If you’re starting a business in the U.S., you probably won’t know much of the most commonly used terms in accounting. This simple glossary of basic terms will help you understand and familiarize yourself with this important part of your entrepreneurship in an easy-to-learn and use language.

  • Assets: Assets are all things that are owned by your business and have value, for example: Inventory, raw materials, equipment and tools, property and cash in the bank.
  • Cash flow: Cash flow is a term used to describe the movement of money in the business (the money that goes out and the money that comes in). If a company makes more money than it spends, it is considered to have a positive cash flow. Similarly, if more money is spent than earned, then you would have a negative cash flow.
  • Cost of goods sold: The costs of goods sold are all those costs related to the production of whatever your company is selling. This includes raw material, labor, shipping and inventory costs, and any other expenses related to the creation of that product or service.
  • Working Capital: Working capital is the amount of available money that a company This can be calculated by subtracting the liabilities from the assets. Unlike cash flow, which evaluates costs and expenses over a specific period of time, working capital provides insight into the financial situation at present.
  • Accounts payable and accounts receivable: These terms are fairly simple: accounts payable refer to any expenses that the company has incurred but has not paid yet. Accounts receivable are exactly the opposite, these refer to those accounts for which the company has not yet received any payment.
  • Liquidity: Liquidity refers to the availability of assets; for example, cash will always be the most liquid asset of a company since it can be disposed of immediately. Other assets are not have as liquid, for example, land or inventory, as they still have to go through other stages and steps before they can be disposed of and use this equity elsewhere.
  • Inventory: Inventory refers to the products that the company has available for sale. It is very important to maintain a balance in inventory, since the goal is to meet customer demand, but without having exorbitant inventory quantities, as it generates additional storage and transportation costs.
  • Liabilities: A company’s liabilities are all unpaid debts. This may include accounts payable, future payroll expenses, or defaults on loans.
  • Equity: Equity refers to the amount of money that has been invested in the company, this can come from a small group of owners or from a large network of shareholders.
  • Balance Sheet: This is a document that provides an overview of your company’s financial statement, including assets, liabilities and equity.
  • Appreciation and depreciation: Some of your company’s assets may increase in value over time; this can happen with real estate properties located in areas that increase their value. On the other hand, assets that lose value over time depreciate, such as vehicles.
  • Fixed and variable costs: A business incurs a lot of expenses, some of these expenses may vary over time depending on certain factors such as sales (the higher sales, the higher the cost of replenishment of raw material, for example). Other costs are fixed, regardless of sales or business volume, such as rent.
  • Return On Investment (ROI): This refers to the amount of money that is earned after making an investment in the business. To calculate the ROI, you will have to divide the profits by the investment, for example: if you invest $1,000 in marketing a product, and this generates sales of $2,000, you will have a gross profit of $1,000, representing a return on investment of 50%.
  • Payroll: Payroll expenses include what is spent on compensation to the employees, including wages, bonuses and commissions.
  • Revenue: Revenue simply refers to the money earned by the company.