Accounting and bookkeeping are critical functions for businesses of all sizes, providing the foundation for managing and understanding a company's financials. However, the world of accounting and bookkeeping can often seem complex and overwhelming, with numerous terminologies and concepts that may be unfamiliar to business owners, especially those in North America. In this blog post, we will demystify key accounting terminologies that businesses in North America need to be familiar with, providing clear definitions and explanations in easy-to-understand wording to help businesses better understand their financial reports and make informed decisions.
There are 3 main elements to complete books of accounts:
Balance Sheet | Income Statement | Cashflow Statement |
Provides a snapshot of a company's financial position at a specific point in time | Summarizes a company's revenues, expenses, and net income (or loss) for a specific period of time | Provides an overview of a company's cash inflows and outflows during a specific period of time |
What you own are owed are called Assets | What you earn is called Revenue or Income | What you receive is a positive cashflow |
What you owe and need to pay are called Liabilities | What you spend or incur is called Expenses / Expenditure | What you pay is a negative cashflow |
What you have put into the business and left over profits are called Equity | Excess of revenue over expenses is known as profits. Depending on the nature of expenses deducted, the profit may be Gross Profit or Net Profit | |
For each accounting period, these 3 statements envelope the complete financial health of your business. The accounting period can be a month, a quarter, or a calendar year. However, it is recommended to keep the accounting period at 1 month for small and medium businesses to keep the margin of error low and identify mistakes relatively quickly.
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