Bookkeeping is an essential component of running any business. It's necessary to keep track of your finances and ensure that your books are in order.
However, bookkeeping can be confusing, especially if you're unfamiliar with all the terms. To help you out, we've compiled a list of common bookkeeping terms and their definitions. Moreover, we've explained these financial terms in simple language.
Let’s get started.
24 Common Bookkeeping Terms
1. Accounting Period
An accounting period is a length of time used for reporting financial information. This can be monthly, quarterly, or yearly. Accounting periods are important because they help you track your business's financial performance over time.
2. Accounts Payable
This term refers to the money you owe your suppliers and other creditors. Accounts payable are typically recorded as a liability on your balance sheet. It’s important to pay close attention to your accounts payable because if you don't pay them off, it can negatively impact your business.
3. Accounts Receivable
Accounts receivable refers to money owed to you by your customers. It’s an accounting entry that's typically recorded as current assets on your balance sheet. Keeping track of your accounts receivable is crucial, as it can help you manage your cash flow statements.
Accruals refer to the expenses and revenue that have been incurred but not yet recorded in the books. For example, if you incur an expense in January but don't pay for it until February, the accrual would be recorded in January.
Without accrual accounting, your statements would only reflect transactions that have been paid for, which would give an inaccurate picture of your business.
Auditing is the process of reviewing financial statements to ensure that they’re accurate and compliant. This is usually done by an independent third party. Auditing assures shareholders, creditors, and other interested parties that your financial statements are reliable.
6. Bad Debt
Bad debt is money owed to you by a customer but isn’t likely to be paid. Bad debt is typically recorded as a loss on your income statement and can negatively impact your business's financial health.
7. Balance Sheet
A balance sheet is a financial statement that provides a snapshot of your business's financial health at a particular moment in time. It lists your assets, liabilities, and equity. A balance sheet can help you assess your business's financial position and make decisions accordingly.
8. Bank Reconciliation
Bank reconciliation is the process of comparing your bank account statements to your financial records to ensure they match. This is important because it can help you spot errors or fraud. You can use your bank statement to reconcile your records every month.
9. Bill of Lading
A bill of lading is a document that lists the goods being shipped to your business and serves as a contract to help ensure that the correct goods are delivered. These documents should be filed accordingly and may be used to verify that purchases are received before payment is made.
A budget is a plan that outlines your monthly income and expenses. Budgets are vital for businesses of all sizes. Without one, it would be difficult to track what your company owes and the expenses incurred.
11. Business Plan
A business plan is a document that describes your business, its goals, and how you plan to achieve them. A business plan can help you secure funding and track your progress. Moreover, a business plan helps you formulate a financial report of how you plan to use your company's assets.
12. Cash Flow
Cash flow is the movement of money in and out of your business. Tracking your cash flow can help ensure you have enough money to cover your expenses. This can be an effective way to measure your company's financial position.
13. Certificate of Deposit
A certificate of deposit (CD) is a type of savings account with a fixed term and interest rate. CDs are a popular investment because they’re low-risk and offer a guaranteed return.
14. Chartered Accountant
A chartered accountant (CA) is a designated professional who provides financial services, such as auditing, tax, and accounting services. CAs are an important part of any business because they provide valuable services to help you grow and succeed.
15. Credit Rating
A credit rating is a measure of a company's creditworthiness. It’s based on factors such as financial stability, payment history, and debt-to-equity ratio. Credit ratings provide investors with an indication of a company's risk level. A higher credit rating means lower risk, making a company more attractive to investors.
16. Debt-to-Equity Ratio
The debt-to-equity ratio measures a company's financial leverage. You calculate it by dividing total debt by shareholder equity. If a company's ratio of debt-to-equity is high, it means the company is highly leveraged and may be at risk of defaulting on its loans.
17. Fixed Cost
A fixed cost is a cost that doesn’t change with production or sales volume. For example, rent is a fixed cost because it doesn't fluctuate based on how much product is sold. Fixed costs are important to consider when making pricing decisions because they cannot be changed.
18. GAAP (Generally Accepted Accounting Principles)
GAAP is a set of guidelines companies use to prepare their financial statements. It includes principles such as revenue recognition, asset valuation, and financial statement presentation. This common framework is essential for reporting financial results. It also helps investors to compare your company to others in your industry.
19. General Ledger
A general ledger records all the financial transactions that take place within your business. It includes information such as revenues, expenses, and assets and can provide an overview of the company's financial health.
20. Income Statement
An income statement is a financial statement that shows a company's revenues, expenses, and net profit. It’s also known as a profit and loss statement. These financial reports provide your business with an indication of financial performance. They can also be used to make informed decisions about spending and investment.
Inventory is the raw materials, finished products, and supplies that a company has on hand. Inventory management is a vital part of any business because it can help to reduce costs and improve efficiencies while ensuring you’re properly recording applicable transactions.
22. IPO (Initial Public Offering)
An IPO is when a company sells shares of its stock to the public for the first time. IPOs are a way for companies to raise capital and generate interest in their business. They can be a risk for investors because there is often little information about the company before the IPO.
23. ROI (Return on Investment)
ROI is a measure of how much money an investment has earned. It’s calculated by dividing the net income from an investment by the original investment amount. This measure helps investors compare the performance of different investments and can be used to assess the efficiency of a company's use of capital.
24. Variable Cost
A variable cost is a cost that changes with production or sales volume. For example, raw materials are a variable cost because the amount you need will fluctuate based on how much product you produce or sell. Variable costs are important to consider when making pricing decisions because they can affect your profitability.
Full-cycle Bookkeeping Made Simple
Bookkeeping can be a complex and time-consuming task, but it’s necessary for the success of your business. Choosing the right service provider can help to make the process easier and more efficient.
At LedgersOnline, we can help you streamline your bookkeeping processes, marrying human expertise with the latest technology. When you work with us, your dedicated bookkeeper will take care of your bookkeeping needs while you focus on growing your business.
Contact us today to learn more.