Bookkeeping Terms and Phrases to Know
With the New Year coming up, more and more business owners are looking to outsource their books. One of the easiest ways to communicate with your bookkeeper is to know a few of the key terms and reports that will be used. Not only will learning the meaning of these phrases add to your financial knowledge, but they can help you gain a firm understanding of what exactly is going on with your books.
Assets: These are all the items of value that a business owns. This includes cash in the bank accounts, cash in petty cash box, accounts receivable, equipment, land and buildings, vehicles.
Accounts payable (A/P): Accounts payable is the money your business owes to vendors for services or product. In other words, all unpaid bills owed by the business to other businesses.
Accounts receivable (A/R): Accounts receivable is the money owed to a business from customers.
Balance Sheet: This financial statement is a snapshot of a company’s financial condition. It presents the assets, liabilities, and capital of a company while detailing and summing up the balance of income and expenditure over an amount of time.
Bookkeeping: The act of recording financial transactions carried out by a business.
Budget: The financial plan in which a business decides what it estimates it will earn in the year ahead, what those estimated earnings will be spent on, and then comparing the actual figures against this plan.
Credit: A credit entry decreases assets and expenses, and increases income, liabilities and equity. Also, money that is owed by a business to a supplier/vendor is called credit.
Chart of Accounts: The list of accounts set up in a bookkeeping system into which all the financial transactions are categorized. The categories can include: Assets, Liabilities, Equity, Income, Cost of Goods Sold and Expenses
Cash flow: This report details how cash flows into the business and what it is spent on. Estimations can also be made in a cash flow forecast on the income and expenses for the year ahead based on prior earnings and costs and can help a business work out their sales goals and budget
Cost of goods sold: Also known as cost of sales, this phrase includes all money spent to purchase or make the products or services a company provides.
Depreciation: This is used to track the aging and use of assets. An example is your car. If you own a car, each year it is used the value of the car is reduced.
Deductible: A purchase that can be claimed as a business expense is called a deductible expense and reduces the business profit, therefore reducing the amount of income tax owed to the government. A non-deductible purchase is one that cannot be used to reduce the profit and tax such as when the owner uses business funds to buy something for personal use.
Equity: Equity includes all money invested into a business by its owner. In a large company that is incorporated, owners’ equity is shown in shares of stock.
General ledger: This is a record of financial transactions a company has. The ledger holds all information that is needed to prepare financial documents.
Income statement: The income statement shows the profitability of a company during a specific time period. It starts with the revenue earned, and subtracts the cost of goods sold and expenses, ending with the net profit or loss of the business.
Inventory: This is the list of items including goods in stock to be sold to customers.
Liabilities: These are all the debts a company owes. This can happen when a company purchases goods or services on credit from a vendor. Common debts that are liabilities include unpaid bills, bonds, and loans.
Reconcile: This is the process of matching one set of figures or documents with another set of figures or documents. For example, matching the cash book with the bank account and investigating and fixing any differences; or checking that the business has received all the invoices listed on a statement.
Revenue: This is the money collected from selling the businesses goods or services before costs or expenses are deducted.
Transaction: A transfer of funds from one account to another.
Write-Off: An amount that will not be paid by a customer can be written off. This just means that an entry is made to the accounts to bring the customer’s account down to zero.