Whether you’re a startup founder or managing a growing company, understanding bookkeeping terminology can feel like learning a new language. The terms used in bookkeeping can overwhelm those not well-versed in accounting practices.
Fortunately, this article is here to help. You’ll avoid common mistakes by familiarising yourself with these 35 common bookkeeping terms.
Core Financial Terms Every Business Owner Should Know
Accounts Payable (AP): This refers to the money your business owes to others for goods or services you’ve received but not yet paid for.
Accounts Receivable (AR): This refers to the money customers owe your business for products or services you have provided but haven’t yet been paid for.
Asset: An asset is anything of value that your business owns, such as equipment, cash, or property.
Balance Sheet: It lists your assets, liabilities, and equity, helping you understand your company’s net worth.
Cash Flow: Healthy cash flow is vital for business sustainability and growth.
Chart of Accounts: It organises transactions and helps track financial data effectively.
Liabilities: These are your business’s debts or financial obligations, such as loans or unpaid bills.
Equity: You calculate equity by subtracting total liabilities from total assets to determine an owner’s interest in a company.
Depreciation: The gradual reduction in the value of an asset over time due to wear and tear or obsolescence.
General Ledger (GL): A complete record of all your company’s financial transactions. It serves as the basis for financial statements.
Journal Entry: The method of recording individual financial transactions in the general ledger. Each entry usually has a debit and credit component.
Gross Profit: This metric helps you understand the basic profitability of your core business activities.
Net Income: You subtract taxes and operating costs from total revenue to calculate profit, also known as the bottom line.
Trial Balance: A report that lists your accounts and their balances to check for errors in your accounting system.
Invoice: A document sent to customers that outlines the amount due for products or services.
Accounts: These categories store financial transactions, such as revenue, expense, and asset accounts.
Accounting Period: Financial activities use a set timeframe, such as a month, quarter, or year.
Advanced Bookkeeping Terms for Better Financial Management
Operating Expenses: Costs associated with the normal functioning of your business, including rent, salaries, and utilities.
Reconciliation: The process of comparing your internal financial records to external documents (like bank statements).
Cash Basis Accounting: The accountant recognises revenues and expenses only when cash is exchanged.
Accrual Basis Accounting: This method recognises revenue when earned and expenses when incurred.
Profit and Loss Statement (P&L): A financial report summarising your revenue, costs, and expenses over a specific period.
Petty Cash: Cash on hand for minor business expenses, such as office supplies or small office purchases.
Bookkeeper: A person responsible for recording daily financial transactions and maintaining accurate records.
Accountant: An accountant typically performs more advanced financial tasks and ensures compliance with tax regulations.
Key Financial Terms for Tracking and Reporting
Vendor: A company or individual that provides services, often through an invoice or contractual agreement.
Receipts: Proof of payment or a transaction record used to track expenses.
Bank Reconciliation: Ensuring that your company’s internal cash records match the figures on your bank statement.
Payroll: The process of compensating employees, including calculating wages, deductions, and taxes, in line with employment laws.
Tax Deductible: Expenses that can be subtracted from your gross income to reduce the amount of income subject to tax.
Gross Margin: The difference between revenue and the cost of goods sold, expressed as a percentage of revenue.
Cost of Goods Sold (COGS): The direct costs of producing goods or services your business sells, such as raw materials and labour.
Retained Earnings: Profits your company has kept rather than distributed as dividends. These are used to fund future growth or pay down debt.
Amortisation: Gradually reducing a loan or intangible asset’s value over time, similar to depreciation but for intangible assets.
Accrued Expenses: Expenses that have been incurred but not yet paid. These are often recorded as liabilities until payment is made.
Conclusion
Don’t let the complexity of bookkeeping overwhelm you. Mastering these 35 terms is the first step toward empowering yourself with the knowledge you need to manage your business more confidently and successfully.