The world of accounting is filled with specialized terms that can feel like a foreign language. From "accounts payable" to "depreciation," a lack of clarity on these key concepts can make it difficult to understand your financial statements and make informed decisions about your business. At Nunniyer Business, we believe that financial literacy is the foundation of a successful company. To help you get a better handle on your numbers, here is a glossary of some of the most common accounting terms every Canadian small business owner should know.
Key Financial Statements
Balance Sheet: A snapshot of your business’s financial position at a specific point in time. It shows what your business owns (assets), what it owes (liabilities), and the owners’ stake (equity). The name comes from the fact that your assets must always equal your liabilities plus your equity.
Income Statement: Also known as a Profit and Loss (P&L) statement. This report shows your business’s revenues, expenses, and profit or loss over a period (e.g., a month, quarter, or year). It tells you how profitable your business is.
Cash Flow Statement: Tracks the movement of cash in and out of your business over a specific period. It’s a critical tool for understanding your liquidity and ensuring you have enough cash to cover your operating expenses.
Foundational Terms
Assets: Everything your business owns that has value, such as cash, accounts receivable (money owed to you), inventory, equipment, and property.
Liabilities: The debts and obligations your business owes to others. This includes things like accounts payable (bills you need to pay), loans, and mortgages.
Equity: The amount of money invested in the business by its owners, plus any accumulated profits or losses. It’s what’s left over after you subtract all liabilities from all assets.
Revenue: The total income your business generates from its primary activities, such as selling goods or services, before any expenses are deducted.
Expenses: The costs your business incurs to generate revenue, such as rent, salaries, utilities, and advertising.
Everyday Accounting Terms
Accounts Payable (A/P): Money your business owes to suppliers and vendors for goods or services you have received but haven’t yet paid for.
Accounts Receivable (A/R): Money your business is owed by your customers for goods or services you have already provided.
Accrual vs. Cash Accounting:
Accrual Accounting: Records revenue when it is earned and expenses when they are incurred, regardless of when the cash is actually exchanged. This is the most common method and provides a more accurate picture of your financial health.
Cash Accounting: Records revenue when cash is received and expenses when cash is paid. It’s a simpler method but can be misleading for long-term planning.
Depreciation: The decrease in the value of an asset (like a piece of equipment or a vehicle) over time due to wear, tear, or obsolescence. You can deduct a portion of this decrease as an expense each year.
GST/HST: The Goods and Services Tax and Harmonized Sales Tax that you may need to charge on most of your goods and services in Canada.
This is just the tip of the iceberg, but mastering these fundamental terms will give you a powerful head start. When you understand the language of your finances, you’re in a much better position to make confident decisions about your business’s future.
If you have questions about any of these terms or want to ensure your bookkeeping is set up correctly, the team at Nunniyer Business is here to help.