The aim of every business is to make profit, Accounting is therefore the soul of every business.Though it can be very difficult to handle accounting in your business, it is however important to tidy your business accounts regularly and understand the basic terms and elements of accounting within your business even if it is being handled by an accountant outside your business.

Here are 7 accounting terms you should familiarize yourself with in business

1) Fixed costs are expenses that have to be paid by a company independent of any business activity,this cost does not vary in the short term irrespective of changes in production ,sales or other measures of activity.It is a basic operating expense of a business that cannot be avoided E.g rent,lease,depreciation,insurance. Some businesses are known to have very high fixed costs but such companies are advised to keep variable costs low.

2)Variable cost are costs that vary in relation to changes in the volume of activity E.g raw materials,sales commission,Labour. These costs vary with production output, they rise as production increases and fall as production decreases.

3) Overhead cost / operating cost – These are expenses associated with running a business that can not be linked to creating or producing a product or service,they are all of the cost on a company’s income statement except those directly related to manufacturing or selling the product.These are expenses the company incurs to stay in business. E.g legal fees,utility costs,repair and maintenance costs,insurance,sales and marketing costs.

4)Total cost is the cost incurred in producing particular goods or services. it is a summation of the total variable cost and the total fixed cost. In pricing a product or service it is important to calculate the total cost of production,to obtain the unit cost of producing an item ,the total cost is divided by the number of items produced. Knowing the total cost lets you know if you are selling at a profit ,breaking even or making a loss.

5) Financial statement; a company’s financial statements are records showing the financial activities within the business, the three (3) major financial statements in business include balance sheet,profit and loss (income statement),cash flow

6) Balance sheet is a financial statement that summarizes a company’s assets,liabilities and shareholders’ equity at a specific point in time,it lays out the ending balance in a company’s assets,liability and equity accounts as of the date stated on the report.

7) Cash flow describes how cash flows in and out of a business,it is the net amount of cash and its equivalents flowing in and out of a business.Positive cash flow indicates that a company’s liquid assets are increasing and enables it to settle debts,reinvest in the business,return money to shareholders,pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company’s liquid assets are decreasing. Cash flow is used to assess how liquid a company is that is, how much cash is or can be made available within a business per time.

8) Profit and loss statement (income statement) describes the revenue,cost and expense incurred in a business over a specific period of time.It shows if a company is making profit,breaking even or operating at a loss .

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