Bookkeeping terms you need to know

If you’re a new small business owner, dealing with bookkeeping and financial reports can be a chore. Even reading a profit and loss sheet can be a challenge, especially when there are many other things demanding attention.

But take heart! Those terms are not nearly as complex as you might think, and you don’t have to be lost in a sea of terminology. Here are some basic terms you’ll want to know to keep on top of the business side of your business.

Sales/Revenue/Income

Sales can also be called revenue or income-the terms all mean the same thing. It’s the money your business earns during the routine course of doing business, such as selling products you manufacture, services you provide, or a combination of those.

COGS/COS

COGS and COS are similar terms, depending on your business: cost of goods sold and cost of sales. Both refer to expenses incurred in direct relation to jobs or product lines. Cost of goods sold generally refers to physical goods, while cost of sales generally refers to a service. For example, if you have a manufacturing business making the ever popular Widgets, the cost of the materials, labor, and identifiable fixed overhead would be rolled into COGS. 

Gross Margin

In its simplest form, gross margin is the difference between what you sell a good or service for and what it cost you to make it happen. In accounting terms, it’s the difference between sales and COGS/COS. This allows you to see how much you’re charging over cost, and it’s a handy number to keep track of even if you’re not selling physical goods. Tracking it from month to month can help you figure out if you’re charging the right amount. 

Overhead

Overhead also refers to expenses from your business, but unlike COGS or COS it’s not tied to a particular job. Overhead includes cost of buildings, utilities, payroll, business licenses, banking fees and more.

Overhead can either be fixed or variable. Fixed overhead doesn’t change much over time, but variable does. For example, if you were to run a lawn care business, the cost of gasoline would be variable-you’d use more in the summer and noticeably less in the winter.

Net Profit/Net Income/Net Revenue

While you may be pleased with the gross margin, keep in mind there are expenses that must be subtracted from it to arrive at your net income. After you’ve figured out sales and then subtracted COGS/COS and overhead, what remains is net profit. This is calculated before taxes and before any depreciation.

Depreciation

Depreciation refers to the downward change in value over time of an asset-for example, a vehicle or a piece of equipment. That asset’s value decreases over time as it ages and accumulates wear and tear, and that is its depreciation. Your CPA generally calculates this for tax purposes, and then gives you the number to enter in your books.

Accounts Payable

This is a bill you have received from a vendor or supplier that has not yet been paid. It is money you owe someone else now or at some point in the future.

Accounts Receivable

Accounts receivable relates to customers: an invoice you’ve sent out that your customer has not yet paid. This is money owed to you.

There are more accounting terms than these, and some are industry-dependent. Some industries have terms of their own, and individual companies may have their own idiosyncratic vocabulary. But for basic bookkeeping, if you know these terms you’ll be able to converse comfortably with your accountant or banker, keep your books straight, and read a profit and loss statement.

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