Understanding the outsourced accounting services helps business managers who are new to the trade to focus on their business’ growth. It allows managers to explore their limitations and further develop their sense of responsibility. Since outsourcing accounting services is also a part of the business’ growth, managers have several financial jargon they need to understand to be able to run their businesses successfully.
Moreover, finance is a crucial part of the business that helps in making decisions. Understanding what the financial statements say is helpful especially when you are to expand your business. This also helps in determining when and where to spend money for several costs.
And as a business manager who outsources accounting services, here are some of the financial jargons that will help you understand what financial statements tell you.
Assets
These are resources in which the business owns with the expectation to be beneficial now and in the future. Cash, accounts receivable, inventory, and equipment are all considered as assets. However, asset is of two types in the accounting industry—current and non-current (fixed) assets.
Fixed or non-current assets include resources that will benefit the business for more than a year. For instance, equipment used in production, truck trailers for delivery and warehouses for storage can still be useful to the business for a couple of years. They are considered as the business’ long term-investments.
Current assets, on the other hand, are investments that are expected to be converted into cash within the year. They include cash, accounts receivable, inventory, cash equivalents, and other liquid assets that can be converted readily into cash.
Liabilities
These are the business’ legal debt that rises through the business process. Liabilities include loans, mortgages, accounts payable, and accrued expenses. Like assets, liabilities are further classified into two—current and long-term liabilities.
Current liabilities include debt made to creditors and suppliers for production and are due within a year. While long-term liabilities are business’ debts that become due for more than a year. These include debentures and loans. Separating current and long-term liabilities in the balance sheet help in determining the current liquidity position of the business.
Equity
In simple terms, equity is the value of assets minus the value of the liabilities.
Equity = Assets – Liabilities
Equity is a good determinant of business decisions for it can help business managers corroborate if their business is being stable and is capable to do expansions or acquire new assets.
Revenue
It is the amount of money brought by the business activities. It is the goal of business. Revenue, however, can be subdivided according to the activities that generate it. With this, managers would be able to determine which business activity brought better results and retain, improve, or streamline these activities to maximize company potential.
Expense
This consists of the cost business managers make in order to gain revenue. Although considered as cash out, expenses are vital in making businesses operational. Expenses include payment to suppliers, factory and warehouse leases, and employee wages.
Although outsourcing accounting services means that there would be accountants to do financial reports, business managers are still ultimately responsible for the things that directly affect their business even if they don’t understand them. Studying these basic financial terms will not only help new managers understand and keep track of flowing money, they will also be able to detect if the relationship with their outsourced partner is healthy.
