This is especially the case if you’ve never come across accounting terms before, and this is the first time you’ve set up a business.

Here are 12 fundamental accounting terms and what they mean.

1. Asset

An asset is anything of value your business owns, controls, or has a legal claim to; it could be a fixed asset, such as machinery or a resource, such as money in the bank. It can also be something that has economic value in the future. Assets can take many forms, both tangible (e.g., property) and intangible (e.g., copyrights and patents). Accounts receivable (see below) are classed as an asset.

2. Liability

A liability is anything your business owes to creditors in goods, services or money. For example, a business bank loan is a debt and therefore a liability. Accounts payable (see below) are classed as liabilities.

3. Cash flow

Cash flow is an accounting term for the money coming in and going out of your business at any given time. It’s especially important for small businesses and freelancers to have a healthy, positive cash flow so you have enough money to perform your tasks and pay your expenses (and yourself!). Even big companies with healthy profits on their balance sheet can experience difficulties if cash flow is tight. A cash flow statement is a key financial statement that tracks a company’s cash inflows and outflows.

4. Dividend

A dividend is an amount paid to company shareholders out of the company’s distributable profits. A dividend is a distribution of earnings, which is typically paid at regular intervals. The Board of Directors declares the timing and amount of dividends.

5. Accounts receivable

Accounts receivable are the amount of money due to your business for goods or services rendered. When you issue an invoice, this is classified as accounts receivable, i.e., money due to your business. It’s important to ensure your accounts receivable are up to date, as unpaid invoices can negatively impact your cash flow.

6. Accounts payable

Accounts payable is the opposite of accounts receivable and is the money owed to your creditors. It’s the amount your business owes for goods or services received and can include credit notes, subscriptions, unpaid bills, and outstanding debts.

7. Gross profit

Gross profit is the financial gain your business generates. It is calculated by total revenue from goods or services sold minus the direct cost of producing that revenue – the cost of goods sold (COGS), e.g., labor, raw materials, etc.

8. Net profit

Net profit is the financial gain your business generates after accounting for all expenses. So, just as with gross profit, you calculate total revenue and then deduct direct costs, COGS, and then you deduct operating expenses such as tax and interest.

9. Profit and loss statement

The profit and loss statement, also known as an income statement, shows your revenues, gains, expenses and losses over a set period. It’s a key financial statement that shows if your business is making a profit or a loss.

10. Balance sheet

A balance sheet is often referred to as a ‘snapshot’ of a business’s current financial position on a given date, typically year-end. It covers assets and liabilities and, if applicable, any shareholder equity. It’s a key financial statement that provides a high-level view of a company’s financial position.

11. Operating expenses

Operating expenses are the fixed and variable costs of running your day-to-day business. It can include rent, salaries and utilities as well as software, subscriptions and office supplies. It’s a good idea to keep tabs on these to ensure you’re not overpaying, could get a better deal elsewhere, or are subscribing to services you no longer use or need.

12. Return on investment

Return on investment (ROI) is the profit a business generates from a specific investment and is calculated by the profit divided by the original cost. You can then multiply by 100 to give you a percentage. It’s a handy metric for evaluating the profitability of your investment.

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Naturally, as well as being conversant with some of the most basic accounting terms, you’ll also need good tools to run your business and get paid quickly and on time.

Invoice Ninja is a leading free invoicing software for all your small business and freelancer needs. Invoice Ninja integrates with some of the world’s most popular payment gateways to facilitate fast online payments. It also includes attractive, professional invoice template designs you can customize with your logo and brand colors.

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Note: The definitions here act as a guide only. For business accounting, auditing and financial advice, we highly recommend you seek expert professional guidance.

1. Company structure

What legal structure will you choose for your business? Will you operate as a sole proprietorship, set up a limited company, form a partnership with someone else, or incorporate?

A lot will depend on your company’s mission and business goals. For example, are you looking to scale your business and employ more staff, or work as a solopreneur? Where do you see the business taking you? While you may not know the opportunities that will present themselves now, having an idea of where you’re going will help you set effective business goals. After all, as the Stoic philosopher Seneca was quoted as saying, “If a man knows not to which port he sails, no wind is favorable.”

How you set yourself up is an important consideration as it will determine how you operate, your liability (if any), the taxes you pay and even how you invoice and are paid. It’s worth seeking professional help and guidance to get your business set up correctly, although that’s not to say you can’t change it in the future as your circumstances evolve.

2. Company name

Will you have a company name, a trading name, or use your personal name for your small business? Will the name be linked to what you do or something more abstract and creative?

There are pros and cons to each option, and the one you choose will depend on your circumstances and, to some extent, your company structure.

For example, personal branding is great and can help you stand out, but it might be more challenging to sell the business down the line if this is something you aim to do.

In any event, make sure to conduct a thorough internet search to ensure the name (and domain) has not already been taken and to check for any trademark issues. There will also likely be business registration requirements.

3. Finance

How will you finance your business? Will you bootstrap it from your own funds and savings, take out a personal loan, or secure funding from family or friends? Are there any business loans or grants available for which you can apply? Alternatively, what about investment from other sources, such as angel or seed investors?

All the above are viable options, and it might be that you end up using a combination of them. While it’s true that for some businesses you might not need much more than internet access and a laptop (think freelance writer or an online consultant), you’ll still need to invest in online tools and subscriptions. Plus, you’ll likely not see the fruits of your labors straight away, so you will need money to tide you over. 

4. Workplace

Where will you work? Does your business need premises, or can you work remotely? If so, do you have an adequate workspace at home or a co-working space in your local area? Will you need to travel to the client’s premises or commute to your workplace? If so, you’ll need to factor the cost of this into your overall business plan and income goals. Also, will your workplace require any special equipment for you to perform your work, or is it location-dependent, for example, a local store? Where and how you perform your work will impact your business finances.

5. Business tools 

What business tools will you need to do your job? This includes both physical tools and online tools that enable your business to function effectively, such as invoicing software. You may also need to hire professionals, such as an accountant, and you’ll need a robust bookkeeping system in place.

You’ll also need tools to market your business, so you might require a website, a scheduling tool for meetings, or need to set up social media accounts for your company. You may even want to build an email list to market your business; again, while many tools are free to begin with, they often require subscriptions to access more advanced features.

6. Taxes, licenses, and permits

Depending on your jurisdiction and the nature of your work, there may be professional licenses, insurance and permits you need to apply for before you can trade. If you work from home, there may be specific regulations governing this in your area.

Additionally, there may be special tax implications to consider, so check what, if any, employer and tax IDs are required. A professional can help guide you through what’s needed to avoid any unhappy surprises down the line.

7. Getting paid

In addition to having a business bank account (to separate your personal and business finances), you’ll also need to consider how you will be paid.

Getting your invoices paid quickly and on time ensures you have a healthy cash flow. That’s where top-notch invoicing software comes into its own. Invoice Ninja is a leading free invoicing software for freelancers and small businesses. It offers multiple payment gateways, so your clients can pay you online with just 1-click. It also comes with professionally designed and customizable invoice templates, as well as numerous helpful, small business-friendly features. Check out all our features here. Try Invoice Ninja for free here.

Plus, if you operate in the EU, you need to be aware of the e-invoicing requirements. You can find out more about e-invoicing and PEPPOL, the EU standard for exchanging electronic documents, here.

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Of course, there are many other areas to consider when starting a new small business, such as sourcing quality suppliers, marketing to customers and clients, and the big one – pricing, so it makes sense to seek professional advice on starting a small business. However, hopefully, this at-a-glance list will act as a good starting point.