10 Accounting Terms Cannabis Business Owners Need to Know

It is your friendly cannabis tax experts again, Redbud Advisors, bringing you 10 accounting terms cannabis business owners need to know. Just because you are not an accountant doesn’t excuse you from taking an active role in your finances, even if you pay an accountant.

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Redbud Advisors is a team of cannabis tax experts who provide a full-service experience for cannabis businesses. What exactly does that mean? This is our fancy way of telling you we can help you in all stages of your business.



We do all of the above but our favorite aspect of being a full-service cannabis accounting firm is being able to educate our clients and the public on all things involving taxes. We like to present information in an easy-to-understand, without all the jargon, format. The more you understand as the business owner the easier it makes our job as your accountant.


Having a well-established relationship with an accountant who specializes in cannabis tax is great. But knowing jargon or terms and how they apply to your business is a valuable resource for three reasons.


  1. The ability to make educated business decisions based on financial information.

  2. Proper management of your business finances by making proper allocations.

  3. Communication with your accountant will evolve.


As cannabis tax experts we understand the impending doom of the IRS lurking in the background waiting to strike with an audit. This probably makes you feel like you don’t have much room for error. The unfortunate reality is it’s true. Internal Revenue Code 280E makes it incredibly difficult to make the smallest mistake.


However, learning more about accounting terms and how they apply to your business will ensure you are in control of your finances and this is the best avenue to take against unsightly IRS correspondence or visits.

Side note: If you're being audited it is important to have representation in the form of a cannabis tax expert.

The 10 accounting terms Redbud Advisors want all our cannabis business owners to know are important to all aspects of their business. The knowledge of these terms will help ensure your taxes are complete and accurate. Setting up a process and procedure for these areas of accounting daily, weekly, and monthly will set you and your accountant up for success during tax filing season.

Accounts Payable

This is all the expenses that a business has incurred but not yet paid. This is a liability on the balance sheet because it is debt owed by the company.


An example of accounts payable is rent and utilities. But this could be any expense unpaid by the business in any capacity.

Accounts Receivable

This is all revenue (or sales) that a company has provided but has not yet been paid for. This is on the balance sheet as an asset because it (hopefully) will convert to cash in the short term assuming your customers all pay you in full.

An example of an accounts receivable is anything you would provide an invoice for.

Assets

This is anything the company owns that has a monetary value.


An example of assets is equipment, furniture, fixtures, buildings, and land. Intangible assets are included as well.

Equity

This is the value left over after liabilities have been removed. Assets = liabilities + equity.


Equity is the portion of the company that is owned by the investors and owners. Or more simply put the owner's stake in the business.


Hint: you always want your business to have as much equity as possible.

Inventory

This one seems obvious but the term is used to classify assets a company has either purchased to resell or the value of assets that will be manufactured to be sold.


More simply put, inventory is the goods a business owns. As the goods or inventory is sold to customers the inventory count will lower.

Cost of Goods Sold (COGS)

This is the expense that directly relates to the creation of a product or service.

An example in a cannabis cultivation business is seeds, clones, nutrients, soil, trays, water, and direct labor.


In the cannabis industry business owners do not have the same opportunity to account for COGS the same as a business that is not using a schedule I or schedule II substance.


Hopefully, President Biden’s Marijuana Reform asking the Secretary of Health and Human Services and the Attorney General to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law will bring future change.

Depreciation

This term accounts for the loss of value in an asset over time.


An asset usually must have substantial value to warrant depreciating it vs. expensing it.


Common things to depreciate include equipment, vehicles, buildings, furniture, and fixtures. These are considered a ‘non-cash expense’ because it doesn’t have an impact on the company’s cash position.

Gross Profit

This indicates the company's profitability in dollars without taking overhead expenses into account.


Gross profit is calculated by subtracting COGS from Revenue. This number is crucial in cannabis because you’re most likely taxed on the gross profit number.

Cash Flow

This describes the inflow and outflow of cash in a business.

It’s found by taking the beginning balance of cash and subtracting the ending cash balance over a period of time. A positive number means that more cash flowed into the business than out.


Knowing this information will assist in making informed business decisions.

Allocation

This is the procedure of assigning funds to various accounts of periods, or by allocating certain costs into other categories (like COGS).

For example, an indirect cost like water may be allocated into COGS because you use it to grow flower, but it also may need to be allocated into utilities because it’s for the restroom.


The proper allocation of funds is imperative for your cannabis business. This will ensure you are maximizing your COGS and able to increase your profit.


Conclusion

Do you feel like an accountant now? Just kidding, we know that it takes years of continued education in a degree program, to be licensed additional hours of study are needed, and a rigorous exam.


The real question is do you have a better understanding of these terms and how they apply to your cannabis business? We hope so. If you have any questions do not hesitate to reach out to the Redbud Advisors team, we are happy to help.


Even though these 10 tax terms do not scratch the surface of accounting, knowing them and how they apply to your cannabis business is helpful. This information gives business owners the ability to make more knowledgeable business decisions hopefully leading to more profits. And it doesn’t hurt that your new-found knowledge might make your accountant's job a little easier.


Redbud Advisors is here to help our clients and cannabis business owners like you by providing tools to be successful. The federally illegal nature and growth within the cannabis industry make it hard to navigate without expert help. Redbud Advisors is a full-service cannabis accounting firm looking to assist more businesses with all their cannabis tax needs. Give us a call at 866-830-5144.



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