Accounting Acronyms Every Business Owner Needs To Know
There are many fancy acronyms used within accounting that can be useful to know when starting a business. Such acronyms could help you to communicate better with accountants, investors, financial advisors and various other financial professionals who may use such terms. Read on to learn about some of the most popular acronyms.
Accounts payable. This is a record of any future outgoing costs that still need to be paid within a set period (such as the next month). Such costs could include business loans, supplies and outsourced services.
Accounts receivable. The opposite of AP. This is a record of any future earnings that you are still owed from others within a set period. This could include unpaid invoices from clients or client subscription fees.
Certified public accountant. A CPA is a fancy title for any accountant who is certified by their state. CPAs are likely to be more trustworthy than accountants that are not certified.
Cost of goods sold. This refers to any money you had to spend on a product before selling it. This could include the cost of purchase (if you bought the product from a supplier) or the cost of manufacture (including the cost of materials you may have bought to make the product). The cost of packaging and shipping should also be included.
EIN (or FEIN)
Employer Identification Number (AKA Federal Employer Identification Number). This tax code number is the business equivalent of a social security number. It is mandatory that you complete the FEIN application process when starting a business in order to register it with the IRS.
Individual retirement account. Essentially a savings account for building up retirement funds. Many employers set up an IRA for themselves and for each of their employees into which pre-tax earnings are paid each month. This money accumulates until an employee leaves or retires and can then be taken out during retirement.
Limited liability company. While there are other business structures, most companies operate as either a ‘sole proprietor’ or as a ‘limited liability company’. Choosing the right business structure can be important if you get into debt – a sole proprietor can still be forced to pay business debts out of their personal account, whereas the owner of an LLC is not personally liable for any business debts.
Net income. Also known as ‘net profit’, your NI is essentially the total amount of money that your business has made. It is calculated by deducting your total business expenses from your total business earnings.
Profits & losses. Many companies produce a P&L statement every year or every three months in order to record the total amount of profits and losses made within that period of time. It is an essential process for keeping within a budget and maintaining a return.
Return on investment. Before investing money into a new business idea, it is always worth calculating the ROI to work out how much money you will likely make back. Spending money to make money is an important part of running a successful business – but you need to be certain that you’re actually going to make some money.