Bookkeeping has several benefits for small business owners. It can help you track your company’s profits or losses, and it can also help you remain organized. Thorough bookkeeping comes in handy if the IRS audits your company. If you are interested in bookkeeping, you’ll need to first know why it is important and you’ll need to know the terminology. Here is what you need to know about the importance of bookkeeping terminology and a list of common bookkeeping terms to know.
Why Bookkeeping Terminology is Important
Bookkeeping is a subject that encompasses many areas of small business operations. Learning bookkeeping terms can save you from a lot of confusion and misunderstanding in the process of growing your business. These terms can also illustrate how intricate the field of bookkeeping is.
30 Bookkeeping Terms that You Should Know
Below is a list of 30 bookkeeping terms that you should know:
- Accounting period: The period in which financial information is tracked, most commonly monthly, quarterly, or yearly.
- Accounts payable: The amount of money a company owes creditors (suppliers, for example) in return for goods or services they have delivered.
- Accounts receivable: The amount of money owed by customers or clients to a business after the receipt or use of goods or services.
- 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.
- Assets: Current assets are those that will convert to cash within one year. Fixed assets are long-term and will likely provide benefits to a company for over one year. Examples of fixed assets include land, major machinery, and real estate.
- 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 owner’s or shareholder’s equity, the remaining amount after deducting assets from liabilities.
- Bank reconciliation: The process of comparing a company’s bookkeeping records to the information on the company’s bank statement.
- Bonds and Coupons: A bond is a form of debt investment and also fixed-income security. Coupons, in this case, is the annual interest rate paid on a bond.
- 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.
- Cash flow: Cash flow is the expense or revenue business activities generate over time.
- Chart of accounts: A list of every account in the general ledger, accompanied by a reference number.
- Cost of goods sold: The direct expenses related to the production of goods sold by a business.
- Credits: An entry that can decrease assets (what the company owns) or increase liabilities (what the company owes) on a balance sheet.
- Debits: An entry that can increase assets (what the company owns) or decrease liabilities (what the company owes) on a balance sheet.
- Depreciation: Depreciation is an accounting method used to track the aging and use of assets.
- Diversification: Allocating or spreading capital investments into varied assets to avoid over-exposure to risk.
- Double-entry: A bookkeeping system that denotes every transaction twice, one as a credit and again as a debit.
- Equity: Calculated as assets (what the company owns) minus liabilities (what the company owes).
- Expenses: All money spent to operate your company that’s not directly related to the sale of individual goods or services.
- General ledger: Contains summaries of all financial transactions over the life of the company.
- 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.
- 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.
- Insolvency: A state where an individual or organization can’t meet financial obligations with the lender(s) when their debts are due.
- Inventory: The account that tracks all products sold to customers.
- 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.
- Liabilities: Debts that a company owes, such as bonds, loans, and unpaid bills.
- Net income: A company’s total earnings, calculated by deducting total expenses from total revenues. Net income is also called net profit.
- 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.
- 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.
- 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.
By staying on top of the bookkeeping for your business, you’ll reap the benefits of organized finances and an accurate record of all your transactions. By hiring a professional bookkeeper, you can save time and gain peace of mind knowing an expert is handling your books.