Effective bookkeeping practices are crucial for small business owners, enabling them to gain insight into their profits or losses and maintain organized records of transactions. Additionally, solid bookkeeping practices prove invaluable during potential IRS audits. To successfully navigate the world of bookkeeping, it is essential to understand its importance and familiarize yourself with the Bookkeeping Terms.
In this article, we will cover the importance of Bookkeeping Terms and provide you with 35 common bookkeeping and accounting terms that will empower you to better understand your finances, set the stage for your small business's success, and make informed financial decisions.
Importance of Bookkeeping Terms
Bookkeeping Terms are essential for effective communication between business owners and financial professionals. It is a language that is commonly used in the accounting world, and understanding it can help small business owners to make informed financial decisions, ensure accurate record-keeping, and maintain organized finances. In addition, understanding bookkeeping terms enhances financial literacy, which is essential for navigating the complexities of managing a successful business.
35 Bookkeeping Terms You Should Know
1. Accounting Period
The period in which financial information is tracked, most commonly monthly, quarterly, or yearly. The most commonly tune accounting period is the financial year which is the year-long period in which financial performance is tracked.
2. Accounts Payable
The amount of money a company owes creditors (suppliers, for example) in return for goods or services they have delivered to the business. Account payable is the specific amount that a business owes for the supply business purchase for
3. Accounts Receivable
The amount of money owed by customers or clients to a business after the receipt or use of goods or services. The account receivable is the amount that is not yet received for the goods and services provided on credit.
4. Accrual Accounting
Accrual accounting is an accounting method that credits payments and debits expenses earned or incurred for a period of time. This is as per two accounting principles matching and revenue recognition principles. Which states that expenses and income or transaction should be recorded for the period it belongs to and revenue is recognized when earned not when received.
5. Asset classes
A group of securities that behaves similarly in the marketplace. The three main asset classes are equities or stocks, bonds or fixed income, and cash equivalents or money market instruments.
6. Assets
Current assets are those that will convert to cash within one year. Fixed assets are long-term and will likely benefit a company for over one year. Examples of fixed assets include land, major machinery, and real estate.
7. Balance Sheet
A financial statement that presents the company's financial position at a given time. Balance sheets summarize a company's assets (what the company owns) and a company's liabilities (what the company owes). Balance sheets also show the business owner's or shareholder's equity, the remaining amount after deducting assets from liabilities.
8. Bank Reconciliation
The process of comparing a company's bookkeeping records to the information on the company's bank statement. It is important to ensure the transactions are accurately recorded.
9. Bonds and Coupons
A bond is a form of debt investment and fixed-income security. Coupons, in this case, are the annual interest rate paid on a bond.
10. Capital
Capital refers to a financial asset or the value of a financial asset, such as cash or goods. Businesses calculate working capital by subtracting current assets from current liabilities.
11. Cash Flow
Cash flow is the expense or revenue business activities generate over time. In simple words, it is the cash inflow and outflow from the business that is expected or takes place in a particular period.
12. Cash Flow Statement
A cash flow statement or CFS summarizes the cash and cash equivalents or CCE that come in and exit the company. It is important in making decisions regarding future investment and having an idea about access to liquidity.
13. Chart of Accounts
A list of every account in the general ledger, accompanied by a reference number. Each account is assigned a valid name and number for classification this systematic approach of creating different heads to put transactions in is referred to as a chart of accounts.
14. Cost of Goods Sold
The direct expenses related to the production of goods sold by a business. It is the overall expense bear by businesses to produce, purchase and sell.
15. Credits
An entry that can decrease assets (what the company owns) or increase liabilities (what the company owes) on a balance sheet.
16. Debits
An entry that can increase assets (what the company owns) or decrease liabilities (what the company owes) on a balance sheet.
17. Depreciation
Depreciation is an accounting method used to track the aging and use of assets. It is the allowance to allocate the used amount to expenses from assets over the years.
18. Diversification
The act of spreading your capital investments across a variety of assets to minimize risk. Diversification is necessary to avoid loss and spread the investment to decrease risk related to investment.
19. Double-entry accounting
A bookkeeping system that records every financial transaction twice, once as a credit and once as a debit. Every transaction effect two accounts at the same time and recognizing and recoding both aspects is referred to as Double-entry accounting.
20. Equity
It is the measure of the owner's belongings in the business with initial capital. The value of a company's assets minus its liabilities. It is the sum of what is available to owners.
21. Expenses
The costs incurred to operate a business that is not directly related to the sale of individual goods or services. Business operations need to be funded to run smoothly these are referred to as expenses such as salaries and wages, insurance and subscription, etc.
22. Fixed Asset
A company-owned asset that generates income in the long-term, such as property or equipment. Fixed assets are available for more than one financial year.
23. General Ledger
A summary of all financial transactions. All transaction appears in their respective account and all these accounts are accumulated to the general ledger that helps in preparing financial statement.
24. Gross Profit
A company's profit after deducting the variable costs associated with producing and selling a product or service.
25. Income Statement
A financial statement that shows a company's monthly, quarterly, or yearly financial activity, starting with revenue and ending with net profit or loss.
26. Interest
The additional money a company pays, when it borrows money, is based on a percentage of the amount borrowed.
27. Insolvency
When an individual or organization cannot meet financial obligations with lenders when their debts are due. This is the statutory term to represent the business unable to meet financial obligations.
28. Inventory
Inventory is the goods kept for sale in the ordinary course of business it measures the value of all the supplies that the business held for sale to customers.
29. Journals
Chronological records of daily company transactions for accounts payable, accounts receivable, and cash.
30. Liabilities
A company's debts, such as loans, bonds, and unpaid bills. Liabilities may be current that are payable in one year and non-current liabilities that can be paid over the years.
31. Net Income
A company's total earnings after deducting expenses from revenue. When we deduct the direct expenses or cost of goods sold from the earning we get gross profit and after deducting general and admin expenses we get the net income.
32. Profit and Loss Statement
A financial statement that summarizes a company's financial position and performance over a period.
33. Retained Earnings
The net income remaining for a business after paying dividends to shareholders. The income statement transfers the amount to the balance sheet to include it in the equity part.
34. Return on Investment
The evaluation of financial performance relative to the amount of money invested. The owner divides the income by the owner's equity or share capital invested in the business for business purposes.
35. Revenue
The company collects the money from selling its goods or services, as well as earning interest from loans and selling assets. This measure represents the money earned from different income sources.
Familiarizing yourself with these bookkeeping terms can help you better manage your business finances and keep accurate records. Consider partnering with a professional bookkeeper for small businesses to save time and ensure your financial records are in good hands.
With a clear understanding of these essential bookkeeping terms, you can pave the way for improved financial clarity and success in your business.
