No matter your fleet size or how long you have been in business, it is crucial to understand basic accounting terms and financial documents. Accounting explains your company’s financial history, health and overall performance. Without a good understanding of this information, you won’t know if you are succeeding or failing. That limits your ability to make informed decisions, operate effectively and position your company for future growth.

Common Terms

To get started, here are a few basic accounting terms and definitions:

• Assets: An asset is something of value that your company owns and can be converted into cash. This can include current assets such as accounts receivable, inventory and available cash. It also includes fixed assets like real estate, buildings and equipment.
• Liabilities: Liabilities are the debts and obligations of your business. They can include money owed on a loan, accounts payable, employee wages or taxes.
• Equity: Equity is your ownership interest in the business. In accounting, equity is calculated when a company’s liabilities are subtracted from its assets. Whatever remains from that calculation is your equity. When liabilities are larger than assets, negative equity exists.
• Revenue and Gains: Revenue is the amount of money that a company receives over a given period of time for the services it provides. On an income statement, revenue is also known as top line or gross revenue. Gains are one-time increases in revenue that are not part of a company’s regular operations. Some examples of gains include the sale of equipment or real estate.
• Expenses and Losses: Expenses are what it costs the company to perform its main operations. Losses are one-time transactions in which the company sells an asset for less than the amount it spent to acquire the asset.

Financial Statements

Understanding financial management involves some familiarity with financial statements. The three most common documents that companies use to gauge their financial health and performance are the balance sheet, the income statement and the cash flow statement.

A balance sheet is a snapshot of your company’s financial standing at any given point in time. It measures the relationship among assets, liabilities and equity. It also calculates your company’s debt load and overall financial health.

Kevin’s Trucking Company: Balance Sheet, January 1, 2020

The income statement shows how money flows through the company over a period of time. It measures sales against costs. Unlike the balance sheet, the income statement covers a certain time period (usually a month, a quarter, or a year).

Kevin’s Trucking Company: Income Statement 2019

A cash flow statement shows how much actual cash the company has on hand. It also projects future cash flow. This is an important statement for small businesses and entrepreneurs because it shows a company’s day-to-day financial health. While the income statement shows how your company performed in the past, the cash flow statement shows how cash is being generated or used. A company can show a profit on its income statement, yet still go out of business because of a temporary negative cash flow.

Kevin’s Trucking Company: Cash Flow Statement, January 2020

Using Accounting Software

Using software for accounting can help you manage the different components you need to determine the financial well-being of your company. For smaller or growing companies, it may allow you to operate without needing an in-house accounting department or accounting personnel.

Reach out to RTS Financial today for suggestions on reputable accounting software for your needs!