affordable bookkeeping services essex

My simple bookkeeping and accounting glossary

Every industry has its jargon, and the business finance space is no different.

As a business owner, it’s in your best interests to learn what some of the lingo means – especially if you aren’t yet outsourcing your bookkeeping or accounting requirements to the professionals and are committed to managing most of your financial tasks and responsibilities in-house.

To get you up to speed (and get you feeling more confident in your own knowledge), here’s a quick breakdown of the main terms used in my industry, and what they all mean.

Accounts payable (AP)

Money that the business owes to suppliers for goods or services received but not yet paid for. It’s a liability on the balance sheet.

Accounts receivable (AR)

Money owed to the business by customers who have purchased goods or services on credit. It’s also listed as an asset on the balance sheet.

Accruals

Income or expenses that have been incurred but not yet received or paid. Accruals help match income and expenses to the correct accounting period.

Assets

The resources owned by the business that have economic value, such as cash, equipment, property, and stock. Assets can be current (short-term) or fixed (long-term).

Balance sheet

A financial statement showing a company’s assets, liabilities, and shareholders’ equity at a specific point in time. In essence, it’s a snapshot of the business’s financial position.

Capital

Funds invested by the owner(s) or shareholders in the business. Capital can include cash or assets.

Cash Flow

The movement of money in and out of the business. Positive cash flow means more money is coming in than going out, while negative cash flow means the opposite.

Chart of accounts (COA)

A complete list of all accounts used to record financial transactions in the general ledger, organised by categories like assets, liabilities, income, and expenses.

Cost of goods sold (COGS)

The direct costs of producing goods or services sold by the business, including materials and labour. It’s used to calculate gross profit.

Credit

An entry that increases liabilities or income accounts or decreases assets or expenses. (Money coming in)

Debit

An entry that increases assets or expenses or decreases liabilities or income. (Money going out)

Depreciation

The gradual reduction in the value of a fixed asset over time, reflecting general wear and tear. Depreciation is recorded as an expense on the income statement.

Dividend

A portion of company profits distributed to shareholders. It’s usually paid out of retained earnings and can be a one-time or regular payment.

Double-entry accounting

A bookkeeping system where each transaction is recorded in two accounts, as both a debit and a credit. It helps make sure the books are balanced.

Equity

The owner’s or shareholders’ residual interest in the business after liabilities are subtracted from assets. Equity can include retained earnings, share capital, and reserves.

Expense

Costs incurred in running the business, such as rent, utilities, salaries, and supplies. Expenses reduce the net income of the business.

Fixed asset

Long-term assets, like property, equipment, and vehicles, that are used in business operations and are not intended for sale.

General ledger (GL)

A master record containing all the financial transactions of the business, grouped by accounts. It’s the main source for creating financial statements.

Gross profit

Revenue minus the cost of goods sold (COGS). It shows the profitability of core business activities before other expenses are deducted.

Income statement

Also known as the profit and loss statement (P&L), it shows the business’s income, expenses, and profits over a specific period.

Liability

Amounts owed by the business, such as loans, accounts payable, and taxes. Liabilities can be short-term (due within a year) or long-term (due after a year).

Net profit (or net income)

The profit left after all expenses, taxes, and costs have been deducted from revenue. Net profit is the “bottom line” of the profit and loss statement.

Payroll

The total amount of wages paid to employees, including taxes and other deductions. Payroll also includes the process of managing these payments.

Petty cash

A small amount of cash kept on hand for minor everyday expenses, such as office supplies or refreshments. Petty cash should be replenished and tracked regularly.

Prepaid expenses

Payments made in advance for goods or services to be received in the future, like rent or insurance. They are recorded as assets until used.

Profit and loss statement (P&L)

A financial report showing the business’s income, expenses, and profit over a period. It’s used to assess financial performance.

Reconciliation

The process of comparing two sets of records (usually bank statements and company books) to ensure they match up.

Retained earnings

The portion of net profit kept in the business rather than distributed to shareholders. Retained earnings are used for reinvestment or to cover future costs.

Revenue

The total income generated from the sale of goods or services before any expenses are deducted. It’s also known as turnover.

Trial balance

A report showing the balances of all ledger accounts at a specific time. It helps verify that debits equal credits, keeping the books accurate.

Share this post

Subscribe

Monthly newsletter for my latest blog, timely tips and tricks to help you stay on top of your company’s financial affairs.