One of the hardest aspects of bookkeeping when you’re just starting out is keeping all of the terminology straight. Since there are so many confusing terms, if you need a crash course on bookkeeping basics, we’ve compiled a list of basic financial terms and their definitions to help familiarize you with bookkeeping jargon.
Accounting is the process of recording, summarizing, analyzing, and reporting transactions made by businesses to government agencies.
2. Accounting cycle
The accounting cycle is a step-by-step financial process that starts with recording journal entries, posting to the general ledger, calculating trial balances, posting adjusting entries, and ends with generating financial statements.
3. Accounts payable
Accounts payable is a short-term debt where a business owes money to its suppliers who have provided the business with services or goods on credit.
4. Accounts receivable
Accounts receivable is the balance of money owed to a business for goods or services delivered or carried out, but not yet paid for by customers.
5. Accrual accounting
Accrual accounting is a financial accounting method where a company records revenue when goods or services are delivered or earned and expenses as they are incurred. Accrual accounting uses the double-entry bookkeeping method.
6. Accumulated depreciation
Accumulated depreciation is the total amount of depreciation expense of an asset that has been allocated since the asset was put into use.
7. Adjusting journal entry
An adjusting journal entry is an entry that occurs in the company’s general ledger at the end of an accounting period to account for unrecognized income or expenses for that period. For example, adjusting entries are used to account for transactions that started in one accounting period and ended in a later period or that corrects a mistake from a previous accounting period.
8. Allowance for doubtful accounts
The allowance for doubtful accounts is an estimate of the percentage of accounts receivable that are expected not to be collected.
Amortization is a method for calculating the value of and spreading an intangible asset’s cost over the asset’s useful life.
10. Annual report
An annual report is a corporate document that is provided annually to shareholders that represent the financial status of the company and describes their business operations from the previous year.
Annuities are contracts from insurance companies that promise to pay you a lump sum of income immediately or a series of payments in the future.
Appreciation is the increase in the value of an asset over time.
An asset is any resource that has economic value that is thought to be of benefit in the future. It’s something that is owned that can be sold in the future to make money.
An audit is the examination of an organization’s financial statements to make sure that they are an accurate and fair representation of the company’s transactions.
15. Bad debt
A bad debt is a portion or all of an account, receivable, or loan that is considered uncollectible.
16. Balance sheet
A balance sheet is a financial statement that reflects a business’s liabilities, assets, and shareholder equity during a specific point in time. It’s a snapshot of what the company owns and owes, along with the amount invested by shareholders.
Bankruptcy is a legal process started when a business or individual is unable to repay outstanding debts.
Bookkeeping is the recording, storing, and retrieving of all financial transactions that have taken place in a business.
A budget serves as a financial plan that projects an estimate of future expenses and revenue.
See also: How to Control Expenses: A Company Budget Guide
Capital is the money that is available to fund a company’s day-to-day operations and its future growth.
21. Cash flow
Cash flow refers to the movement of cash in and out of a business. This represents cash received and money spent.
22. Cash basis accounting
Cash basis accounting is an accounting method that recognizes expenses and revenue at the time cash is paid out or received.
23. Cash receipts journal
A cash receipts journal is a journal that is used to record the receipt of cash from other businesses or individuals.
24. Closing entry
A closing entry is a journal entry made at the end of an accounting period to clear the balances of temporary accounts and summarize the period’s expenses and revenue in order to prepare for the next accounting period.
25. Common stock
Common stock is a security that represents ownership in a corporation.
26. Contra account
A contra account is an account used in a general ledger to reduce the value of a related account.
27. Cost of goods sold
Cost of goods sold refers to all of the costs and expenses involved in producing the goods sold by a business such as the cost of labor and materials used to produce the goods.
Credit is the agreement where a borrower receives something of value and repays the debt at a later date, often with interest. It also is a bookkeeping entry that either increases liability and equity or decreases assets on a business’s balance sheet.
A debit is a bookkeeping entry that increases assets or decreases liabilities on a business’s balance sheet.
Debt is money borrowed by one party from another party.
Depreciation is the accounting method that spreads the cost out of an asset over its useful life. It represents the reduction of an asset’s cost over its useful life.
A disbursement is a payment by cash or check.
A distribution is a payment or disbursement of assets from an account or fund to an investor.
A dividend is the distribution of a company’s earnings to its shareholders.
35. Double-entry bookkeeping
Double-entry refers to a bookkeeping method where every financial transaction has opposite and equal effects in two different accounts. Credits are offset by debits.
Equity is the sum of money that the owner or shareholders would receive if all the assets were liquidated and all of the company’s debt was paid off.
37. Fiscal year
A fiscal year refers to 12 consecutive months chosen by a business as its accounting period. It does not have to be a calendar year.
38. Fixed assets
A fixed asset is a tangible piece of equipment or property that a business plans to use long-term to generate income.
See also: Accounting for Property Managers: A 6-Step Guide
39. Generally accepted accounting principles (GAAP)
GAAP stands for generally accepted accounting principles that are a set of accounting rules, procedures, and standards issued by the Financial Accounting Standards Board. Public U.S. companies must follow these rules when creating financial statements.
40. General ledger
A general ledger is a record of a company’s transactions over a period of time that documents changes to revenue, expenses, equity, liabilities, and assets.
41. Gross income
Gross income for an individual is the individual’s total earnings before taxes and other deductions are taken out. Gross income for a business is total revenue minus cost of goods sold.
42. Income statement
An income statement refers to the financial statement that reflects the revenue and expenses of a company during a specified time.
Insolvency is the inability to pay debts when they are due.
44. Intangible asset
An intangible asset is one that has no physical existence such as patents and trademarks.
Interest is the percentage charged for borrowing money.
Invest is to put money into stocks, property, or a business in hopes of earning interest and a profit.
A liability is a debt owed or a financial obligation.
Liquidation is the process of ending or closing a business and distributing its assets.
49. Net income
Net income represents total revenue minus the expenses, taxes, and interest.
50. Operating expense
An operating expense is an expense other than the cost of goods sold that is incurred while running a business.
51. Petty cash
Petty cash is a small amount of money that a business keeps on hand to pay for small office expenses.
Principal refers to the original amount of money borrowed for a loan or put into an investment. This amount does not include any earnings or interest.
53. Profit and loss statement
The profit and loss statement refers to the financial statement that summarizes the expenses, costs, and revenue during a specified period. Companies issue profit and loss statements quarterly and annually.
54. Purchase order
A purchase order is a written authorization to a vendor to deliver specified goods or services at a designated price.
See also: What Is a Purchase Receipt?
55. Purchase returns & allowances
Purchase returns & allowances is a contra account found in the periodic inventory system that is used to record cash refunds and account credits for unsatisfactory merchandise that was purchased.
56. Retained earnings
Retained earnings is the accumulation of a company’s undistributed earnings that has been retained for the future.
Revenue is the profit earned from the sale of products or services delivered and earnings from interest, dividends, and rent.
58. Tangible asset
Tangible assets are any assets with a physical existence such as machinery, buildings, land, and cash.
59. Trial balance
A trial balance is the comparison of the balances of the total of the debits and credits in the general ledger to make sure they are equal.
A wage is the payment of an employee’s services by an employer based on an hourly rate.
Withholding refers to the amount deducted by the employer from an employee’s paycheck and paid by the employer to the proper authority.
A write-off is charging an asset account as an expense or loss. A write-off refers to a business expense to account for payments that haven’t been received or losses on assets.
Frequently asked questions
No, the two terms are not interchangeable. Bookkeeping refers to the recording of financial transactions and accounting is the interpretation of what the summary of these transactions mean.
A home inspection would be considered a rental property expense.
Bookkeeping jargon can be a little confusing at first and almost seem like a second language. However, it’s like everything else, once you’ve studied the terms here in our bookkeeping basics article and had some exposure and experience in bookkeeping, the terms will become second nature.
To further hone your bookkeeping skills, check out our mammoth list of bookkeeping resources!
Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.
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