Basic Accounting Terms for Entrepreneurs
 
In the world of accounting, there are a set of basic terms that entrepreneurs should be familiar with, even if they do not have an accounting background. Here are the most important of these terms:
 
Accounts Receivable and Payable
All accounting accounts are classified as either debit or credit:
        - Accounts Receivable: Includes assets and expenses.
        - Accounts Payable: Includes liabilities, revenues, and equity.
When recording accounting entries, the nature of the accounts (debit or credit) can change to reflect increases or decreases in different accounts.
        - Creditor: The party that provides money, goods, or services.
        - Debtor: The party that receives money, goods, or services.
These concepts are based on the basic accounting equation:
        Assets = Liabilities + Equity
 
Creditor Note and Debtor Note
        - Creditor Note: A document issued by an entity to prove that it has an obligation to pay a certain amount to a customer, such as sales returns.
        - Debtor's Note: A document issued by the entity to prove that it has a financial right to a supplier, such as purchase returns.
 
Assets and Liabilities
        - Assets: Resources owned by the entity such as cash, equipment, land, or even intangible assets such as a trademark.
        - Current Assets: Assets that can be converted into cash within a single fiscal year such as cash and inventory.
        - Fixed Assets (Non-Current): Assets used in long-term operations such as real estate and equipment.
        - Liabilities: Financial obligations of the entity to other parties, such as loans and suppliers.
 
Owner's Equity, Revenues, and Expenses
        - Owner's Equity: The net worth of the owners of the entity.
        - Revenue: Income generated from the sale of products or the provision of services.
        - Expenses: The costs incurred by the entity to run its business such as salaries and rents.
 
Common Accounting Terms
        - Purchase Orders: A document proving approval to purchase products before receiving them.
        - Accounting Entry: Recording a financial transaction in the accounting records, including the date of the transaction, the parties involved, and the amount.
        - General Ledger: A record containing all accounts used in the facility, showing the impact of financial transactions on each account.
        - Closing entries: Entries used at the end of the financial period to zero out the revenue and expense accounts and determine the net profit or loss.
 
Financial Statements
Financial statements are reports that reflect the financial performance of the facility, and include:
        - Statement of financial position: Shows the status of assets, liabilities, and equity on a specific date.
        - Income statement: Shows revenues and expenses and shows the net profit or loss during a specific period.
        - Simplified income statement: Shows revenues and expenses directly.
        - Multi-step income statement: Separates operating and non-operating revenues and shows the net profit in detail.
        - Cash flow statement: Shows the cash flows in and out during the financial period.
 
Additional financial concepts
        - Market value: The price at which the share is traded in the market.
        - Book value: The value of the share according to the financial statements after calculating assets and liabilities.
        - Depreciation: The decrease in the value of fixed assets over time due to use or obsolescence.
        - Historical cost: The original cost of purchasing the asset plus all the expenses associated with getting the asset ready for use.
 
These terms are the foundation that helps entrepreneurs understand the financial aspects of their companies and make more accurate and clear decisions.