Entrepreneurs are generally equipped with a variety of skills needed to run a business. In the online industry, there are terms which are necessary for entrepreneurs to understand more and monitor their sales and impact on the target market. These are usually technological terms such as social media, affiliate marketing, email campaigns and leads. However, aside from technological terms, an entrepreneur should at least know and understand the basic terms used in financial reporting and management. These financial terms, whether you are an online business entrepreneur or offline owner of a small business, will help you understand more the operations of your company and its impact on your financial resources. Here are the basic financial terms which every entrepreneur should know.

ASSETS

These are the economic resources of the company. These can either be in the form of cash or in the form readily convertible to cash. These can be your cash and receivables, inventory, office supplies, trademarks, copyrights, office furniture, vehicles, or anything that a company can earn income from when sold. There are 2 kinds of assets, the current assets and fixed assets. The current assets are the ones which can be easily converted to cash (e.g. receivables, inventory for sale). The fixed assets are the ones owned by your company, but you do not have the intention to sell these assets. However, you can still earn from them, in case you decide to sell them (e.g. land, buildings, office equipment, vehicles).

LIABILITIES

Liabilities are the financial obligations of your company. In other words, these are the ones which require your business to shell out financial resources in the future. Examples of liabilities are accounts payable, notes payable, loans payable, bonds payable, credit card debts, and other amounts of money owed to be paid back in the future. Liabilities are also divided into 2 types – current liabilities and long-term liabilities. The current liabilities are those which are due within a year (e.g. accounts payable, credit card debts), and long-term liabilities are those which are due for more than a year (e.g. notes payable, bonds payable). The type depends on the terms of payment and how long it is required to be paid.

GROSS INCOME OR SALES

Gross income refers to the resources which flow into your business. This refer to the money you earn in exchange for the goods and services you offered. Almost all business entrepreneurs already know this. However, one important thing to take note when it comes to financial reporting and understanding the financial reports, gross income or sales are only realized when the goods are already delivered or the services are already rendered. You may have goods which are available for one customer, because it was ordered. But if there is no policy which states that once ordered it is already sold, then it does not comprise your gross income or sales until it is delivered and received by the customer.

EXPENSES

These are the economic resources which your company uses in order to run the business. These are usually called your operating expenses. These include your rent, utilities, transportation expenses, telephone bills, electricity consumption, salaries and wages of personnel, or any cost in running your business operations. Most entrepreneurs know what the expenses are. But it is also important to know the right time in recording them, in order to match them with the corresponding gross income or sales. If gross income or sales are recorded when goods are delivered and services are rendered, expenses are recorded in the books when they are incurred or are committed, regardless of when their payment will be. For example, for this month of December during this calendar year, you were build with a specific amount for your electricity. Thus, the electricity expense is recorded for the month of December during this calendar year, even if it will be paid in January the following year. This is called, accrual – a basic principle in accounting.

PROFIT OR LOSS

Profit or loss is your gross income or sales less your expenses. This refers to the net income of the business, which already considers all the cost you have incurred in generating it.

EQUITY

This refers to the capital of the business – your ownership. In short, this is your investment. In accounting, the simple explanation for this is Assets = Liabilities + Capital. Your total assets will always equal your total liabilities or purchases for the company and the amount of investment you put into the business. Every financial year, the profit or loss of your business is added to your equity. This is the retained earnings of your company.

There are other financial terms used in business, but if you know the basic ones, such as the above, you will be properly guided in the interpretation of the financial reports. This will help you in making financial decisions and understand the cash flows of your business. It is important to note that every business should hire an accountant, who is in-charged of all these matters – financial recording, reporting and analysis. However, as an entrepreneur or the as the business owner, you also need to understand the figures and why they are reported on such financial reports. Knowing and understanding the basic financial terms would help you better manage your business and make you sensitive in making financial decisions for your company.