In Other Words: An Accounting Glossary
To successfully manage a company’s bookkeeping or accounting, knowledge of terminology is a must. This is a list of common bookkeeping terms. Though it’s by no means a definitive list, it covers many of the basics you’ll need to start (or refresh).
Accounts Payable – Represent unpaid supplier invoices and other bills that are owed by the business to others. Accounts payable appears on the balance sheet as a liability.
Accounts Receivable – Unpaid sales invoices and other money owed to the business from customers. Accounts receivable appears on the balance sheet as an asset.
Assets – Items of value owned by a business. They can be found on the company’s balance sheet and might include cash, accounts receivable, real estate, furniture and equipment, and vehicles.
Bad Debt – These are receivables that have been written off because the payments are unlikely ever to be paid. Sales invoices should be written off only after the payments are past due and the company has made an effort to collect the funds. Bad debt is shown as an expense.
Balance Sheet – A balance sheet shows how many assets the business owns, what the business owes and how much equity the owners have in the business as of a particular date in time.
Cash Flow – The movement of cash through the business. The Statement of Cash Flows details how cash flowed into the business and how cash was spent.
Cost of Goods Sold (COGS) – May also be referred to as Cost of Sales. COGS is the calculation of all costs involved in selling a product to customers.
Credit – The right-hand side in the double-entry method of bookkeeping. A credit either increases a liability or equity account, or decreases an asset or expense account.
Debit – The left-hand side in the double-entry method of bookkeeping. A debit either increases an asset or expense account, or decreases a liability or equity account.
Depreciation – Accounting for an asset’s decrease in worth over time due to wear and tear and daily use. Depreciation is an expense that can be used to reduce taxable income.
Double-entry – The method of bookkeeping in which all financial transactions are entered twice – once as a debit and once as a credit. All the debits and credits must be equal. If they are not, the books are out of balance and the error will need to be found.
Equity – Equity appears on the balance sheet, and it shows how much the business owner has invested into the business from personal funds (capital), and how much he or she has withdrawn from the business for personal use.
Expenses – All money spent to operate the company that is not directly related to the sale of goods or services.
General Ledger – Where all the company’s accounts are summarized.
Income Statement or Profit & Loss (P&L) – The financial statement that shows a summary of the company’s financial activity over a period of time, such as a month, quarter or year. It starts with revenue earned, subtracts cost of goods sold and expenses, and ends with net profit or loss.
Inventory – A list of items that the business buys and sells.
Liability – Liabilities are found on the balance sheet and are made up of debts that the company owes to other businesses. This includes accounts payable, credit card balances and loans.
Petty Cash – Cash kept in a safe place for the purpose of making small purchases. All money paid out is typically recorded in a petty cash book.
Revenue – All money brought into a company from selling its goods or services.
Trial Balance – A report used as a test to ensure the books are in balance before pulling together information for the financial statements and closing the books for the year.