Getting a handle on all the bookkeeping jargon may seem daunting at first, but it’s actually fairly easy once the phrases are broken down into simpler explanations that everyone can comprehend.

We’ve prepared an easy-to-understand bookkeeping glossary to assist you in keeping accurate records of your financial activities and comprehending the meanings of the terms that actually matter.

Accounts Payable 
Accounts Payable include all of the expenses that a business has incurred but has not yet paid. This account is recorded as a liability on the Balance Sheet as it is a debt owed by the company.

Accounts Receivable 
Accounts Receivable include all of the revenue (sales) that a company has provided but has not yet collected payment on. This account is on the Balance Sheet, recorded as an asset that will likely convert to cash in the short term. An expense that has been incurred but hasn’t been paid is described by the term Accrued Expense.

 Asset 
Assets refer to the items tangible or intangible that your business owns and that could be turned into cash. These items might be property, vehicles, the cash you have, etc. Assets are included on your balance sheet. With traditional accounting, you have to add up and record how much you have in assets.

Balance Sheet 
A financial statement that reports on all of a company’s assets, liabilities, and equity. As suggested by its name, a balance sheet abides by the equation <Assets = Liabilities + Equity>.

Book Value 
As an asset is depreciated, it loses value. The Book Value shows the original value of an asset, less any accumulated Depreciation.

Cash Flow
Cash flow refers to the money going in and out of your business (aka your income and your expenses).

Equity 
Equity denotes the value left over after liabilities have been removed. Recall the equation Assets = Liabilities + Equity. If you take your Assets and subtract your Liabilities, you are left with Equity, which is the portion of the company that is owned by the investors and owners.

Inventory 
Inventory is the term used to classify the assets that a company has purchased to sell to its customers that remain unsold. As these items are sold to customers, the inventory account will be lower.

Liability 
All debts that a company has yet to pay are referred to as Liabilities. Common liabilities include Accounts Payable, Payroll, and Loans.

Depreciation 
Depreciation is the term that accounts for the loss of value in an asset over time. Generally, an asset has to have substantial value in order to warrant depreciating it. Common assets to be depreciated are automobiles and equipment. Depreciation appears on the Income Statement as an expense and is often categorized as a “Non-Cash Expense” since it doesn’t have a direct impact on a company’s cash position.

Expense
An Expense is any cost incurred by the business.

Gross Margin 
Gross Margin is a percentage calculated by taking Gross Profit and dividing it by Revenue for the same period. It represents the profitability of a company after deducting the Cost of Goods Sold.

Gross Profit
Gross Profit indicates the profitability of a company in dollars, without taking overhead expenses into account. It is calculated by subtracting the Cost of Goods Sold from Revenue for the same period.

Net Income
Net Income is the dollar amount that is earned in profits. It is calculated by taking Revenue and subtracting all of the Expenses in a given period, including COGS, Overhead, Depreciation, and Taxes.

Accounting Period
An Accounting Period is designated in all Financial Statements (Income Statement, Balance Sheet, and Statement of Cash Flows). The period communicates the span of time that is reported in the statements.

Allocation
The term Allocation describes the procedure of assigning funds to various accounts or periods. For example, a cost can be Allocated over multiple months (like in the case of insurance) or Allocated over multiple departments (as is often done with administrative costs for companies with multiple divisions).

 Business (or Legal) Entity
This is the legal structure, or type, of a business. Common company formations include Sole Proprietor, Partnership, Limited Liability Corp (LLC), S-Corp and C-Corp. Each entity has a unique set of requirements, laws, and tax implications.

 Cash Flow 
Cash Flow is the term that describes the inflow and outflow of cash in a business. The Net Cash Flow for a period of time is found by taking the Beginning Cash Balance and subtracting the Ending Cash Balance. A positive number indicates that more cash flowed into the business than out, where a negative number indicates the opposite.

 Certified Public Accountant (CPA)
CPA is a professional designation that an accountant can earn by passing the CPA exam and fulfilling the requirements for both education and work experience, which vary by state.

Credit
A credit is an outstanding amount that is due to a creditor by a debtor (borrower). In the accounting ledger, this is recorded on the right side of the balance sheet (negative) as it is a decrease in assets. A credit is an increase in a liability or equity account or a decrease in an asset or expense account.

Debit
A debit is an expense or an amount of money paid from an account, that results in the increase of an asset or a decrease in a liability or owner’s equity on the balance sheet.

Fixed Cost 
A Fixed Cost is one that does not change with the volume of sales. For example, rent and salaries won’t change if a company sells more. The opposite of a Fixed Cost is a Variable Cost.

General Ledger 
A General Ledger is the complete record of a company’s financial transactions. The GL is used in order to prepare all of the Financial Statements.

 Interest
Interest is a fee for borrowing an asset from a lender. It can be considered an expense to the borrower and income to the lender. In essence, interest is compensation for service.

Journal Entry
Journal Entries are how updates and changes are made to a company’s books. Every Journal Entry must consist of a unique identifier (to record the entry), a date, a debit/credit, an amount, and an account code (that determines which account is altered).

Liquidity
A term referencing how quickly something can be converted into cash. For example, stocks are more liquid than a house since you can sell stocks (turning it into cash) more quickly than real estate.

Payroll
Payroll is the account that shows payments to employee salaries, wages, bonuses, and deductions. Often this will appear on the Balance Sheet as a Liability that the company owes if there is accrued vacation pay or any unpaid wages.

Present Value
Present Value is a term that refers to the value of an Asset today, as opposed to a different point in time. It is based on the theory that cash today is more valuable than cash tomorrow, due to the concept of inflation.

Receipts
A Receipt is a document that proves payment was made. A business produces receipts when it provides its product or service and it receives receipts when it pays for goods and services from other businesses. Received receipts should be saved according to IRS receipts requirements and cataloged so that a company can prove that its incurred expenses are accurate.

Return on Investment (ROI)
Originally, this term referred to the profit that a company was making (Return), divided by the Investment required. Today, the term is used more loosely to include returns on various projects and objectives. For example, if a company spent $1,000 on marketing, which produced $2,000 in profit, the company could state that its ROI on marketing spend is 50%.

Trial Balance 
Trial Balance is a listing of all accounts in General Ledger with their balance amount (either debit or credit). The total debits must equal the total credits, hence the balance.

Variable Cost
These are costs that change with the volume of sales and are the opposite of Fixed Costs. Variable costs increase with more sales because they are an expense that is incurred in order to deliver the sale. For example, if a company produces a product and sells more of that product, it will require more raw materials in order to meet the increase in demand.

Final Thoughts:

Now that you’ve learned the basic definitions of the most commonly used bookkeeping terminology, it’s time to move on to the next step. At The Profit House, we believe that every business deserves reliable, affordable, and easy bookkeeping. With our bookkeeping package, we ensure that your finances are in good hands. Get in touch with us right away to find out more about our bookkeeping packages!

https://calendly.com/dhfinancial/the-profit-house-complimentary-consultation/

Resources:

https://www.neat.com/blog/23-bookkeeping-terms-and-what-they-actually-mean-for-your-business/
https://paysimple.com/blog/42-basic-accounting-terms-all-business-owners-should-know/
https://www.easybooksapp.com/blog/bookkeeping-terms-every-small-business-owner-should-know
https://www.myaccountingcourse.com/accounting-dictionary/interest
https://debitoor.com/dictionary/debit