5 Accounting Terms All Business Owners Should Know

Essential Concepts in Business Accounting

  • Return on Investment
  • Cash Flow
  • General Ledger
  • Balance Sheet
  • Book Value and Depreciation

Formal education in accounting is almost always an asset for a business owner, but it’s certainly not necessary to succeed as one. However, every entrepreneur and company leader should be familiar with at least a few key concepts and terms as they relate to business operations. Understanding basic accounting principles is necessary to truly comprehend the opportunities and potential consequences presented by management decisions.

Related: The Top 15 Best Affordable Online Master’s in Accounting Degree Programs

1. Return on Investment

Return on investment (ROI) is a basic financial phrase that describes the ratio of investment to return. A positive return on investment is one that yields more value in output than it required as input. In this context, input can take the form of money, time or any other resource that has value. In business management, a company’s ROI is a general indicator of potential profitability and overall health. Businesses cannot survive with a consistently negative return on their investment.

2. Cash Flow

Companies derive their total value from dozens if not hundreds of assets, which can take many different forms. The term cash flow only describes the actual flow of cash in and out of the business. Most of the inward flow comes from sales of a product or service, with cash flowing out due to operating expenses, canceled sales or other reasons. Monitoring cash flow is only part of managing a company’s overall financial health, but it can provide early indications of emerging problems. Issues related to cash flow are also cited as a top concern among small business owners overall, according to Forbes.

3. General Ledger

A ledger describes a formal record-keeping document that a company uses to track its financial activities. Every business should at least have a general ledger (GL), which is the primary record for all of a company’s finances. These documents can be extremely important in settling accounting or legal conflicts, so owners should develop a system for keeping them safe and back up records when possible.

4. Balance Sheet

Balance sheets are plentiful in the accounting profession, particularly for those who work for businesses. These documents are used to provide an accurate and comprehensive report of a company’s assets, either in total or with specific criteria. The sheets include both equity and liability to determine the true value of a company or its property. Accounts receivable and accounts payable are other common terms related to balance sheets. They describe the company’s expected revenue or expense from transactions that are ongoing, but incomplete.

5. Book Value and Depreciation

Many types of businesses rely on appliances, machinery, vehicles and other equipment on a daily basis. It also doesn’t take long for owners to learn that they usually can’t sell assets for the same price that they paid for them. In accounting, an item’s current worth is called its book value and is determined by condition, age, and other factors. Book value is the result of depreciation, or sometimes appreciation, on the original value of the asset, resulting in a different current value that is reported on balance statements.

Basic financial literacy is a must for anyone who wants to successfully run or manage a growing company. These basic accounting terms are just a few of the many essential concepts that help inform and guide decisions made by business leaders in any industry.