Mastering the Basics: Accounting Terms

No matter where you are in your career—fresh out of college, stepping into investing, leading a team for the first time, or well into your professional journey—understanding the basics of finance is essential. Even if you don’t work directly in finance, being able to grasp how your decisions affect the financial health of your business and explain these impacts to others is crucial. This knowledge not only helps you make better decisions but also positions you to achieve greater success in your career.

This cheat sheet defines several foundational financial terms to help you learn to speak the language of business.

Accounting Terms:

Amortization: Amortization is a method of spreading an intangible asset’s cost over the course of its useful life. Intangible assets are nonphysical assets that are essential to a company, such as a trademark, patent, copyright, or franchise agreement.

Asset: Assets are items you own that can provide future benefit to your business, such as cash, inventory, real estate, office equipment, or accounts receivable, which are payments due to a company by its customers. There are different types of assets, including:

  • Current Assets: Can be converted to cash within a year
  • Fixed Assets: Can’t immediately be turned into cash, but are tangible items a company owns and uses to generate long-term income.

Balance Sheet: A balance sheet is a financial statement that communicates an organization’s worth, or “book value.” The balance sheet includes a tally of the organization’s assets, liabilities, and shareholders’ equity for a given reporting period.

Cash Flow: Cash flow refers to the net balance of cash moving in and out of a business at a specific point in time. Cash flow is commonly broken into three categories, including:

  • Operating Cash Flow: The net cash generated from normal business operations.
  • Investing Cash Flow: The net cash generated from investing activities, such as securities, investments and the purchase or sale of assets.
  • Financing Cash Flow: The net cash generated when financing a business, including debt payments, shareholders’ equity, and dividend payments.

Cash Flow Statement: A cash flow statement is a financial statement prepared to provide a detailed analysis of what happened to a company’s cash during a given period. This document shows how the business generated and spent its cash by including an overview of cash flows from operating, investing, and financing activities during the reporting period.

Depreciation: Depreciation represents the decrease in an asset’s value. It’s a term commonly used in accounting and shows how much of an asset’s value a business has used over a period of time.

EBITDA: An acronym standing for “Earnings Before Interest, Taxes, Depreciation, and Amortization,” EBITDA is a commonly used measure of a company’s ability to generate cash flow. To get EBITDA, add net profit, interest, taxes, depreciation, and amortization together.

Equity: Equity is the residual assets that belong to the owners of the business by adding up all the resources of the business (assets) and subtracting all the claims that third parties (such as lenders and suppliers) have against those assets.

Expense: An expense is a cost associated with providing goods or services to customers.

Income Statement: An income statement is a financial statement that summarizes a business’s income and expenses during a given period. It’s also sometimes referred to as a profit and loss (P&L) statement.

Liability: The opposite of assets, liabilities are what you owe other parties, such as bank debt, wages, and money due to suppliers—also known as accounts payable. There are different types of liabilities, including:

  • Current Liabilities: Also known as short-term liabilities, these are due within a year.
  • Long-Term Liabilities: These are financial obligations that can be paid off over a longer period of time.

Liquidity: Liquidity describes how quickly your assets can be converted into cash. As a result, cash is the most liquid asset. The least liquid assets are items like real estate or land, because they can take weeks or months to sell.

Net Worth: You can calculate net worth by subtracting what you owe—your liabilities— from what you own—your assets. The remaining number can help you determine your overall financial health.

Profit Margin: Profit margin is a measure of profitability calculated by dividing net income by revenue or net profit by sales. Companies often analyze two types of profit margins:

  • Gross Profit Margin: Applies to a specific product or line item rather than an entire business.
  • Net Profit Margin: Represents the profitability of an entire company.

Revenue: Revenue is the money a business brings in from its customers for providing goods or services related to its normal operations.

Working Capital: Also known as net working capital, this is the difference between a company’s current assets and current liabilities. Working capital—the money available for daily operations—can help determine an organization’s operational efficiency and short-term financial health.

Final Thoughts

Navigating your finances can feel overwhelming, especially if you’re not familiar with all the jargon. It doesn’t matter if you’re fresh out of school, looking to invest for the first time, or just trying to make smarter decisions with your money—understanding the basics of finances is helpful.

It’s crucial to carefully evaluate your situation and seek advice from financial professionals like our team at W3 Financial Group. Our knowledgeable team will help you make an informed decision that aligns with your long-term objectives.

Learn more about our business financial services or contact us today to discuss your needs!

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