Accounting basics for business owners
Here’s what we talk about when we talk about accounting.
Broadly speaking, accounting is the recording of financial transactions. It’s a key function for any business. Accounting entails logging, summarizing, analyzing, and reporting a business’ financial data. The reports that result from accurate and timely accounting can be very valuable when it comes to making informed decisions about your business.
Accounts payable (often shortened to “A/P”) means money that you owe in the short term. For example, if you’ve purchased some materials and received an invoice with an upcoming due date, but you haven’t paid yet, that cost is added to the general ledger under accounts payable. It’s a record of all the money your business owes and needs to pay back soon. (Long term debts, on the other hand, are usually recorded differently.)
Sometimes, A/P is also used to mean the person or department in charge of making sure accounts payable is handled – that is, making sure bills get paid on time.
Accounts receivable (often shortened to “A/R”) is the flip side of accounts payable. A/R means money that is owed to you. So if you’ve sent out an invoice but not gotten paid yet, that amount is in your accounts receivable. Knowing not just how much money you have, but how much you owe and are owed, helps you get a more complete picture of your financials and how your business is running.
Assets are anything a company owns that has economic/cash value. Assets can include cash, land, equipment, anything your business owns or controls that is expected to or could provide a benefit in future where the value can be determined as a cash number.
(So, your super rad son might have value, but he’s not an asset for accounting purposes, unless you can determine exactly how much he’s worth in monetary value – and no, priceless doesn’t count.)
A current asset is anything you can expect to become cash within the year (like your outstanding invoices in accounts receivable, hopefully!), while a fixed asset is a longer term resource expected to be in use for several years, like a backhoe. (Or your son, if it turns out you can put a price on him after all.)
When people hear the word ‘audit,’ they often think of the IRS (and maybe a cold shiver runs down their spine). But there are actually several kinds of audits, and none of them are scary if you’re properly prepared. A financial audit is an objective examination of your financial records to make sure your books accurately represent your business.
Internal audits are where you check your files yourself. External audits are where you have an accounting firm check to make sure your records are in order. And, of course, tax audits are where tax agencies check to make sure what you told them lines up with reality. Most companies do an annual internal and/or external audit. Prax regularly conducts internal audits of all our clients’ books as part of our engagement.
A balance sheet is a report that captures a complete financial snapshot of one day in time. That means it shows you your balances for everything – from your checking, to credit cards, loans, mortgages, anything you owe or are owed by another company – for a given single day.
The bookkeeper is the person who keeps up with your day-to-day needs and transactions. They enter sales and expenses, keep A/R and A/P up to date, process payroll, and reconcile your accounts (which means making sure your bank statements match your general ledger). A rockstar bookkeeper is the one who catches every detail, getting their hands dirty to help make sure you don’t break anything or start receiving not-so-friendly greeting cards from the IRS.
Capital is the broad term we use to mean the funds and assets you have available, on hand, to cover the costs of your business’ day-to-day operations and invest in its future growth.
Cash flow is pretty much exactly what it sounds like. This is the expected flow of money into and out of your business. It’s most commonly used when talking about liquidity – the cold, hard cash you have on hand to pay for expenses (or to fill a room with and roll around in, if need be).
The chief financial officer, or CFO, is the person at the top of a business’ financial chain of command, responsible for big picture budgeting and planning. They make informed decisions (and, occasionally, educated guesses) about the future in order to plan how the business will meet and capitalize on future needs. Traditionally, a CFO is one person, looking exclusively at the budget and planning for just their company, and may or may not pay attention to broader industry trends.
A controller has your back and knows the big picture. In no particular order, they handle tasks like watching cashflow, prepping financial statements, setting up budgets, building internal controls, assessing where you can cut costs, setting up payroll, and arguing with the IRS for you. They are the ultimate CYA fighter.
Cost accounting is a form of accounting specifically related to calculating costs, and net income after costs, for the purpose of strategic business planning. Cost accounting digs down to the granular level so you know exactly what product or service you make the most profit on. That means looking not just at the materials you use and wages you pay – literal, directly related expenses – but the time you put into it, research and development time, what percentage of your capital investments and fixed assets are a part of the process, everything.
It’s a broad concept that can be applied in a wide variety of circumstances, but it’s commonly used in construction and related industries.
A CPA is a Certified Public Accountant. CPA is a designation given by the American Institute of Certified Public Accountants (AICPA) to those who pass the Uniform CPA Examination and meet the related requirements. The CPA designation is one of several designations in the financial services industry and is most relevant for tax preparation and auditing. Find out more at Investopedia.
A credit (CR), in the accounting sense, means an entry in your general ledger that increases liabilities and equity or decreases assets on your balance sheet.
Credits and debits are a bit confusing, but we can help you get straightened out if you have any questions.
Saw it under ‘controller’ and got confused? Simply means ‘cover yer arse,’ baby!
A debit (DR), in the accounting sense, means an entry in your general ledger that decreases liabilities and equity or increases assets on your balance sheet.
Credits and debits are a bit confusing, but we can help you get straightened out if you have any questions.
Expenses are what we call your business’ costs. Every payment you make is some kind of expense, and there are quite a few types and classifications of expenses.
For example, fixed expenses are payments you make on a regular basis where the cost stays mostly the same, like your monthly rent or internet bill. Variable expenses, on the other hand, are expenses that vary based on usage, like hourly workers or dues and subscriptions.
Equity, sometimes referred to as either shareholders’ equity (for companies with shareholders) or owners’ equity (for privately held companies), refers to the amount of money that would be leftover if all of a company’s assets were liquidated and all of their debts paid off.
Fractional CFO services, sometimes called outsourced CFOs, broadly refers to hiring an outside person or firm to function as your CFO, with the goal of helping your company take a look at the bigger financial picture of your business and strategize for the future.
When we talk about fractional CFO services at Prax, we go one step further – while you have one primary CFO contact when you work with us for CFO services, we actually spread the duty out among several CFO-level experts, making it quite literally fractional.
The benefit of this is that you get the combined strategic advice of experts in business, accounting, and trends specific to your industry. It’s like having a CFO with two different Master’s degrees, a reliable right hand person to provide a gut check on decision making, and time to read industry news. We bring it all together and apply that combination of accounting expertise and industry-specific knowledge to get insight and give strategic advice on how to grow your business.
A general ledger is a company’s record-keeping system. It’s one of the most basic elements of accounting: It’s where all of your financial information is recorded. The general ledger is where we enter and categorize transactions to create financial statements.
KPI stands for Key Performance Indicator, and it means something measurable in numbers that you can use to track whether or not you’re making progress toward a specific goal. First you choose a defined goal, then you decide how you’ll track your progress toward achieving that goal. The metric you identify that’ll tell you how you’re doing is the KPI.
So, for example, let’s say you wanted to grow a garden that attracts more hummingbirds. It might be hard for you to be there counting hummingbirds every day, so instead, you decide to track how much hummingbird food you’re using. The amount of times you have to refill your hummingbird feeder in a month could be your KPI to track progress. The more times the feeder is emptied out, the more hummingbird visits your garden is probably getting.
Unless the squirrels are getting to it. Dang squirrels.
A liability, in accounting, is anything a person or business owes. So liabilities include everything from an upcoming invoice you’ll have to pay to a mortgage. We usually classify them as current (due within the year) or long-term (payable over a longer period).
Net income is how we describe how much money is pure profit after all costs have been taken out of what you were paid.
Let’s say you bake a cookie, then sell the cookie for $100. (Wow, nice! How’d you get someone to pay that much for a cookie?) To get your net income, you take what you made on the sale and subtract your costs, like this:
- Income from cookie sale: $100
- Time spent making one perfect cookie $60
- Ingredients $11
- One-day bakery rental $300
- Advertising costs $72
Net profit -$343
Huh. Probably should have made more than one cookie. Or sold it for even more…
At Prax, we offer a pair of services that go hand-in-hand called the Prax Tax Savings Estimate and Prax Tax Plan.
Prax Tax Savings Estimate – A short overview report. You fill out a couple questionnaires, we take a look and, based on your answers, estimate how much we can help you save in taxes.
Prax Tax Plan – A full-length, in-depth report where we dive into your business and tax situation, tell you all the possible strategies available to you out of everything that’s out there, and share exactly how either we would implement them or you could implement them yourself.Need more info? Check out our videos or click here.
A P&L statement is a report that captures all the money that came in from sales and all the money that went out for expenses in a specified period of time (usually a fiscal quarter or year).
Remote accounting is exactly what it sounds like. It means accounting services that aren’t based in your office and don’t typically come into your office. While standard onsite accounting uses an in-house accounting department or an accountant who comes in on a set schedule for a few hours each week, remote accountants perform their services virtually.
ROI stands for ‘return on investment.’ We use this term a lot here at Prax! ROI means what you get back in return when you make an investment. For example, when you pay for Prax’s services, we want to make sure that our work helps you to make more money than we charge you.
The person who prepares your taxes. Simple enough! In case you’re curious, this is generally the only role that actually requires a CPA or EA designation, and you only need them once a year.
With these terms in your mind, you’re well-equipped to chat about your finances.
Need a little more guidance? You’re not alone.
Just ready to put these words to use? How exciting!