Bookkeeping Terms

Understanding bookkeeping terms makes managing your business finances easier. This glossary defines common words and phrases you’ll see in financial reports, bookkeeping software, and discussions with your accountant. Bookmark this page for quick reference.

Financial Statements & Core Concepts

• Accrual Accounting: Recording revenues and expenses when they are earned or incurred.
• Accrued Expense: Costs incurred but not yet paid; recorded as a liability.
• Accrued Revenue: Income earned but not yet received; recorded as an asset.
• Assets: Resources owned by your business, such as cash, inventory, or equipment.
• Balance Sheet: A snapshot of your business's financial position at a specific point in time, detailing assets, liabilities, and equity.
• Book Value: The net value of a company's assets, calculated as total assets minus intangible assets and liabilities.
• Capital: Financial assets or the financial value of assets, such as cash and investments.
• Cash Accounting: Recording revenues and expenses only when cash is received or paid.
• Cash Flow Statement: A summary of cash inflows and outflows, highlighting how cash is generated and used.
• Cost of Goods Sold (COGS): The direct costs attributable to the production of goods sold by a company.
• Deferred Expense: A payment made for goods or services to be received in the future; recorded as an asset until used.
• Deferred Revenue: Money received for goods or services not yet delivered; recorded as a liability until fulfillment.
• Double-Entry Bookkeeping: An accounting method where each transaction affects two accounts, maintaining balance.
• Equity: The owner's interest in the business, calculated as assets minus liabilities.
• Expenses: Costs incurred in the process of earning revenue.
• Financial Statement: A document showing a business’s financial performance (e.g., income statement, balance sheet).
• Gross Profit: Revenue minus the cost of goods sold; indicates profitability before other expenses.
• Income Statement: A report showing your business's revenues, expenses, and profits over a period.
• Liabilities: Obligations your business owes, like loans or accounts payable.
• Net Profit: The remaining income after all expenses have been deducted from revenue.
• Non-Operating Income: Revenue not related to core business activities, like investment income.
• Operating Income: Profit earned from a firm's core business operations, excluding interest and taxes.
• Prepaid Expense: Payments made in advance for goods or services to be received in the future.
• Revenue: Income earned from selling goods or services.
• Trial Balance: A report ensuring that total debits equal total credits in the ledger.
• Unearned Revenue: Funds received before delivering goods or services; a liability until the obligation is met.
  

Bookkeeping & Daily Operations

• Accounts Payable (AP): Money your business owes to suppliers or creditors.
• Accounts Receivable (AR): Money owed to your business by customers.
• Bank Reconciliation: The process of matching the balances in an entity's accounting records to the corresponding information on a bank statement.
• Chart of Accounts: A list of all accounts used to record financial transactions.
• Closing Balance: The amount remaining in an account at the end of a financial period.
• Contra Entry: An entry that affects both cash and bank accounts, such as transferring funds between them.
• Credit Note: A document issued to a buyer, reducing the amount owed due to returned goods or errors.
• Debit Note: A document sent to a supplier indicating a return of goods or a request for a credit.
• Drawings: Funds withdrawn from the business by the owner for personal use.
• General Ledger: The primary accounting record summarizing all financial transactions.
• Journal Entry: A record of a financial transaction in the accounting system.
• Ledger: A book or digital record containing all financial transactions of a business.
• Opening Balance: The amount in an account at the beginning of a new financial period.
• Petty Cash: A small amount of cash on hand used for minor business expenses.
• Reconciliation: The process of ensuring that two sets of records are in agreement.
• Subsidiary Ledger: A detailed ledger that supports a general ledger account, such as accounts receivable.
• Suspense Account: A temporary account used to record uncertain transactions until they can be properly classified.
• Write-Off: A reduction of the recognized value of something, typically a bad debt that is no longer collectible.
  

Payroll & Compliance

• Audit: An official inspection of an organization's accounts, typically by an independent body.
• Compliance: Adhering to laws and regulations relevant to financial reporting and taxation.
• FICA Taxes: Federal Insurance Contributions Act taxes for Social Security and Medicare.
• Form 1099-MISC: A form used to report miscellaneous income.
• Form 1099-NEC: A form used to report nonemployee compensation.
• Form 940: An annual form used to report federal unemployment taxes.
• Form 941: A quarterly tax form used to report income taxes, Social Security tax, or Medicare tax withheld from paychecks.
• Form 944: An annual form for small employers to report employment taxes.
• Form W-2: A tax form reporting an employee's annual wages and the amount of taxes withheld.
• Form W-4: A form employees complete to indicate their tax situation to the employer.
• Form W-9: A form used to request a taxpayer identification number and certification.
• FUTA: Federal Unemployment Insurance. This is a federal payroll tax for employees who lose their jobs. This tax is paid by the employer only.
• Garnishment: A court-ordered deduction from an employee's paycheck, often for debt repayment or child support.
• Gross Pay: Total earnings before deductions.
• L&I: Washington State's version of Workers Comp Insurance. This is essentially a state-run insurance program that covers employees who get injured on the job. This tax is partially paid by the employer and partially paid by the employee.
• Net Pay: Earnings after all deductions; take-home pay.
• Overtime Pay: Additional pay for hours worked beyond the standard workweek, usually calculated at a higher rate.
• Payroll Tax: Taxes withheld from employees' wages and paid by employers on behalf of employees.
• Payroll: The total amount of wages paid to employees.
• SUI: State Unemployment Insurance. This is a state payroll tax that covers employees if they lose their jobs through no fault of their own. This tax is paid by the employer only.
• Withholding Tax: Taxes deducted from employees' wages and paid directly to the government.
• Workers Comp: Officially called Workers Compensation, this is an insurance for employees who get injured on the job.

Financial Planning & Analysis

• Benchmarking: Comparing business processes and performance metrics to industry bests.
• Break-Even Point: The point at which total revenues equal total costs, resulting in no net loss or gain.
• Budgeting: The process of creating a plan to spend your money.
• Capital Budgeting: The process of planning and managing a company's long-term investments.
• Contribution Margin: Sales revenue minus variable costs; contributes to covering fixed costs.
• Current Ratio: A liquidity ratio that measures a company's ability to pay short-term obligations.
• Debt-to-Equity Ratio: A measure of a company's financial leverage, calculated by dividing its total liabilities by stockholders' equity.
• Forecasting: Predicting future financial outcomes based on historical data.
• Key Performance Indicators (KPIs): Measurable values that demonstrate how effectively a company is achieving key objectives.
• Liquidity: The ease with which assets can be converted into cash.
• Margin of Safety: The difference between actual sales and break-even sales.
• Operating Margin: A profitability ratio showing what percentage of revenue remains after paying for variable production costs.
• Return on Assets (ROA): An indicator of how profitable a company is relative to its total assets.
• Return on Investment (ROI): A measure of the profitability of an investment.
• Rolling Forecast: A continuously updated forecast that adds a new period as the most recent period is completed.
• Scenario Planning: A strategic planning method used to make flexible long-term plans.
• Sensitivity Analysis: A technique used to predict the outcome of a decision given a certain range of variables.
• Solvency: The ability of a company to meet its long-term financial obligations.
• Variance Analysis: The process of analyzing the difference between planned and actual figures.
• Working Capital: Current assets minus current liabilities; indicates short-term financial health.
• Zero-Based Budgeting: A budgeting method where all expenses must be justified for each new period, starting from zero.

Taxation & Legal

• Amortization Schedule: A table detailing each periodic payment on a loan.
• Audit Trail: A step-by-step record by which accounting data can be traced to its source.
• Capital Gains Tax: A tax on the profit from the sale of an asset.
• Depreciation Schedule: A table showing the depreciation of an asset over time.
• Estimated Tax: Quarterly tax payments made on income not subject to withholding.
• Excise Tax: A tax on specific goods like fuel, tobacco, or alcohol.
• Fiscal Year: A 12-month period used for accounting purposes, which may or may not align with the calendar year.
• Form 1040: The standard IRS form that individuals use to file their annual income tax returns.
• Intangible Asset: Non-physical assets like patents and trademarks.
• Overhead: Ongoing business expenses not directly attributed to creating a product or service.
• Sales Tax: A consumption tax imposed by the government on the sale of goods and services.
• Tax Bracket: A range of incomes taxed at a given rate.
• Tax Credit: An amount that can be subtracted directly from taxes owed.
• Tax Deduction: An expense that can be subtracted from gross income to reduce taxable income.
• Tax Year: The 12-month period for which tax is calculated.
• Use Tax: A tax on goods purchased out of state but used within the state, often applied to online purchases.