Financial Statements Key Terms

Understanding the bottom line when investigating financial statements

Financial statements help business owners understand where their businesses stand. For your business, you can either do this yourself or hire an accountant to do it for you. Either way, if your business is a corporation, a limited liability company or publicly traded, having good financial statements is an absolute necessity.

If you decide to do your own financial statements there are a number of software programs that you can use to do so. If you hire an accountant to do it for you, becoming savvy about all the different terms will help you understand how well your business is doing.

 

Balance sheet

A balance sheet is a key part of a financial statement. In financial accounting terms, this is a statement or summary of a business' assets, liabilities and ownership equity. Usually it is a snapshot taken on a specific date and it gives a business owner a good idea of where the business stands financially.
Try: BusinessTown.com offers an excellent definition of balance sheets, along with examples of the items typically found on a balance sheet.

FASB

FASB stands for the Financial Accounting Standards Board. The FASB is a private, not-for-profit organization that develops generally accepted accounting principles (GAAP)in the United States. Financial statements follow FASB guidelines.
Try: You can find out all about the FASB at the organization's website.

Accounts receivable

Accounts receivable (sometimes written A/R) consists of the total amount that customers owe for goods and services. Financial statements should always include an accounts receivable section.
Try: For an in-depth discussion of the accounts receivable topic, go to the Business Owner's Toolkit website.

Revenue recognition

Revenue recognition is a key element of accounting and determines the accounting period in which expenses and revenues are recorded. Financial statements include the principle of revenue recognition.
Try: AllBusiness.com explains revenue recognition and some related terms.

Inventory turnover

Inventory turnover, usually expressed as an equation, is the sales total divided by the inventory, although sometimes it's expressed as the cost of goods sold divided by the average inventory. Financial statements should factor in inventory turnover, which can help to determine the profitability of an enterprise.
Try: Investopedia offers more details about inventory turnover.

Leverage

Leverage is basically how much borrowed money a business is using, as a percentage of its total finances. Financial statements help a business owner determine how much leverage it has.
Try: InvestorWords defines leverage in simple terms.

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