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Accounts Payable (AP): This just means money your business owes to someone else for goods or services you’ve already received but haven’t paid for yet. Eg if you have a contractor that invoices you for serviced provided and you don’t have to pay for 2 weeks, then this would become part of your accounts payable. Keep in mind, this is only going to show up in your accounts payable if you add it as a bill or payable in your accounting software when you receive the invoice. This is found on your balance sheet.
Accounts Receivable (AR): This just means money that customers owe to your business for products or services you’ve already provided them. Eg if you install a new roof for a client and issue them an invoice on completion which is due in 2 weeks. The amount that has been invoiced but not yet paid will be part of your accounts receivable. If you issue invoices through your accounting software, then these unpaid invoices will generally be tracked in your accounts receivable. This is found on your balance sheet.
Accrual Accounting: This sounds a bit confusing, but accrual accounting is one way you can record your income and expenses. Under accrual accounting, you record things when they happen even if no money has actually changed hands. Eg. under accrual accounting you would record your income on the date you issue the invoice, even if it isn’t paid for 2 weeks. Similarly, you would record expenses on the date the invoice is issued to you, not the date you actually pay for it.
Assets: This is a general term for things your business owns that have value. This might include things like cash in the bank, equipment you own, vehicles or inventory.
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Balance Sheet: This an important financial statement that gives you a snapshot at a particular point in time showing what your business owns (assets), what it owes (liabilities), and its worth (equity) at a specific time. This is important for all businesses to understand as it is a very quick way to see whether the things you own (assets) are worth more than what you owe (liabilities) and the different is going to be the equity you have in the business. You can use this to track changes over time eg from one financial year to the next to see if things are moving in the right direction.
Bank Reconciliation: Any kind of reconciliation really just means matching balances to make sure nothing has been missed. When we refer to a bank reconciliation it means checking to make sure the cumulative bank balance shown in your accounting software is the same as the actual bank balance on your bank statements. If these don’t match, that generally means that there is an error somewhere in your accounting software that needs to be investigated to make sure you haven’t accidentally overstated your income or understated your costs which can end up costing you money.
BAS (Business Activity Statement): This is your quarterly lodgement to the ATO where you report and then pay a range of taxes including GST, PAYG Withholding, PAYG Instalments, Fringe Benefits Tax, Luxury Car Tax or Wine Equalisation Tax.
Bookkeeping: This is essentially the process of recording all the financial transactions of your business so you can get an accurate summary of all your activities to use for your reporting and lodgements.
Break-Even Point: When people talk about a break-even point, this means the point where your business’s income equals its expenses. Anything above the break even point means your making profit. This is not always a straightforward calculation as there are a number of fixed and variable costs that contribute to the cost of the goods or services you provide. However, it is really important to know what this point is to ensure you are charging enough to cover costs and also make a profit on top.
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Capital: This is the fancy word used to describe the money or assets that owners contribute to their business to help it grow. For example, a business owner might put $20,000 into their new business bank account to cover some of the startup costs and provide some cashflow while things are still growing. This capital can then be repaid to the owners once the business has enough cash available.
Cashflow: This buzz word describes the movement of money in and out of your business. Over time you obviously need to maintain a positive cashflow (more money coming in than going out) in order to stay profitable. The difficulty with cashflow is that there is often a timing issue where you have money going out before the money is coming in. This can be managed with a a ‘cashflow buffer’.
Cashflow Buffer: A cashflow buffer is a reserve of funds available in your business operating account equivalent to at least 3 months of your regular expenses. That means that even if no money came in for 3 months you could still afford to pay your bills as they come in. Obviously, to maintain a profitable business you need to have positive cashflow, where more money is coming in overall than is going out. However, as we noted above, the timing of money coming in can sometimes mean you don’t have enough available to pay the bills on time. A cashflow buffer will alleviate this stress.
Cashflow Statement: This is another financial report that shows how much physical cash came into and went out of your business over a specific period of time.
Cost of Goods Sold (COGS): You might see a section on your Income Statement (AKA the Profit & Loss Statement) called ‘Cost of Goods Sold’. This is where you would usually record the direct costs of producing the products or services your business sells. For example, if you make and sell floral arrangements, you would record all the items you purchase to make those arrangements in your COGS including flowers, wrapping paper, cards, foam inserts, wires etc.
Credit: In accounting speak, a credit is an entry that either increases or decreases an account, depending on what the account is. As a general rule,
you will credit a liability account (eg car loan account) to increase the account balance and making the debt bigger
you will credit an asset account (eg bank account ) to decrease the account and making the available balance lower
you will credit an income account (eg sales) to increase the account and making your sales amount higher
you will credit an expense account (eg marketing) to decrease the account balance and make it lower (for example if you received a refund).
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Debit: In accounting speak, a debit is the other entry that increases or decreases an account balance, depending on what that account is. As a general rule,
you will debit a liability account (eg car loan account) to decrease the account balance and making the debt smaller
you will debit an asset account (eg bank account) to increase the account and making the available balance higher
you will debit an income account (eg sales) to decrease the account and making your sales amount lower (eg if you gave a refund on a sale)
you will debit an expense account (eg marketing) to increase the account balance and make it higher.
Depreciation: This is how we measure the loss of value of an asset (like equipment or a car) over time due to use (wear and tear). Instead of claiming a deduction for the full purchase cost when you buy a depreciating asset, you claim a portion of the cost over a number of years (called the life of the asset – or the number of years you would expect that item to last).
Dividend: This refers to money paid to business owners (or shareholders) out of a company’s profits. This is usually done at the end of the financial year to help distribute some of the profits out of the company to the owners.
Drawings: If you are operating your business as a sole trader, any money you take out of the business for personal use is called ‘drawings’ or ‘owner’s drawings’. These drawings are not recorded on the Profit and Loss report and are not a tax deduction for the business.
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Equity: This refers to the value of the business after all liabilities have been deducted from its assets. It represents what the business is worth to its owners and is shown on the balance sheet. For example, if you had assets totalling $250,000 and debts of $240,000 then the equity in the business would be a total of $10,000.
Expenses: This is how we record the money spent or costs incurred in running your business. Expenses show up on your Income Statement (or Profit & Loss Statement) and get deducted from your income to determine the net profit.
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Fixed Assets: This is an accounting term used to categorise long-term assets like buildings, machinery, or equipment that a business uses over a longer period of time. For example, if you owned a printing business then you would categorise the printers and equipment used as fixed assets on your balance sheet.
Fringe Benefits Tax (FBT): This is a tax that employers pay in Australia on certain benefits they provide to employees in addition to their wages. The purpose is to ensure that the ATO still gets to collect tax where employers reward their employees with things like a company car, free meals, entertainment & events or other non-cash benefits.
Financial Year (FY): This just refers to the 12-month period used for accounting and tax purposes. The standard financial year in Australia runs from July 1 to June 30.
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Goods and Services Tax (GST): This is a consumption tax added to most goods and services sold in Australia, currently set at 10%. This tax is generally added on top of the cost of the product or service and is collected and paid to the ATO by the business owner.
Gross Profit: A gross profit is calculated by deducting the cost of goods sold from your total sales. It essentially tells you how much money you make from selling the products or services after you take into account how much it costs you to purchase everything you need to make those products of services. It doesn’t take into account other general operating costs. For example, if a florist can sell a bouquet of flowers for $95 and it costs $43 to buy all the flowers, wraps, wires and foam to make that bouquet, then the gross profit would be $52. This can also be referred to as the margin.
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Hire Purchase: This is an arrangement where you can buy equipment or assets over time by paying regular amounts, with ownership transferring after the final payment. For example, you might acquire a new truck for your business through a hire-purchase agreement, making monthly instalments over 3 years. Once the final monthly payment is made, the ownership of the truck is transferred to you.
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Income: This is the money your business earns from selling goods or services. It can also be referred to as revenue or turnover.
Interest: This can refer to either the cost of borrowing money (eg on loans) or the return earned on money saved (eg on term deposits).
Inventory: This refers to goods your business has in stock that are ready and available to be sold. This might also be called stock, or stock-on-hand. If you track inventory it would be shown as an asset on your balance sheet.
Invoice: If you’re registered for GST this would be called a ‘Tax Invoice’ and is essentially a document showing what a customer owes your business for goods or services you’ve provided. There are certain pieces of information you must include on an invoice, depending on the value of the sale.
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Journal Entry: This is another accounting term that refers to a record of a financial transaction that is entered into your business’s accounting system. Modern cloud accounting systems generally create journal entries automatically, for example when you categorise transactions from the bank feed or process payroll. Other types of journal entries need to be entered manually by your accountant or bookkeeper to record adjustments or properly record changes to your income, expense, asset or liability accounts.
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Liabilities: This is the technical term to describe debts or financial obligations that your business owes to others. This might include things like loans, credit cards, or unpaid invoices and bills.
Loan: This refers to money your business borrows that must be repaid, usually with interest. In your accounting software, loans might also be used to record money that your business owes to you (eg money you invested to get the business off the ground) or money you owe to the business (eg personal expenses you paid for from your business account).
Loss: Your business is making a loss when your expenses are higher than your income overall.
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Margin: This describes the difference between the selling price of a product or service and its cost. For example, if you make a dress for $72 and sell it for $120 then you make a margin of $48. This is also called a gross profit.
Mark-Up: This describes the amount you add to the cost price of goods or services to make a profit when you sell them. For example, if you bought a shirt for $15 and then sell it for $25 then your mark-up is $10.
Mortgage: This describes a loan specifically for purchasing property, where the property is used as security against the loan.
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Net Profit: The net profit refers to the amount of money left after all business expenses, including taxes, have been deducted from your income.
Net Worth: This is another term for equity or owner’s equity and refers to the total value of your business after the liabilities are subtracted from assets.
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Operating Expenses: This the general term used to describe costs associated with running the business, like rent, wages, advertising or travel.
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Profit: This refers to the money left over after all expenses have been paid. If it’s negative, it’s called a loss. Sometimes you might hear people refer to this as a ‘before tax profit’, which tells us how much money your business made before you take into account the income tax. And then as you might guess, the ‘after-tax profit’ is how much money you have made after all the expenses and taxes have been taken into account. Interestingly, you will hear profit referred to as “the bottom line” which came about because the profit (or loss) is literally the bottom line in this financial statement.
Profit and Loss Statement (P&L): This is another important financial report that shows your business’s income, expenses, and profit over a specific period of time. This is a key report that you can use to monitor trends in your income as well as track and monitor expenses. The best way to view this report is to compare it across periods (eg compare across the months within the financial year or compare this financial year to the previous year). It is also referred to as an Income Statement.
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Quotation (Quote): A formal statement that shows how much a business will charge for a product or service. A good quote will clearly outline the full scope of work and a breakdown of the charges. I would also recommend you have an expiry date on the quote to ensure you do not commit yourself to prices that may not profitable in the future.
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Reconciliation: Any kind of reconciliation really just means that you are making sure two sets of records match. For example, we routine reconcile the business bank account balance to the accounting software balance to ensure it is the same. Similarly, we routinely reconcile the amounts processed as net wages to the amounts you have physically paid to ensure they also match.
Revenue: The total amount of money your business earns from selling products or services. This is another term used to describe income or turnover.
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Salary: A salary refers to the fixed amount of money paid to an employee on a regular basis, regardless of hours worked. It generally includes a base rate of pay plus extra to cover things like overtime, public holiday pay or penalty rates. There are some pretty specific rules around the way you calculate a salary, so always consider the guidelines provided by Fair Work if you are not sure.
Shareholders: A shareholder is an individual or other entity that owns shares in your company, representing partial ownership. The number of shares owned by each shareholder will determine their share of ownership. Shareholders are also referred to as ‘members’.
Single Touch Payroll (STP): Introduced in 2019, STP is a government initiative to try and streamline employer’s reporting to government agencies. Each time you pay your employees you need to process the payrun through STP enabled software and show the type of earnings, the tax withheld and super contribution amounts. This must be reported to the ATO at the time you make the physical payments to the employees. Employees will then be able to see a real-time summary of how much they have earned by logging into ATO Online via myGov.
Statement of Cash Flows: This is another name for a cashflow statement and is a summary showing how cash moves in and out of your business over a specific period of time.
Superannuation (Super): In Australia, superannuation refers to money put aside by employers into a fund for their employees’ retirement. Some contractors are also eligible to be paid superannuation contributions depending on the nature of your working arrangements. Check the ATO website for more details if you’re not sure about your obligations.
Super Guarantee Charge (SGC): The SGC applies when employers don’t pay the minimum super for their eligible employees by the due date. You must lodge an SGC statement and pay the penalties which includes interest and admin fees. The SGC is also not tax deductible, so if you don’t pay your super on time you cannot claim it as a business deduction.
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Tax: This is a portion of money that businesses and individuals must pay to the government, usually based on income, sales or wages. In Australia there are a range of different types of taxes such as income taxes, consumption taxes (eg GST), excise taxes, import taxes and employment related taxes.
Trial Balance: This is a report available in your accounting software that lists all of a business’s accounts and their balances to ensure everything is correctly recorded. It can be a useful tool to check the correct account allocations for your transactions as well as a reviewing tax allocations.
Trust Account: This is a special account where funds are held on behalf of another person or business, often used in real estate and legal businesses. Certain business types and states have different requirements for trust accounting in Australia.