I can’t think of anyone who started their own business because they were excited about the bookkeeping. In fact, very few small business owners have any background in accounting–yet finances are a crucial part of staying afloat!
Hopefully, you’ve got smart bookkeeping software to do the heavy-lifting for you. You shouldn’t have to count beans, but knowing some accounting terms will help you understand your financial reports.
We’ve created a glossary of all the terms you’ll need to know to stay on top of your books–from A to Z:
Account: Aseparate record for each type of asset, liability, equity, revenue, and expense used to show the beginning balance and to record the increases and decreases for a period and the resulting ending balance at the end of a period.
Accounts Payable (Liability): Creditor’s claims against the business’s property arising from the business’s purchase of goods and/or services on account.
Accounting Period: The time period for which financial information is being tracked. Most businesses track their financial results on a monthly basis, so each accounting period equals one month. Some businesses choose to do financial reports on a quarterly or annual basis. Businesses that track their financial activities monthly usually also create quarterly and annual reports.
Accounts Receivable (Asset): Business claims against the property of a customer arising from the sale of goods and/or services on account.
Accrual Method of Accounting: Method of accounting that records income in the period earned and records expenses and capital expenditures such as buildings, land, equipment, and vehicles in the period incurred.
Advertising (Expense): Promotional expenditures, such as newspapers, handbills, television, radio and mail.
Assets: The properties used in the operation or investment activities of a business, or in other words, anything that company has that is worth anything.
Bank Reconciliation: The process of bringing the checkbook and bank statement balances into agreement.
Balance Sheet Account: A type of account that is included in the Balance Sheet; namely the Assets, Liabilities, and permanent Equity Accounts.
Bank Statement: A copy of the bank’s record of the business’s account showing the balance of the account at the beginning of the month, the deposits and withdrawals (mostly checks) made during the month, service charges, and the balances at the end of the month.
Buildings (Asset): Expenditures for structures erected on land and used for the conduct of business.
Building Rental (Expense): Expenditures paid to an owner of property (building) for use of the property. A rental agreement called a lease contains the terms.
Cash (Asset): Monetary items that are available to meet current obligations of the business. It includes bank deposits, currency & coins, checks, money orders, and traveler’s checks.
Cash Method of Accounting: Method of accounting that recognizes revenues (earnings) in the period the cash is received and expenses in the period when the cash payments are made.
Capital Statement: The financial report that summarizes all the changes in owner’s equity (capital) that occurred during a specific period.
Chart Of Accounts: A coded listing of all the accounts in the general ledger.
Check Book: Formal record of all checks written, deposits, bank charges, and miscellaneous charges and credits.
Check: A written order directing a bank to pay cash from the account of the writer (drawer) of the check.
Closing the Books: Process of transferring the balances from the temporary income statement accounts (revenues and expenses) to the permanent balance sheet equity account(s).
Contra Account: An account which offsets and reduces or offsets the balance of another account.
Costs of Goods Sold: All money spent to purchase or make the products or services a company plans to sell to its customers.
Credit: An entry in the financial books of a firm that increases a liability, owner’s equity (capital) or revenue, or an entry that decreases an asset, draw, or an expense.
Current Asset: Cash and other assets normally expected to be converted to cash or used up usually within a year.
Current Liability: Amounts owed (liabilities) that need to be paid or settled usually within a year.
Debit: An entry in the financial books of a firm that increases an asset, draw or an expense or an entry that decreases a liability, owner’s equity (capital) or income.
Depreciation: An accounting method used to track the aging and use of assets. For example, if you own a car, you know that each year you use the car its value is reduced (unless you own one of those classic cars that goes up in value). Every major asset a business owns ages and eventually needs replacement, including buildings, factories, equipment, and other key assets.
Double Entry: Type of accounting/bookkeeping system that requires every transaction to be recorded in at least two places (accounts) using a debit and a credit. Every transaction is recorded in a “formal” journal as a debit entry in one account, and as a credit entry in another account. Periodically, usually monthly, the summarized balances from the journals are posted (transferred) to a formal business record called the general ledger.
Equipment (Asset): Expenditures for physical goods used in a business, such as machinery or furniture. Equipment is used in a business during the production of income.
Equity: All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown in shares of stock.
Expense, Cost: Decrease in owner’s equity (capital) resulting from the cost of goods, fixed assets, and services and supplies consumed in the operations of a business, or, the costs of doing business. The stuff we used and had to pay for or charge to run our business.
Financial Statements: Accounting reports prepared periodically to inform the owner, creditors, and other interested parties as to the financial condition and operating results of the business. The four most important financial statements are: balance sheet, income statement, capital statement, and the Statement of Changes in Financial Position.
General Ledger: A book containing the accounts and balances for all of a business’s assets, liabilities, equity, revenue, and expense accounts.
Income Statement: The financial statement that summarizes revenues and expenses for a specific period of time, usually a month or a year. This statement is also called a Profit and Loss Statement or an Operating Statement.
Income Statement Account: A type of account that is included in the Income Statement; namely the Revenue and Expense Accounts.
Interest: The money a company needs to pay if it borrows money from a bank or other company. For example, when you buy a car using a car loan, you must pay not only the amount you borrowed but also interest, based on a percent of the amount you borrowed.
Interest Income (Income): Amounts earned from investments.
Inventory (Asset): Expenditures for items held for resale in the normal course of a business’s operations.
Invoice: A business document showing the names and addresses of the buyer and the seller; the date and terms of the sale; the description, quantity, unit price, and total price of goods purchased or sold and the method of delivery. Selling business refers to this document as a Sales Invoice. Buying business refers to this document as a Supplier Invoice.
Journals: A preliminary record where business transactions are first entered into the accounting system. The journal is commonly referred to as the book of original entry.
Land (Asset): Expenditures for parcels of the earth. It includes building sites, yards, and parking areas.
Liabilities: All the debts the company owes, such as bonds, loans, and unpaid bills.
Loss: Amount a business’s expenses exceed (are greater than) revenues. In other words, we earned less than we spent.
Maintenance & Repairs (Expense): Expenditures paid to repair and or maintain buildings and/or equipment.
Mortgage Payable (Liability): Notes payable which are secured by a lien on land, buildings, equipment, or other property of the borrower (your company).
Notes Payable (Liability): Formal written promises to pay definite sums of money owed at specified times.
Notes Receivable (Asset): Formal written promises given by customers or others to pay definite sums of money to the business at specified times.
Office Supplies (Asset): Expenditures for maintaining a supply of on hand supplies such as typewriter, copier, and computer paper, pens, pencils, and special forms.
Owner’s Drawing: Decrease in owner’s equity (capital) resulting from withdrawals made by the owner, or, the amounts the owner withdraws from his business for living and personal expenses.
Owner’s Equity, Owner’s Capital: The owner’s rights to the property (assets) of the business; also called proprietorship and net worth, or, what the business owes the owner after paying all of its liabilities.
Owner’s Investments: Increase in owner’s equity (capital) resulting from additional investments of cash and/or other property made by the owner, or, the additional amounts, either cash or other property, that the owner puts in his business.
Payroll: The way a company pays its employees. Managing payroll is a key function of the bookkeeper and involves reporting many aspects of payroll to the government, including taxes to be paid on behalf of the employee, unemployment taxes, and workman’s compensation.
Payroll Taxes (Expense): Expenditures for taxes based on wages paid to employees.
Permanent or Real Account: Another term used to refer to the balance sheet accounts.
Posting: Process of transferring balances from bookkeeping records called journals to a “final” bookkeeping record called the general ledger. See: small business bookkeeping
Profit: Amount a business’s revenues exceed (are greater than) expenses. In other words, the amounts we earned were greater than our expenses.
Property: Another term for assets.
Purchase Order: A document originated by the purchaser (buyer) requesting the supplier to ship goods or perform services
Receiving Report: A document originated by the buying business listing the quantities and condition of the goods and/or services received from a supplier.
Rental Income (Income): Amounts earned from renting properties.
Retained Earnings: All company profits that have been reinvested in the company rather than paid out to the company’s owners. Small businesses track money paid out to owners in a Drawing account, whereas incorporated businesses dole out money to owners by paying dividends.
Revenue: All money collected in the process of selling the company’s goods and services. Some companies also collect revenue through other means, such as selling assets the business no longer needs or earning interest by offering short-term loans to employees or other businesses.
Salaries (Expense): Expenditures for work performed by employees.
Sale of Products (Income): Amounts earned from the sale of merchandise.
Sale Of Services (Income): Amounts earned from performing services.
Sales Order: A documented originated by the seller listing the goods and/or services ordered by a customer and other information such as prices and delivery dates.
Single Entry: Type of “informal” accounting/bookkeeping system where a user of this system makes only one entry to enter a business financial transaction. It generally includes a daily summary of cash receipts and a monthly record of receipts and disbursements (worksheets).
Specialized Journals: Journals used to initially record special types of transactions such as sales, cash disbursements, and cash receipts in their own journal.
Statement of Changes in Financial Position: The financial statement that reports the sources and uses of cash or working capital for a specific period of time, normally a year.
Subsidiary Ledgers: A separate record set up to record the individual items relating to a single general ledger account (control account). Examples include an accounts receivable and accounts payable ledger.
Supplies (Expense): Expenditures for incidental materials needed in the conduct of business, such as office supplies.
T-Account: A skeleton outline of an account which provides the same basic data as a formal ledger account. Used as a teaching aid.
Temporary Account: Another term used to refer to the income statement accounts. The accounts are called temporary due to the fact that their balances are set to zero when the books are closed.
Transaction: Any event or condition that must be recorded in the books of a business because of its effect on the financial condition of the business, such as buying and selling. A business deal or agreement.
Trial Balance: A worksheet listing of all the accounts appearing in the general ledger with the dollar amount of the debit or credit balance of each. Used to make sure the books are “in balance” -total debits and credits are equal.
Utilities (Expense): Expenditures for basic services needed to function in the modern world, such as water, sewer, gas, electricity and telephone. Most businesses track the amount spent for each type of utility service.
Working Capital: Net difference between current assets and current liabilities. Working Capital = Current Assets – Current Liabilities
Worksheets: Forms which are used to summarize all the information necessary to complete the end-of-period financial reports and prepare other financial analysis.
Brad Hanks is in charge of Growth at ZipBooks.