18 Financial Terms Every Businessperson Should Know

Accounting is the “universal language of business.” Regardless of your role or level within an organization, to communicate well with your boss, understanding that language is important. The accounting process is a system designed to record, classify, report and interpret financial data. Take the time to understand the language.

Common accounting terms:

1. Accrual method: Recognizes revenue at the point of sale and recognizes expenses when incurred
2. Asset: An item of value owned by a business or individual, whether or not there is a claim on the item
3. Balance sheet: Summary statement of the firm’s financial position at a given point in time
4. Bottom line: This is profit. Something that affects net earnings or net income, e.g., revenues or expenses.
5. Capital expenditure: An outlay of funds by a company, expected to produce benefits over a period greater than one year
6. Current assets: The value of all assets expected to be converted into cash within one year
7. Current liabilities: Short-term liabilities, due within one year
8. Depreciation: The systematic charging of a portion of the cost of a fixed asset against the annual revenues generated by the asset
9. Equity: The value of the owners’ interest in property remaining after all claims and liens against it
10. Fixed cost: An expense that doesn’t vary based on changes in the volume of goods or services a company produces
11. Gross margin: Percent of revenue a company retains after deducting the expenses to produce goods or services. Overhead (salaries, rent, etc.) isdeducted from gross margin.
12. Income statement: Provides a financial summary of the company’s operating results during a specified period
13. Leverage: The amount of borrowed funds that a company uses to finance company growth and development, usually through the purchase of assets
14. Liability: A legal commitment to pay some amount or transfer some benefit, at some point in the future
15. Retained earnings: Those earnings of a company that are not distributed as dividends
16. Sales forecast: The prediction of a company’s sales over a given period, used as the key input to the short-run financial planning process
17. Statement of cash flows: A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. The cash flow statement is concerned with the flow of cash in and out of the business.
18. Statement of retained earnings: Reconciles the net income earned in a year and any cash dividends paid with the change in retained earnings between the start and the end of that year

Know the basic financial concepts of the business world. Understand how they affect your company’s bottom line. It’ll give you the confidence to speak up when the time is right.