15 Bookkeeping Terms You Need to Know to Run Your Business Smoothly

If you’ve been keeping up with our book-keeping articles, you’ll know that bookkeeping has its own set of jargon and terminology that can sometimes feel like a foreign language. For small business owners looking to monitor their finances better, this can be a challenge. 

To help you navigate this financial landscape more confidently, here are some important terms you should familiarize yourself with:

Assets 

Assets are items a business owns that can be used to generate income or provide some future benefit. They are an important part of any balance sheet in financial accounting and come in many forms. Assets can be physical (tangible) e.g. cash, inventory, or equipment, or non-physical (intangible), like patents or trademarks.

Liabilities 

Liabilities are your business’s obligations to external parties, such as loans, credit card balances, or unpaid bills. They represent what your business owes to others and are a crucial component of your business’s balance sheet.

Equity

Equity, also known as owner’s equity or shareholder’s equity, is the residual interest in the assets of your business after deducting liabilities. In simpler language, it is the owner’s share of what is left after liabilities are deducted from assets. It’s essentially the value of the ownership stake you have in your company.

Revenue

Revenue, often referred to as sales or income, is the money your business earns from selling products or providing services. It is different from profit because it is calculated before any deductions. Think of it as the total money that comes in before you deduct your cost price or any other utility costs.

Expenses

Expenses are the costs your business incurs to operate. This includes every outflow from rent and utilities to salaries and office supplies. Expenses are classified into different forms including operating expenses, Cost of Goods Sold (COGS), Interest Expenses, Depreciation and Amortization, Taxes, etc.. 

Accounts Receivable 

Accounts receivable  is the money your customers owe you for products or services they’ve received but haven’t paid for yet. Accounts receivables are usually recorded as assets in a balance sheet.

Accounts Payable

Accounts payable represents the money you owe to suppliers or creditors for goods or services you’ve received but haven’t paid for yet. Accounts receivable are recorded as liabilities in a balance sheet. 

Balance Sheet 

A balance sheet is a financial statement that provides a snapshot of your business’s financial position at a specific point in time. It shows your assets, liabilities, and equity. Usually, balance sheets are divided into two sections: assets and liability with equity representing the relationship between the two. 

Income Statement 

An income statement, also known as a profit and loss statement (P&L statement), summarizes your business’s revenue, expenses, and net income (or loss) over a specific period, usually a month, quarter, or year.

Cash Flow Statement

 A cash flow statement tracks the movement of cash into and out of your business. It helps you understand how changes in your balance sheet and income statement affect your cash position.

Double-Entry Accounting

This is the foundational accounting principle where every financial transaction has equal and opposite effects on two or more accounts. It ensures that your books always balance.

Depreciation

Depreciation is the gradual decrease in the value of tangible assets over time. For example, if you buy a machine for your business, over time, some parts of the machine will get bad due to constant use, making the machine less valuable. Depreciation is recorded as an expense to account for the wear and tear of assets like machinery or vehicles. 

Accrual Accounting

Accrual accounting records income and expenses when they are earned or incurred, regardless of when the cash actually changes hands. It provides a more accurate view of your business’s financial performance.

Trial Balance

A trial balance is a list of all your accounts and their balances at a specific point in time. It’s used to ensure that your books are in balance before preparing financial statements.

General Ledger

The general ledger is the central repository of all your financial transactions. It contains a detailed record of every transaction and is used to prepare financial reports.

Conclusion

Understanding these key terms is like learning the vocabulary of bookkeeping. It will make conversations with accountants, financial professionals, and even your own records much clearer. As you dive into the world of bookkeeping, remember that mastering these terms is a valuable step toward ensuring the financial health of your small business.