A Guide to Essential Accounting Terms Every Business Leader Should Know

A Guide to Essential Accounting Terms Every Business Leader Should Know 

A Guide to Essential Accounting Terms Every Business Leader Should Know 

Business leaders should become familiar with a core set of accounting principles even if they do not intend to get involved in balancing the books of their company. In order to responsibly drive and nurture growth producing strategies, leaders need to understand the nitty gritty of how profits and debts are calculated. Here is an introductory guide to several kinds accounting terms all senior businesspeople should know. 


Inventory is the value of the tools, products and physical assets that a company has in storage. In retail or manufacturing, the more products that are sold, the less inventory a company will have. Inventories should typically be kept as small as possible in order to minimize storage and logistics costs. 

Accounts Payable 

Accounts payable are all of the different expenses that a business has incurred but not yet paid. Each payable account is considered to be an independent liability. Short term debts to suppliers, producers or staff can be considered as accounts payable. The sum of all outstanding accounts is typically recorded as the accounts payable total for that month. If a company’s accounts payable total keeps increasing month after month, this indicates that there is a serious cashflow problem. The company may be purchasing more products than it sells or pricing services wrongly. Individual departments may record their own accounts payable numbers even if they are using funds to procure resources that the company already technically owns. 

Accounts Receivable 

On the other end of the spectrum, the accounts receivable figure calculated at the end of each financial period records the number of payments that are owed to a company. This can include money owed to a company for a whole host of reasons. Many companies that offer services or large-scale product deliveries are paid using invoices. These invoices are typically paid off after a period of time instead of immediately. All unpaid invoices are counted as being accounts receivable. Although the accounts receivable figure does not indicate immediate cashflow, it does indicate potentially incoming future money. It can be used to generate money using a process known as ‘invoicefinancing’. 

Retained Earnings 

Retained earnings are the earnings that will remain after accounts payable of all kinds have been paid. These earnings count as profit: they can be reinvested into the company in order to create growth. Ultimately, a company wants to use retained earnings to create a situation in which more retained earnings will be available in the future. This kind of exponential growth is ideal. A statement of retained earnings is a completely essential core accounting document. It lets business leaders know how much money they can budget into growth efforts and gives some information on what the future might hold. 

Balance Sheet

A balance sheet is one of the core corporate accounting documents. It lists all of a company’s assets and how they are being paid for. It helps company accountants to work out how much their business actually owns. Assets have to be balanced on the sheet with shareholder equity and liabilities in order to get an accurate picture of assets that bring value to a company. Balance sheets are usually divided into two sections side by side. On one side, all of the assets are listed. On the other side, equities and liabilities are listed. 


If you take assets and subtract liabilities, then you are left with equity: the percentage of resources that the owners and shareholders have actual ownership of. The fewer liabilities a company has to its name, the more equity they are able to lay claim to. The more equity a company has, the more control it has over its own finances. 


Liabilities are debts owed by a company or any party which it deals with financially. A payroll document would influence the liability calculations that a company has to make. The less staff a company hires, the smaller its payroll liability figures will be. 

Gross Income 

Gross income indicates the total amount of profit that a company has made before any kind of calculation regarding the expenses and reinvestments that a company needs to makehas been made. Gross income can indicate a healthy business, but only if it is matched by healthy outgoings that do not outstrip or diminish it greatly. 

Net Income

Net income is the amount earned in actual profits. All taxes, reinvestments and liabilities need to be subtracted from an income figure in order toproduce a net income figure. 

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A Guide to Essential Accounting Terms Every Business Leader Should Know 

A Guide to Essential Accounting Terms Every Business Leader Should Know
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