Small business accounting: 10 terms you need to know

This article was paid for by Intuit QuickBooks.

Running a small business can be exciting and rewarding. But it also comes with a long list of tasks that have little to do with why you opened your business. 

Unless you hire someone else to handle it, accounting will be one of those responsibilities. And even if you do hire an accountant, understanding key accounting terms is still an essential part of being a successful business owner – helping you to spot red flags, stay in compliance with state and federal regulations and make more well-informed decisions for your business.

Here are 10 important accounting terms for small business owners to understand.

One of the most fundamental accounting terms in the business world, accounts receivable, is the money your business is owed for products or services it provides to clients. In other words, your company has already provided the good or service in question, and an invoice has been issued but not yet paid. 

"Accounts receivable is money owed to you by customers, and managing accounts receivable ensures steady income and avoids cash delays that can disrupt operations," says Steven Terrigino, Partner and Small Business Advisory Service Line Leader at The Bonadio Group. 


Your accounts receivable is considered an asset and is the opposite of accounts payable.

The money your business owes to others, such as vendors or suppliers, is referred to as accounts payable. These are unpaid bills and might include, for example, money you owe for inventory purchased on credit or payments due to contractors for services they provided your company. Accounts payable also include expenses like utility bills and any subscriptions your company may have. 

"Staying on top of accounts payable helps maintain good relationships and prevents overspending or missed payments to accounts," says Terrigino. Accounting software like QuickBooks can automate these payments so you won't lose track.

Gross revenue, revenue, or gross income, is the amount of money your business generates. Gross revenue takes into account money from all sources, whether that's sales of a product or service or the sale of stocks. 

This calculation also encompasses any interest your business may earn, along with money generated from such things as selling property or equipment. This figure does not reflect the deduction of expenses incurred in the course of doing business.

Net profit, also called net income, is the money remaining after a business's operating expenses have been deducted.

"This reflects your gross revenue less all the expenses incurred in bringing that product or service to fruition," says David Leichter, CPA and CEO of Leichter Accounting Services.

Determining net profit requires subtracting all types of operating expenses, everything from rent to salaries, along with taxes that your business must pay to the government.

Cost of Goods Sold (or COGS) refers to the direct costs incurred to create the product your business sells or the cost associated with the service your business provides. Knowing your COGS is essential to setting prices and ensuring you make a profit. 

"This is easier to understand in a product-based business. For instance, the cost of the cotton required for a t-shirt is a Cost of Goods Sold," says Caitlynn Eldridge, CPA and CEO of Prospera Strategy. "The labor to make the t-shirt would also be considered a Cost of Goods Sold."

Break-even point refers to the point at which your revenue is equal to your expenses. At your break-even point, there is no loss for your business. But there's no gain either. 

"Basically, it's the point where you're not losing money, but not making any either," says Paul Miller, CPA and managing partner for Miller & Company. "Knowing this number helps you set realistic sales goals and price your products or services correctly. It's a critical milestone every business should be aware of, especially in the early days."

A balance sheet lists all of your assets, along with their liabilities. Balance sheets also include shareholders' equity, which is calculated as the difference between a business's liabilities and assets. It's a key statement prepared at the end of an accounting period to provide a financial snapshot of a business at that moment in time.

"A balance shows your financial position and helps assess stability and value," says Terrigino.

Similar to a business's balance sheet, a profit and loss statement (or P&L) is a key document that summarizes how much your business earns and how much it spends.  Businesses often prepare profit and loss statements quarterly or annually to gauge their financial performance.

"Your P&L shows your revenues, expenses, and profit over a specific period of time. It's one of the most important tools to see how your business is actually performing," says Miller. "As a small business owner, checking your P&L regularly can help you spot trends like rising costs or seasonal dips before they become big issues." An accounting software like QuickBooks can help you track all of these moving pieces.

Depreciation is a tax deduction for the cost of items you've purchased for your business, typically expensive assets. It is a term used to describe the gradual loss in value of those assets.

The IRS allows businesses to recover, over time, the cost of purchasing certain assets. This is accomplished through an annual tax allowance for the "wear and tear, deterioration, or obsolescence of the property." This means your business can claim a deduction for a portion of the cost incurred in purchasing the deteriorating asset. The depreciation allowance spreads the cost of a purchase over multiple years rather than claiming the entire cost in one year.

While land your business purchased cannot be depreciated, the IRS does allow depreciation for buildings, machinery, vehicles, and even some intangible assets like patents or computer software.

Finally, the portion of your business's net profits that you retain for future uses, rather than distribute as dividends or through owner's draws, is known as retained earnings.

"The reason why the retained earnings figure is so crucial for the business is because it is a strong determinant in the business's ability to qualify for loans or get backed by investors," says Leichter. "Banks and investors will look at this figure to see that you're building a financially healthy and self-sustained business — not just for now, but for the future as well."

"If you want to know whether your business is stable and profitable over time, retained earnings is where you go to gauge that," Leichter adds.

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