20 Common Accounting Terms Every Business Owner Should Know
Accounting terms can be tricky. Some sound more complicated than they are, while others seem familiar but mean something entirely different. And when used incorrectly? Well, that can lead to confusion, miscommunication, and even costly financial mistakes. Let’s break down 20 commonly misunderstood accounting terms in a way that actually makes sense.
Terms That Are Frequently Used Incorrectly
1. Revenue – Many people think revenue equals profit. Not so - Revenue is the total amount earned before deducting expenses. Profit is what’s left after expenses are paid.
2. Profit vs. Cash Flow – You can have profit on paper but still be cash poor. Why? Because profit reflects earnings after expenses, while cash flow tracks actual money moving in and out of your business.
3. Expense vs. Liability – An expense is a cost incurred for business operations (like rent). A liability is money your business owes (like a loan or credit card balance).
4. Depreciation – No, it’s not just a tax write-off. Depreciation spreads out the cost of an asset (like equipment) over its useful life. It reflects value loss over time.
5. Accounts Payable vs. Accounts Receivable – Simple but often confused: Payable = What you owe. Receivable = What others owe you.
6. Net Income vs. Gross Income – Gross income is total earnings before expenses. Net income is what’s left after expenses. Net = reality check.
7. Fixed Costs vs. Variable Costs – Fixed costs (like rent) stay the same regardless of sales. Variable costs (like materials) change based on production levels.
8. Book Value – Not the price you paid for an asset, but its worth after accounting for depreciation.
9. Write-Off vs. Write-Down – A write-off means completely removing an asset’s value from the books. A write-down means reducing its value but not eliminating it.
10. Capital Expenditure vs. Operating Expense – A capital expenditure (CapEx) is a long-term investment (like buying equipment). An operating expense (OpEx) is a day-to-day cost (like utilities).
Terms That Sound Like They Mean Something Else
11. Equity – No, this isn’t just about homeownership. In business, equity is the value left after subtracting liabilities from assets.
12. Accrual Accounting – Sounds fancy, but it just means recording revenue and expenses when they occur, not when money is exchanged.
13. Amortization – Often confused with depreciation, but it applies to intangible assets like patents or loan payments spread over time.
14. Retained Earnings – Not extra cash sitting in a bank. It’s past profits reinvested in the business instead of being distributed to owners.
15. Operating Profit – This isn’t net profit - It’s earnings before interest and taxes (EBIT). It reflects core business performance before financial costs.
16. Fiscal Year – The 12-month financial period of your business, which doesn’t always match the calendar year.
17. Balance Sheet – This isn’t a list of transactions. It’s a snapshot of a company’s financial standing at a given moment.
18. Gross Margin – Percentage of revenue left after deducting only the cost of goods sold (COGS). It doesn’t include other expenses.
19. Trial Balance – Not your final numbers - This is a check to ensure total debits and credits match before preparing financial statements.
20. Liquidity – Not just having cash, but how quickly assets can be converted into cash without losing value.
Accounting terms don’t have to be confusing. Knowing the difference between these commonly misunderstood terms can help you manage your finances more effectively—and avoid costly mistakes. So next time someone says “revenue” when they really mean “profit,” you’ll know better. And that knowledge? It’s just as valuable as a well-balanced ledger.
This information should never be taken as advice. Please talk to your bookkeeping and tax business professionals to discuss your individual situation. By the way, we’d love to partner with you on that! Give us a call or schedule your no-obligation consultation today, click here to book a call.
