Bookkeeping Terms for Beginners

Accounting Word Cloud

Bookkeeping Terms – A Beginner’s Guide

Bookkeeping terms can be confusing, every definition seems to need another definition to understand the first one! In this article, you’ll find the simplest definition we could come up with. Where additional information is available, we’ve either linked out to another site with more information or linked to another article of our own. 

While we’ve organized this list alphabetically, we’ve also tried to reference related terms when it seems appropriate.  

If you still need help, you can always call us at 800-201-CA$H (2274) we’re happy to talk to you.

 

A – Bookkeeping Terms Beginning With A

Accountant

An accountant is a professional who performs accounting functions such as account analysis, auditing, or financial statement analysis.

Accounts Payable

This is the money that you owe to your suppliers. It is important to keep track of this to ensure that you pay your bills on time and maintain a healthy relationship with your vendors.

Accounts Receivable

Accounts Receivable is all of the money your customers owe you. It’s important to keep track of this to ensure your customers pay you on time.

Accounts Receivable Turnover

Accounts receivable turnover is the number of times a business collects its average accounts receivable per year. Accounts receivable turnover measures how efficiently a company collects on the credit that they provide its customers, i.e., how fast a company collects its accounts receivable.

Accrual Accounting

With the accrual accounting method, transactions are recorded when they occur, as opposed to when the payment is exchanged.

Allowance for Doubtful Accounts

Also known as a bad debt reserve, allowance for doubtful accounts is a company’s estimate of the accounts receivable balances that customers will not pay, i.e., their anticipated bad debt.

Assets = Liabilities + Equity

Assets

Assets are the things that your business owns. This could include cash, inventory, equipment, or property.

Average Accounts Receivable

 Average accounts receivable provides a snapshot of how much each customer owes on average. It is calculated by dividing the total accounts receivable by the number of customers. Average accounts receivable can be calculated monthly, quarterly, or annually. 

B – Bookkeeping Terms Beginning With B

Bad Debt

Pronounced det – the b is silent. Bad debt is any receivable or amount of money owed to a business that cannot or will not be paid.  

Balance Sheet

A balance sheet is a financial statement that shows your assets, liabilities, and equity. It is important to keep track of this to see your business’s overall financial health.

Bank Reconciliation

A bank reconciliation is the process of matching the transactions in your accounting records with the transactions on your bank statement. Regular bank reconciliations are important for businesses to do to locate bank errors (which happen more often than you might think) and ensure that their accounting records are accurate.

Bank Statement

A bank statement is a document that shows all transactions that have occurred in your business’s bank checking accounts over 30 days—ideally, a calendar month, but not always. You’ll need your bank statement to complete your bank reconciliation.

Bookkeeper

A bookkeeper is responsible for keeping financial records up to date and ensuring that all transactions are properly documented. This may involve maintaining ledgers, preparing financial statements, and Reconciling bank accounts.

C – Terms Beginning With C

Cash Accounting

Using the cash accounting method, transactions are recorded only when there is an exchange of payment as opposed to when the transaction occurred.

Cash Flow Statement

The cash flow statement shows how much cash is coming in and going out of your business daily. Small and cash-strapped companies need to monitor cash flow closely to prevent overspending. The cash flow statement is designed for this purpose.

Cash Receipts

A cash receipt is an accounting entry that documents the collection of a payment from a customer. Cash receipts increase (debits) the company’s cash balance on its balance sheet and decrease (credits), usually accounts receivable.  

Chart of Accounts

Chart of Accounts

A chart of accounts is a list of financial accounts that businesses use to track their assets, liabilities, and income. It is usually sorted in order of account type, with asset accounts listed first, followed by liability accounts and then equity accounts. The chart of accounts is a fundamental accounting tool used to record transactions and prepare financial statements. In many accounting systems, each account in the chart has a unique number, which is used to identify the account in journal entries. Not all systems require account numbers. QuickBooks for example, does not require them. The chart of accounts is an important part of the accounting system, as it provides a structure for recording transactions and tracking the financial health of a business.

Cost of goods sold (COGS)

The cost of goods sold is the amount of money it costs your business to produce its product or service, including raw materials, labor, and overhead expenses.

CPA – (Certified Public Accountant)

CPAs are accountants who have passed a certified public accounting exam and met other requirements set forth by their state’s board of accountancy.  CPAs are licensed by the state in which they practice and are subject to that state’s rules and regulations. CPAs provide a variety of services, including auditing, tax preparation, and financial consulting.

Credit

A credit is an accounting entry that decreases an asset or expense account or increases a liability or equity account.

Creditor

A person or entity that is owed money.  With any luck, this is you.

Credit Sales

Sales not paid at the time of purchase. In other words, the seller offers the buyer credit terms to pay later. In business, typical credit terms are Net 10, Net 30, etc.

D – Bookkeeping Terms Beginning With D

Debit

A debit is an accounting entry that increases an asset or expense account or decreases a liability or equity account.

Debtor

A person or organization that owes money that they cannot or will not pay. (Again silent b)

Depreciation

Depreciation is an accounting method used to allocate the cost of a long-term asset over its useful life. Businesses depreciate assets for both tax and financial reporting purposes. For tax purposes, businesses can deduct the depreciation expense from their income, which reduces their taxable income and, as a result, their taxes. For financial reporting, businesses include depreciation expense in their operating expenses, which is deducted from their revenue to calculate their net income. Depreciation is not an actual cash outlay; rather, it is a non-cash expense that reduces a business’s reported profits.

DSO

DSO stands for Days Sales Outstanding – it measures the average number of days a business takes to collect it’s accounts receivable. It can be measured monthly, quarterly or annually. To calculate DSO, divide the total accounts receivable for the time period you are measuring by the total credit sales then multiply by the number of days in the period.

Double-Entry Accounting

Double-entry accounting requires two entries, a debit (entered in the left column) and a credit (entered in the right column) for every transaction. For your “books” to be balanced, the debits must equal the credits.

E – Terms Beginning With E

Equity

Equity is the money that you have invested in your business. It is important to keep track of this to know how much your business is worth.

F – Bookkeeping Terms Beginning With F

Financial Statement

A financial statement is a generic term for the three primary financial reports you’ll use to evaluate the health of your business. These are the balance sheet, the income statement, or profit and loss (P & L), and the cash flow statement.

G – Terms Beginning With G

GAAP (Generally Accepted Accounting Principles)

“GAAP or Generally accepted accounting principles refers to a set of accounting rules, standards, and procedures issued by the (FASB) Financial Accounting Standards Board. Public companies in the U.S. are required to follow GAAP when their financial statements are compiled.”

General Ledger

The general ledger records all the financial transactions in your business. The general ledger is your master document into which all of your journal entries go.

Gross and Net in Accounting –

You’ll notice the terms gross and net used frequently in this and any other glossary of accounting terms, as in gross profit and net profit or gross margin and net margin. So let’s define these two terms before we start. – In accounting the term Gross refers to the amount before deductions – and Net refers to the amount after deductions. So gross profit is the money we make before we deduct expenses and net profit is the amount we make after we deduct expenses

Gross Margin

Gross margin is the difference between the revenue and the cost of goods sold. Gross margin is the money your business has left after paying for its inventory.

I – Bookkeeping Terms Beginning With I

Inventory

Inventory is the unsold assets a company has purchased and is available to sell to its customers. 

Invoice

An invoice is essentially a bill – it lists the services provided or product sold with the amounts due and the terms of the sale.

IPO (Initial Public Offering)

An initial public offering (IPO) refers to the process of offering shares of a privately held company to the public for the first time. IPOs are often undertaken by businesses that are looking to raise capital in order to expand their operations or fund other initiatives.

J – Terms Beginning With J

Journal (in accounting)

A book for recording accounting transactions in the order in which they occur

Journal Entry

A journal entry is the information pertaining to a single transaction, including the date, and the amount. Every journal entry has both a debit and a credit. The purpose of a journal entry is to record every financial transaction in a business. “Journal entries are the foundation of effective record-keeping. They are sorted into various charts of accounts and, once verified for accuracy, posted to the general ledger, which then feeds information to the financial reports that business decision-makers depend on.” (quoted from Oracle)

L – Bookkeeping Terms Beginning With L

Liabilities

Liabilities are the debts that your business owes. This could include your accounts payable, loans, or credit cards.

P – Terms Beginning With P

Payroll

Payroll is the process of paying your employees for their work, including calculating wages, withholding taxes and other deductions, and issuing paychecks. Payroll can be done in-house or outsourced to a payroll service.

Profit

Profit is the money your business has left after all the expenses are paid. The purpose of business is to make a profit.  There are three types of profit in accounting.

Gross Profit

Gross profit is the difference between the revenue and the cost of goods sold. This is the money that your business has left after it pays for its inventory.

Net Profit

Net profit is the difference between the gross profit and all the other expenses. This is the money that your business has left after it pays for everything else.

Operating Profit

Operating profit is the money your business has left after it pays for its operating expenses. This includes things like rent, salaries, and utilities.

Public Company

A public company is a corporation whose shares of stock can be bought and sold by members of the general public. A publicly traded company must register with the U.S. Securities and Exchange Commission (SEC) and issue shares through an initial public offering (IPO).

R – Bookkeeping Terms Beginning With R

ROI (Return on Investment)

ROI is a calculation used in business to evaluate the success of an investment. The goal of ROI is to measure how much money was earned (or saved) as a result of investing in a particular venture. There are many different ways to calculate ROI, but the basic concept is always the same: To figure out what percentage of total investments has been returned as profit?

S – Terms Beginning With S

Single-Entry Accounting – Definition

Under this system, all revenues and expenses are recorded when they occur as a single entry. This is often the preferred method for small businesses because it is more straightforward and easier to keep track of finances.

T – Terms Beginning With T

Trial Balance

A trial balance is a list of all the accounts in your business with their corresponding debits and credits. The debits and credits should be equal. Accounts and bookkeepers used the trial balance report with manual accounting systems to locate errors; with the advent of accounting software, it is not as necessary as it once was.

Terms of a Sale

The terms of sale state what you and your supplier agree upon beforehand. Typical terms are net 30, net 10 or net end of month, meaning the invoice comes due in 30 days, 10 days or at the end of the month.

 

 

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