8 Accounting Terms Every Entrepreneur Must Know

As an entrepreneur, accounting is one of the tasks you’ll have to deal with, especially when starting out.

Even though accounting is boring and no one likes it, it helps to know a little about accounting to be successful.

We’ll help you understand some common accounting jargon to make you feel less like a deer in the headlights when you’re with your bookkeeper.

Although you might still be bored, you’ll likely find it’s not as confusing as you may have imagined.

Accounting Jargon You Need To Know

Balance Sheet

A balance sheet shows you what your business owns (assets) and what it owes (liabilities).

Assets are anything of monetary value that your business owns and can be:

●      Tangible: land, buildings, cash, vehicles, or equipment

●      Intangible: brand names, copyrights, goodwill, intellectual property rights, patents, franchise agreements, and client lists

Liabilities are the financial obligations your business owes, which can be:

●      Short term/current: paid within one year of incurring them and include employee salaries/wages, and accounts payable

●      Long term/noncurrent: paid over a period longer than one year and includes mortgages, deferred taxes, or other loans lasting more than one year

Income Statement (AKA The P&L)

Remember the accountants in the TV series The Office? One time, $3,000 went missing from Dunder Mifflin, and it was up to them to figure out what happened.

With an income statement, they could’ve traced it back to find out at what point it got lost.

An income statement is a snapshot of your business that shows your revenues, expenses, and profit for a particular period. It shows whether you’re making or losing money.

With a P&L, you don’t have to spend more than you can afford or repeat mistakes like recording depreciation twice, as The Office accountants did.

Depreciation

You probably own business assets like equipment and vehicles that are worth a lot of money and are expected to last more than a year.

Over time, these assets decline in value due to wear and tear. This process of losing value is known as depreciation.

Other assets you can depreciate include buildings, furniture, and computers and software.

You can’t depreciate land, though, because it usually doesn’t lose value.

Bookkeeper vs. Accountant

If you don’t have time to keep your books, a bookkeeper is a numbers wizard who usually has ninja-like skills with Quickbooks, Xero, or Wave (AKA, account reconciliation software). They help you:

●      Collect documentation for each financial transaction

●      Invoice customers

●      Process payroll

●      Balance the general ledger

An accountant is an even nerdier numbers guru and helps you make sense of your financial information by:

●      Analyzing operation costs

●      Generating financial statements and reports and explaining them to you

●      Helping with year-end business tax planning and filing

●      Advising you on the most financially savvy strategies

Tax Credit vs. Tax Deduction

Tax credits and tax deductions trim your tax liability but in different ways. Tax credits are generally more valuable than deductions.

A tax credit:

●      Gives you a dollar-for-dollar reduction in your tax bill. For instance, if you have a $15,000 federal tax bill and are entitled to a $5,000 tax credit, the credit slashes your tax bill by $5,000 to $10,000.

●      Examples of a tax credit include the work opportunity credit, FMLA tax credit, or small employer health insurance tax credit.

A tax deduction:

●      Lowers the amount of your taxable income

●      Includes most normal business expenses, such as depreciation, wages, and rent

Decipher Accounting Acronyms

CPA (Certified Public Accountant)

A certified public accountant is the nerdiest of all accounting professionals. They:

●      Completed at least 150 hours of secondary education and a specific number of annual continuing education hours

●      Has at least two years of public accounting experience

●      Passed the CPA Exam

●      Performs financial audit services that confirm your financial statements and disclosures accurately adhere to generally accepted accounting principles (GAAP)  

●      Prepare income tax filings and perform tax audits

H3: EA (Enrolled Agent)

An enrolled agent or EA is a federally licensed tax professional representing taxpayers in IRS-related matters, including audits, collections, or tax appeals. Specifically, an EA:

●      Has sufficient experience and passed a rigorous IRS examination

●      Advises, represents, and prepares tax returns for individuals, businesses, or anyone else that reports to the IRS

●      Must complete 72 hours of continuing education every 36 months

●      Are subject to a code of ethics and rules of professional conduct

COGS (Cost of Goods Sold)

Cost of goods sold or COGS is the cost of producing a product or service (i.e., direct labor costs and material costs).

COGS doesn’t include indirect costs like marketing and distribution expenses, utilities, or rent/mortgage interest.

The COGS formula is: Beginning inventory + Purchases - Ending Inventory.

Say you had a beginning inventory of $10,000, purchases during the period of $5,000, and an ending inventory of $3,000.

Your COGS would be: $10,000 + $5,000 - $3,000 = $12,000.

Build Your Accounting Vocabulary

Whether you started your business out of necessity or genuine interest, knowing these accounting terms can help you get a handle on small business accounting basics and contribute to your business’s success -- now and as it grows. You may still find it boring, though.

Does a Start-Up Need a Business Accountant?

Before you take your dream from the beginning stages of notes and drawings to actually running and operating your business, you need to make sure you have someone to help you with your financial organization of the business. Starting your company takes a great deal of time and passion that you probably don't have for the accounting aspects of running your business.

Starting the right way with an accountant can set you up for better success from day one. Although it is an added expense you thought you should hold off on till funds start rolling in, you may be missing out on what a business accountant can do for you in the start-up phase that can be saving you time and money.

Finding an accountant that you can trust and work with can be a time-consuming task. To make it easier, you can always ask for references from friends, family, or your attorney. This is an important decision, so make sure your references are suitable for your needs. There are also search firms like Ageras that will provide you with certified accounting professionals in your area. These services are generally free of charge to you and will give you a handful of professionals that are experienced to handle your business and industry accounting needs. You can consult with each one and make a decision on who will be the best for you and your business.

Reasons for Startups To Have an Accountant

If you are still wondering why it is so important to have that accountant right at the start-up of your business, here are four reasons to consider:

1. They can help you determine the best software to use for your accounting system.

2. They can help you determine if an LLC, sole proprietorship, corporation, or partnership is the best business structure for you.

3. They can assist with your initial banking and set up of accounts and bank cards.

4. They can file your financial statements and taxes to ensure you are in compliance.

Imagine the time saved in just these decisions alone by having a professional guide you through these initial steps. You can take this extra time now and work on getting your business off the ground, finding your clients or partners to work with, and establishing yourself in your industry.

How Accountants Grow Your Business

You can also work with your accountant throughout the year, not only at start-up and tax time. This will enable you to have a financial advisor who is willing to guide you to success. If you have big business decisions like expansion and hiring an employee, the purchase of large equipment, or adding more inventory, your accountant will be able to assess when a good time is for your business for doing these ventures.

A good financial plan and budget are the backbone of growing your business. Accountants are your resource and guide for doing just this. You can meet with your professional quarterly to set the stage and plan for your next quarter.

As your company and cash flow expand, managing your income and expenses becomes just as important as managing your start-up funds. Here is how your accountant can now help you:

1. Invoicing. They can set up a system to help you collect account receivables more efficiently.

2. Cash Flow. They can help you organize your cash flow when you have unexpected expenses.

3. Payroll. If you do have employees, they can assist you in managing payroll and staying compliant with payroll taxes.

Spend Your Time in Your Business

You have spent a great deal of time dreaming about your new business, planning its execution, making a presence in social media and in your industry, and building your client base. Keep your focus on your business and not on the stresses of compliance and accounting procedures.

Not having an accountant during start-up could have cost you not knowing what deductions you could have been taking and planning future deductions. Take the guesswork out of big business decisions and future budgeting. Turn to your professional financial advisor and work together to grow and succeed. Your accountant may not be the least expensive budget item you have, but they will save you more time, energy, and money than you could have on your own.

Differences Between GAAP And IFRS Financial Statements

In the accounting world, there are a few different financial reporting standards that must be met. These standards can differ by country or region, but here in the United States, the two most common standards are that of International Financial Reporting Standards (IFRS) and General Accepted Accounting Principles (GAAP).

Let's get into these two different standards and how they work with auditing services and accounting firms. 

GAAP

GAAP must be used for any company that distributes financial statements outside of the company. This would apply to companies that are publicly traded or that release their financials to the public in any way shape or form. If the company is also publicly traded, these financial statements would also need to comply with the standards set by the U.S. Securities and Exchange Commission.

GAAP standards are made up of things such as a balance sheet, item classification, revenue recognition, and share measurements that are outstanding. With how adopted GAAP is nationwide, as an investor, if you see financial statements that don't follow GAAP guidelines, you should definitely be suspicious of the validity of the company you are receiving them from. 

GAAP also states that when financial data is released that does not follow GAAP guidelines, such as in press releases, that it should be disclosed as such.

IFRS

IFRS standards are meant to provide stability and transparency to financial records. IFRS standards help auditors and tax advisors to better see what has been happening with a company in order to allow those in charge to make better financial decisions.

IFRS standards are practiced in Europe, Asia, and South America. Over 144 countries around the world have adopted and instituted the use of IFRS standards. This makes IFRS the ultimate financial language to be used worldwide. Interestingly enough, these standards are not practiced in the United States due to the SEC not having made the switch yet. The SEC is continuing to review proposals to switch from GAAP to IFRS standards as the world is pressuring the USA to get on board with IFRS. The companies that benefit the most from IFRS standards are those that deal with a lot of international business and investing. 

Main Differences

The key difference between these two standards is that IFRS is principles-based and GAAP is rules-based. Due to this, IFRS financial statements typically are not as detailed as GAAP reports. Because of this, IFRS reports may leave some figures up for interpretation, which can require more financial disclosure and explanation than figures done in GAAP format. With that being said, IFRS reporting is often more logically sound and may better represent the economic situation and factors of the transactions that businesses make. 

Another huge difference is that of how inventory is treated. With IFRS standards, the use of last-in, first-out accounting methods are banned and are not used. GAAP allows for this to be used. GAAP also does not allow for inventory reversals, whereas IFRS does allow them under certain parameters and conditions. 

Constantly Changing

Due to the complexity of international business and investments, the IFRS standards and guidelines constantly change. This is where using an auditing service that is familiar with, and has experience using IFRS is extremely important in order to help your business navigate the rules and principles that go along with this type of reporting. If you are a U.S.-based company, having a firm that can help you transition from GAAP over to IFRS is extremely important to ensure that your company can operate in an international environment when it comes to your financial records and investments. 

A good firm can help convert your existing financial records over to the IFRS standard. They can also help you to shore up any areas of your reporting that need more transparency or that need to be analyzed in a different way. They can also help train your existing financial employees and accountants in a consultant role to help them understand how IFRS reporting works and to be able to stay within the guidelines when making and sending out financial statements. 

Conclusion

As you can see, IFRS standards are the future way of recording financial statements and will most likely be adopted in the USA in the future. If more countries continue to adopt and use IFRS, it will provide one universal financial reporting language that all countries can understand and interpret, thus making it easier for companies to do business internationally as opposed to just operating domestically. With the inevitable move over from GAAP to IFRS, it's in your company's best interest to start making the transition now so that you are already prepared for when the switch to GAAP to IFRS inevitably happens. Choosing a firm that can help you to convert your existing statements, as well as provide training to your current employees can help to make this transition process even easier.