paid.
Financial Statement Audits
A Financial statement audit examines an organization’s financial statements by an independent body, typically to ensure accuracy and compliance with laws and regulations.
For businesses, audits are usually performed on an annual basis. However, if there are concerns about potential fraud or mismanagement, organizations may choose to undergo more frequent audits. While some business owners view audits as a necessary evil, they can help identify areas where the company can improve its financial management.
By understanding these terms, you will be better equipped to manage your finances and stay in compliance with the law.
RTI Business & Consulting Services
Need help getting a handle on your business finances? RTI is here to help. We offer business accounting consulting services and can provide the tips and strategies you need to succeed. Contact us today at (314) 529-1525 to learn more!