Bookkeeping Terminology: 35 Common Bookkeeping Terms

I cannot emphasize enough the advantages that effective bookkeeping brings to small business owners. By diligently tracking your company's financial activities, you'll gain insight into profits or losses and maintain a well-organized record of transactions. Solid bookkeeping practices also prove invaluable during a potential IRS audit.

To successfully navigate the world of bookkeeping, it's essential to understand its importance and familiarize yourself with the terminology. In this article, we'll cover the importance of bookkeeping terminology and provide you with 35 common bookkeeping and accounting terms that will empower you to better understand your finances. Continue reading to set the stage for your small business's success.

Why Bookkeeping Terminology is Important 

Bookkeeping terminology is important for several reasons. First, it enables clear and effective communication between business owners and financial professionals. Second, it empowers business owners to make informed financial decisions, ensuring accurate record-keeping and organized finances. Finally, understanding bookkeeping terminology enhances financial literacy, which is essential for navigating the complexities of managing a successful business.

35 Bookkeeping Terms that You Should Know

Below is a list of bookkeeping terms that you should know:

1. Accounting period: The period in which financial information is tracked, most commonly monthly, quarterly, or yearly. 
2. Accounts payable: The amount of money a company owes creditors (suppliers, for example) in return for goods or services they have delivered.
3. Accounts receivable: The amount of money owed by customers or clients to a business after the receipt or use of goods or services.
4. Accrual accounting: Accrual accounting is an accounting method that credits payments and debits expenses earned or incurred for a period of time.
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.
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. 
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.
13. Chart of accounts: A list of every account in the general ledger, accompanied by a reference number.
14. Cost of goods sold: The direct expenses related to the production of goods sold by a business. 
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. 
18. Diversification: Allocating or spreading capital investments into varied assets to avoid over-exposure to risk. 
19. Double-entry bookkeeping: A bookkeeping system that denotes every financial transaction twice, one as a credit and again as a debit.
20. Equity: Calculated as assets (what the company owns) minus liabilities (what the company owes). 
21. Expenses: All money spent to operate your company that’s not directly related to the sale of individual goods or services.
22. Fixed asset: A fixed asset is a company-owned asset that is used to produce income for the company in the long term.
23. General ledger: Contains summaries of all financial transactions over the life of the company.
24. Gross profit: This is a company's profit after deducting all the costs associated with producing and selling the product or services. Gross profit only accounts for variable expenses and not fixed costs.
25. Income statement: An income statement is a financial statement with a company’s monthly, quarterly, or yearly financial activity. The income statement starts with the revenue earned and subtracts the costs of goods sold and expenses to end with the bottom line, a net profit or a loss.
26. Interest: The additional money a company needs to pay if it borrows money from a bank or company, based on a percentage of the amount borrowed.
27. Insolvency: A state where an individual or organization can’t meet financial obligations with the lender(s) when their debts are due.
28. Inventory: The account that tracks all products sold to customers.
29. Journals: Records where bookkeepers keep logs, in chronological order, of daily company transactions. Accounts Payable, Accounts Receivable, and cash should each have their own journal.
30. Liabilities: Debts that a company owes, such as bonds, loans, and unpaid bills.
31. Net income: A company’s total earnings, calculated by deducting total expenses from total revenues. Net income is also called net profit.
32. Profit and loss statement: A financial statement that summarizes a company’s performance and financial position. To compile a profit-and-loss statement, you’ll review costs, expenses, and revenues over a certain period.
33. Retained earnings: Retained earnings are the net income remaining for the business after paying out dividends to shareholders. Often, when a company wants to expand, it will choose to keep retained earnings to finance expansion instead of distributing them amongst shareholders.
34. Return on investment: Return on investment (ROI) evaluates financial performance relative to the amount of money invested. You can calculate a company’s ROI by dividing the net profit by the cost of the investment. 
35. Revenue: Revenue is money collected from selling company goods or services. Revenue can also be collected through earning interest by providing loans or selling assets. 

Partner with the bookkeeping experts

Familiarizing yourself with these 35 common bookkeeping terms empowers you to better manage your business finances and maintain accurate records. Partnering with a professional bookkeeper for small businesses not only saves time but also provides peace of mind, knowing an expert is overseeing your financial records. So, embrace these essential bookkeeping terms and let them pave the way for improved financial clarity and success.