A Few Accounting Terms Definitions
Updated: Feb 26, 2019
This post is in fact a collections of accounting terms we are defining in order to help our readers. This does not consist of an article per say.
They are listed alphabetically.
COST OF GOODS SOLD:
Your COGS is the cost you incur to sell your product or service. It includes the direct costs required to produce your product or service. These direct costs, direct expenses only take place if you sale or produce something. An example of COGS includes labor, subcontractors, raw material, freight costs, and more. If your production is stopped, you don't have to buy raw material (direct cost), but you still need to pay the rent and electricity (indirect costs).
All of these costs are added to your profit and loss statement. They are registered as expenses and work against the sales you’ve generated.
Cash flow is the measure of how much cash is moving in or out of your business in a given period of time. For example, during one month, you might pay $5,000 in bills and receive $8,000 in cash from your customers. In this case, your total cash flow would be $3,000. Calculations are as simple as:
Cash Received – Cash Paid Out = Cash Flow
Cash flow refers to the revenues a business generates (and collects) in comparison to expenses it pays out over a fixed period of time.
Broadly speaking, businesses bring in money through sales, financing, and returns on investments, and they spend money on supplies and services, as well as utilities, taxes, and other bills.
Being cash flow positive means that you’re bringing in more money than you are spending, and your business is in good shape. Being cash flow negative means—you guessed it—that you are spending more than you have coming in, and you’re headed for trouble.
FREE CASH FLOW:
Free cash flow refers to the cash a company has on hand after paying its expenses.
FCF = Cash from Operations - Capital Expenditures
A company's gross income is the revenue from all sources minus the costs of goods sold (COGS).
Gross Income can also be known as Gross Profit.
Net income is the income your business earns after deducting all costs of goods sold COGS, all expenses, and taxes.
Operating expenses are any expenses that you incur in order to operate your business. Even if you make no sale at all, you still incur these expenses. These include capital expenditure, utilities, legal fees, rent, and more.