Welcome to part two of your own, personal guide to the often confusing jargon used by accountants. Earlier we discussed a few of those terms in part one, and now we’ll keep the conversation going with a few more to add to the list.
When a percentage or part of a company is owned by an entity, it’s known as an equity stake. For example, if in a sole proprietorship, the business owner would hold 100% equity stake – though that share could also be called “owner’s equity stake” as the percentage is owned by the CEO.
Usually seen as the first marker of how profitable a business really is, gross profit is the amount of sales less the costs of the items sold. Typically only expenses relating strictly to producing income are considered such as materials, cost of operating equipment, and labor.
Gross Profit Margin
One way of displaying gross profit is by finding the gross profit margin – essentially the profit in percentage form. The equation is simple: (gross profit/net sales) X 100. And the end result brings you your gross profit margin percentage.
Gross sales is the bare bones figure of how many sales you’re making; your income, essentially, excluding any returns, discounts, or deductions that may occur in the process. It’s a figure used to show how well sales efforts are working at face-level value.
If you want a detailed snapshot of your financials as a whole, look at your income statement. Also known as the “profit and loss statement”, “statement of operations”, or “earnings statement”, this report details the total revenue, expenses, and profit within your business and can be viewed for periods such as weekly, monthly, quarterly or annually.
A liability is anything the business owes, from mortgages, loans, and rents, to payments for services not yet delivered, interest, or taxes. If the debt is owed within a year, it’s known as a “current liability”, whereas anything over a longer period is a “long-term liability”.
Net income is the final number of money earned once all expenses are accounted for; like gross profit, but differing in that even non-operating related expenses such as depreciation, taxes, and interest are considered.
Notes Payable and Receivable
A grandiose way of saying “IOU”, notes payable are debts to a bank or business and are entered immediately in as a liability on the balance sheet to be paid off when due. In the same way, notes receivable are debts you can expect to be paid.
They say knowledge is power – or in this case, profit – so empower your business and your monetary standing by learning to recognize just what your financial reports mean, and better yet, how to improve them.
In the meantime, don’t be afraid to save or bookmark any of these posts for future reference, and stay tuned for part three’s release!