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20 Financial Terms Every Business Owner Should Know

Balance Sheet: The financial statement of the assets, liabilities, and equity of a business or other organization at a particular point in time. A photograph of your business. To be “balanced” statement must meet the test that assets = liabilities + equity.

Income Statement: aka “profit and loss”. The financial statement of revenue and expenses of a business over a specified period, usually a month, quarter or year. A moving video of your business over time.

Statement of Cash Flows: The financial statement detailing the money coming in and money going out of a business.

Assets: Property owned by a business regarded as having value and reported on the balance sheet. Can be broadly categorized into current assets, fixed assets, investments and intangible assets.

Current Assets: Assets expected to be converted into cash within one year. Generally include cash, accounts receivable, inventory and prepaids.

Fixed Assets: Long-term resources such as equipment, computers, furniture, real estate and buildings.

Intangible Assets: Economic resources with no physical presence, such as patents, trademarks, copyrights and goodwill.

GAAP: Generally Accepted Accounting Principles in the United States. Includes the concepts and principles, as well as industry-specific rules, to ensure that financial reporting is transparent and consistent from one business to another.

IFRS: International Financial Reporting Standards.The global accounting principle framework followed by over 100 countries worldwide, excluding the United States.

Liabilities: Debts for which a business is responsible, such as accounts payable, payroll payable, loans and taxes. Reported on the balance sheet.

Equity: The net amount of a business’ total assets and total liabilities. This includes retained earnings and capital contributions. Reported on the balance sheet.

Retained Earnings: The amount of profit left over or saved by the business since its inception.

Budget: An estimate of income and expenditure for a set period of time used for planning and performance measurement purposes.

Revenue: aka “the top line” or “sales”. Amount of money earned by a business from its business activities during a specific period. Reported on the income statement.

Cost of goods sold (COGS): Direct expenses incurred in the production of a good or service, such as materials purchased to create the good or labor costs. Reported on the income statement.

Profit margin: aka “gross profit”. The profit made after deducting the costs associated with making and selling its products, or the costs associated with providing services. Reported on the income statement. Calculated with this formula: Gross profit = revenue – cost of goods sold

Expenses: Business expenses are any costs incurred that are ordinary and necessary to run a business.

Non-Deductible Expenses: Expenses incurred by a business not that are deductible under the IRS code even though they may be considered an ordinary cost of running a business. These expenses include entertainment, bribes, penalties and officer’s life insurance.

Payroll: Total amount of wages and salaries paid by a business to its employees for a set period of time. Payroll can also refer to the list of employees of a business and the amount of compensation due to each. This is a major expense for most businesses and can differ from one pay period to another because of overtime, sick pay and other variables.

Net income: aka “the bottom line.” Appears on the income statement and is an important measure of how profitable the business is. Calculated as sales less cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes and other expenses.


20 Financial Terms Every Business Owner Should Know