Top 10 Accounting Terms Every Business Owner Should Know

If you're a business owner or you're

about to become one, there's something you need to hear. Accounting is critical for your success, but it doesn't have to be scary. The truth is, I've seen brilliant entrepreneurs with amazing ideas lose sleep or worse, lose money because they didn't understand a

few basic financial terms. And I get it.

Nobody starts a business because they love balance sheets or income statements.

But if you don't know what those numbers mean, you're flying blind.

Now, I've worked with thousands of clients from first time founders to seasoned pros, and the biggest breakthrough always comes when they finally get their numbers.

So in this video, I'm going to

break down the 10 most important accounting terms every business owner should know. No jargon, no boring textbook definitions, just clear, simple explanations with real world examples you can actually use. We'll talk about what revenue really means, what expenses are more than just receipts, the difference between profit and cash flow, and what a balance sheet tells you about your business. And along the way, I'll show you how to spot red flags and all those numbers before they become expensive problems. By the end of this video, you'll be able to speak your accountant's language, make smarter business decisions, and feel a whole lot more confident as you manage your business. Finances. Let's jump in. Now, I want to kick this off

with a story from a movie maybe

many of you have seen. And that's Ocean's Eleven. Now, in this show, Brad Pitt and Matt Damon are waiting for Terry Benedict to come down the escalator. And as he gets to the floor, his pit boss brings over to him

a little post it.

And I think they reference it as the day's take. And there's a couple numbers on there. And what was just incredibly insightful for me and what I've seen over and over again with business owners is that they're able to take a quick look at just a few numbers and really assess the health of their business and make better decisions. And in the show, Terry Benedict sees the number and knows right what to do.

And I want you to have that

same power that you're in control of your business with just looking at a few key numbers. Now, the first three important accounting terms are actually financial statements. These three statements are going to give you the health and condition of your business in a snapshot at any given moment. And these terms are synonymous with good business ownership and management. Now, the first one is balance sheet. And of all these financial statements, this is the one that's probably most Synonymous with snapshot. It's going to explain the accounting equation between your assets, your debts or liabilities and your equity, and in an easy format, tell you where you stand in relationship to those assets and liabilities. The next one up is the cash flow statement. I love this statement personally, because I

want to know where I'm at at any given time in the month on what cash flow I need to have come in to cover my nut. If you've ever heard that term of making sure you're going to be able

to cover all of those expenses throughout the giving month, it explains the difference between the cash coming in and the cash going out.

It doesn't really tell you what your

profit is or the relationship to assets and liabilities. It's all about cash, and we want to remember cash is king, and we need that cash to stay alive and well. Now, the importance of this statement is that you need to have enough time to make adjustments in your business if you're going to be short on cash flow. We never want to be caught where we're not ready to be able to cover payroll or pay certain bills. This report is very, very simple.

Not a lot of line items. And it's that difference again between what's

coming in and what's going out, even if it's not an expense or not. We want to know where your cash position is at all times. The third term I want you to know is P and L or profit and loss statement, sometimes synonymous with income statement. Now, this report is going to become your best friend. This really tells you about your company's financial performance for the last period of time. It might be a quarterly report or an annual report, and it's the same data that's going to end up on your tax return. How much revenue came in, how many expenses went out, and what's your profit?

And we want that profit to be in the black, not the red. So the income statement is going to

be that barometer that measures your company's financial success at the end of the

day the next term. Assets. Assets are the cash, inventory, accounts receivable, sometimes referred to as fixed assets, equipment, real estate, vehicles. They may not generate you money, but they're typically assets you're going to use in your business to make money. And on your balance sheet, your assets are going to be listed based on how much you paid for them, not how much they're worth. This is referred to as book value. What are the assets worth on the books and what you paid for them? Conversely, on your balance sheet, our Next term is liabilities. The liabilities or the debts of the company. The obligations that you owe to others could be accounts payable, credit cards, long term loans, leases. Anything that you owe to another person would be listed in liabilities. Those are going to be tracked at the real time value. Like how much do you owe this company or this person at this moment in time? So I can take my assets minus those liabilities if I had to pay them right now to come up with my equity. So that next term equity starts to break down. What the value of the business is to me if I were hypothetically to sell everything, pay my debts, and what's that value of my business? That's known as owner's equity. Now, these three terms are what make up your balance sheet. Assets minus the liabilities equals equity. And I want to highlight this important point. This truly shows the net worth of your business and is key for investors that you might want to raise capital for to scale or if you're going to sell the business. Now let's move to revenue. Now, revenue is a number that is not going to be on your balance sheet. We're now over to the P and L or the profit and loss. Now, revenue just means income, total income. I sold goods, I sold services. How much came in the door? Now, most business owners are a cash basis taxpayer. So that means when you make money, it goes on the books. If you just bill someone, send them an invoice, that's not revenue. That's an accounts receivable kind of a deeper concept. What I want you to worry about is what money did I make today? What do I get to deposit in my bank account? What came in through Zelle, what or Apple Pay or Venmo. That is revenue. And let me say this too. This is often called the top line, the first number on your income statement. Now let's think about Terry Benedict again. That take from the night before was a key indicator on his company's ability or the casino's ability to generate more cash before expenses. That's going to be a top line number that's important to every business owner. Now, expenses, pretty straightforward, but something we don't want to overlook. These, of course, are going to be the costs you're going to incur to run your business. They could be categorized from variable costs like supplies or paying sales commissions to fixed costs like rent or utilities. And then you may have capital costs like software or subscriptions and even outside vendors, which. Well, your goal is to track all of those and of course keep them as Low as possible when you try to generate as much revenue as possible. Revenue's good, expense is bad, but we need to spend money to make money. Now, once you take your revenue minus your expenses, that brings us to number nine, profit. Oh, that wonderful number we hope is in the black. We want to be making as much profit as possible. Now, in a lot of businesses that sell product, they have revenue minus cost of goods sold. We'll come to that in a moment. But the simple approach is just revenue minus expenses. And then I'm going to have my profit margin. How much money did I make based on my revenue in the door? If I brought in $100,000, had $80,000 in expenses and netted 20, then my profit margin would be 20%. I made $20,000 on $100,000 of revenue, and that could be another KPI. That could mean a lot to you. Also, I want to point out that the bottom line we talked about top line being revenue. Bottom line is that profit or loss. And what's interesting is you'll see sometimes businesses are making a lot of money, they got a lot of revenue, but they're still losing money because it's at the end of the day, what really matters. Profit minus expenses. That's the bottom line we're looking for. Last but not least cost of goods sold. Now, I saved this for last because this does not apply to every business. This is for businesses that have direct costs of producing or selling a product. Now, my health food store guy, I mean, this is a perfect example. He would have top line revenue from selling product. But all of that inventory on the shelves was a cost directly related to the sale. So that was a cost of goods sold. So if he made $100,000, but there was $30,000 worth of inventory to get that 100,000, that cost of goods sold would be the 30,000. And then we have that $50,000 of operating costs of maybe workers and rent and utilities. And that brings us back down to our $20,000 of profit. So our profit margin was 20%, but our cost of goods sold was 30%. So that we knew to sell one product. It took me 30% of cost of goods sold to get there. But if you're selling a product, even think of a restaurant selling food, you want to know what that top line cost is? That's directly related to your revenue. That's cost of goods sold. Then we work through our other expenses and we get to the bottom line profit at the end of the day. So in summary, if we go back to our profit and loss statement and that's where you're going to see the cost of goods sold. We're going to have our top line revenue and the first chunk of expenses are going to be that cost of goods sold, direct expenses related to sales. So that $30,000 for all the inventory on the shelves would be my cost of goods sold. So my operating profit at that point would be $70,000. And then I go to my next layer of expenses, rent, workers, utility bills, whatever, and I get down to my $20,000 of profit. Now that picture is known as the profit and loss statement or the income statement. And as a business owner, if you have direct expenses related to sales or cost of goods sold, you want to be able to track that and measure it and really be efficient on managing that number so that you can drive up your bottom line profit. All right, thanks for hanging out with me and going over these challenging topics. But if you're starting to take your finances seriously, this is a big step and trust me, it's going to pay off. If you want more help getting your books in order, building a tax strategy, getting the right entity and structure in place, check out KKOS lawyers at the link in the description Description we would love to be of help during our consultation. We can also line you up with one of our certified Main street tax pros that can be there to help do your tax return at the end of the year. And if this video helped demystify accounting even a little bit, do me a favor, give it a like. Subscribe to the channel and stick around. We've got more great content coming your way. I'm Mark J. Kohler and I'll see you in the next one Sat.