Mon, November 18, 2019

Basic Financial/Accounting Terms for Teens

financial_newsThis article is meant as a starting point for those wanting to know more about business finances and accounting.  The list does not cover everything.  We wanted to get the essential words and keep it simple.  Make sure to check out our other sections on Business Terms and Marketing Terms.  Note: Terms are not in alphabetical order since some concepts build on each other.

  • Finance is anything that has to do with money.  ‘Finance’ comes from an old French word meaning ‘to end, settle or pay.’   Finances are how we use, manage, and communicate about money. 
  •  Accounting is how we keep track of money or how we account (count) for where money goes.
  • Budget is a general guideline of how much money is expected to be spent.  Budgets help keep  businesses on track so that their funds are properly used.
  • Fiscal Responsibility is the same as financial responsibility.  ‘Fiscal’ comes from a word that means ‘treasury or money bag.’  Often businesses will have a fiscal year.  This means that their accounting records start and end on specific dates which do not have to be in January and December.
  • Cash Method of Accounting is a way of accounting that shows only how much money you actually have at any one time.  Smaller businesses find this easier, but it may not be as  detailed as the accrual method.  If you sell t-shirts and someone pays, you put that amount on your sheet. If they order a bunch and will pay in two weeks, it will show that you paid for the shirts but that there has not been any money made (income) on the transaction.
  • Accrual Method of Accounting is a way of accounting that puts everything on paper when it happens whether or not cash has traded hands.  Accrual accounting helps see when the transactions actually took place.  It combines current cash flows with future cash flows to give a better understanding of the current financial condition of a company.  If someone orders t-shirts from your t-shirt business, but they don’t pay for two weeks, it would show that the transaction was made and the books would register what will happen.
  •  Assets are basically anything that is owned and adds value to your business.  Usually assets can be turned into cash pretty quickly if extra money is needed.  If you run a t-shirt printing business, your assets would include everything from ink, to screens, to t-shirts all the way to how much money is in the bank. 
  • Liabilities are what you owe and they remove value.  These are debts: like loans, payments on equipment and things like that. 
  • Income is how much money is coming in.  Income does not equal profit.  Profit is when expenses have been subtracted from our income. 
  • Expense is anything we need to pay out.  Bills, supplies, employees, postage, taxes, etc… 
  • Equity is how much you have in the business.  It is how much the business is worth if you are the only person working.  Equity is split when there is more than one person in a business. 
  • Revenue is the same as income.
  • Working Capital is how much total investment is in your current assets.  This includes cash, payments owed to you (Accounts Receivable) and Inventory.
  •  Accounts Receivable is money that is owed to you by a customer or client.  
  •  Accounts Payable is money that you owe. Usually this is money owed to suppliers who send you what you need on a promise that you will pay them. 
  • Net 30 means that you have thirty days to pay on a bill.  Also Net 60, or Net 90.  Companies only bill a business after the business has proved themselves trustworthy in making payments and placing orders.
  • Balance Sheet is a snapshot of your financial condition.  It shows assets and liabilities for any given time frame.  Balance sheets are usually done monthly and go along with bank reconciliation.
  • Bank reconciliation is a specific point when the amount of money in the bank is verified and takes into consideration all outstanding checks and current deposits. Usually this is done monthly, but some businesses will do it quarterly. 
  • Quarterly Report is a report done every three months or four times a year based on a company’s fiscal calendar. When there are fewer transactions, some businesses will choose to look at their fiancés quarterly instead of monthly.  It is usually cheaper when you are paying an accountant or bookkeeper if you only meet them four times a year versus twelve times.  Be careful, though, if something goes wrong, it may not be caught for two or three months and can cause major business headaches.
  • Income Statement is a report that tells your profit or loss for a period of time.
  • Statement of Cash Flows shows how you have managed your business cash during a specific period of time.  It covers everything from operating expenses, investments, and financing activities.

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