In the world of entrepreneurship, keeping your finances organized is essential for the success and longevity of your business. With the growth of cloud bookkeeping services, it's now easier than ever to manage your finances from anywhere.
But the financial side of the business has terms that might not be familiar, especially if you haven’t studied business or accounting. From our experience working with many business owners, we know that understanding key bookkeeping terms is crucial if you want to effectively manage your business finances.
Whether you're just starting out, well established or a growing business considering outsourcing your bookkeeping, here are 10 essential bookkeeping terms that every business owner should know.
1. Accounts Payable (AP)
Definition: Accounts Payable is the money your business owes to suppliers or creditors for goods and services you’ve received but haven’t paid for yet.
Why It Matters: Keeping your accounts payable organized helps maintain good relationships with suppliers and avoid late fees. With cloud bookkeeping, you can track and manage AP in real-time, helping you stay on top of payments.
2. Accounts Receivable (AR)
Definition: Accounts Receivable is the money owed to your business by customers for products or services you’ve already delivered but haven’t been paid for yet.
Why It Matters: Keeping an eye on AR helps you manage your cash flow and collect outstanding payments. Cloud bookkeeping apps can automate invoicing and payment reminders, reducing the time spent managing receivables.
3. The General Ledger
Definition: The general ledger is a complete record of all your company’s financial transactions.
Why It Matters: It provides a detailed view of your financial activity and is important for accurate financial reporting. Cloud bookkeeping gives you real-time access to your general ledger, helping you monitor your financial health.
Note: Your general ledger is not your bank statement. It’s created by your bookkeeping system and includes all your financial records.
4. The Chart of Accounts
Definition: The chart of accounts is a list of all the financial accounts in your general ledger, grouped by categories like assets, liabilities, equity, revenue, and expenses.
Why It Matters: A well-organized chart of accounts ensures your financial transactions are recorded in the right places. Cloud bookkeeping allows you to easily customize and manage your chart of accounts.
5. Bank Reconciliation
Definition: Bank reconciliation compares your bank statements with your accounting records to make sure they match and there are no errors.
Why It Matters: Regular bank reconciliations help you catch discrepancies, mistakes or fraudulent activity. Cloud bookkeeping often has features that automatically match your transactions, saving time and reducing errors.
Note: Your bank reconciliation is not the same as your bank statements. It’s created in your bookkeeping system to check for accuracy.
6. Depreciation
Definition: Depreciation is the process of spreading out the cost of a physical asset over its useful life, like machinery or equipment.
Why It Matters: Understanding depreciation helps you accurately track the value of your assets over time. Cloud bookkeeping can automate depreciation calculations and integrate them into your financial reports.
7. Cash Flow
Definition: Cash flow is the movement of money in and out of your business. It’s a key indicator of your business’s financial health.
Why It Matters: Positive cash flow ensures you have enough money to meet your obligations and grow your business. Cloud bookkeeping gives you real-time cash flow tracking to help you make smarter financial decisions.
8. Profit and Loss Statement (P&L)
Definition: A Profit and Loss Statement, or income statement, shows your business’s revenue, costs, and expenses over a set period, helping you calculate net profit or loss.
Why It Matters: A P&L statement helps you evaluate your profitability and overall financial performance. Cloud bookkeeping can generate these statements automatically, making it easy to analyze your results.
9. Balance Sheet
Definition: A balance sheet gives a snapshot of your business’s financial position, showing your assets, liabilities, and equity at a specific point in time.
Why It Matters: The balance sheet helps you assess your business’s financial stability and is crucial for financial planning. Cloud bookkeeping systems provide up-to-date balance sheets for your business.
10. Tax Liabilities
Definition: Tax liabilities refer to the taxes your business owes based on income, sales, or other taxable activities.
Why It Matters: Properly tracking your tax liabilities ensures you pay the right amount of taxes and avoid penalties. At SaltyBooks we use cloud bookkeeping tools to help you manage taxes, track deductions, and calculate your tax liabilities with ease.
In Canada, the three most common types of taxes business owners need to understand are:
- Income Tax (RC): This is the tax your business pays on the income it earns.
- Sales Tax (RT): This is the tax you collect from customers on sales of goods and services, which you then remit to the government (such as GST/HST).
- Payroll Tax (RP): This is the tax your business pays based on employee wages, including contributions to programs like the Canada Pension Plan (CPP) and Employment Insurance (EI).
Understanding these essential bookkeeping terms is crucial for keeping your business on track financially. Whether you're managing your own books or outsourcing, staying informed will help you make better financial decisions and grow your business with confidence.
If you're ready to take the next step in your business and need help with your year-end taxes or other bookkeeping services, we’re here to help!
Contact us at info@saltybooks.ca or call 613-702-0808 to get started. We specialize in sole proprietor tax services and cloud-based bookkeeping solutions to make your life easier.
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