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Simple and Understandable Definitions for Bookkeeping Jargon

As a business owner, you know that sometimes when you’re speaking to your bookkeeper it feels like they are speaking a foreign language. With words like amortization and accruals, it can be hard to keep track of what the conversation is about. Understanding bookkeeping terms is critical to deciphering financial language and getting the information you need to make informed decisions. In this blog post, we will provide you with some simple and easy-to-understand definitions of common bookkeeping and accounting terminology.

Debits and Credits:

These are the building blocks of financial transactions. A debit is something that increases assets or expenses or decreases liabilities or equity. A credit is something that decreases assets or expenses or increases liabilities or equity. An example to explain could be purchasing inventory for your store for $1000. The expense would be recorded as the following:

Debit: Represents the increase in the value of inventory, which is an asset for your business. So, you would record an increase in the inventory account by $1,000.

Credit: Represents the decrease in cash, which is also an asset. So, you would record a decrease in the cash account by $1,000

Accruals:

Accrual accounting is the method of accounting that records revenues and expenses when they are earned or incurred. This does not depend on when the cash transactions occur. This method of accounting provides a more accurate portrayal of your business’s financial position because it accounts for all transactions that are in progress despite the status of the money transfer.

Amortization:

This process involves spreading out the recording of the cost of intangible assets, like patents or copyrights, over their useful life. This would better reflect their gradual decline in value.

Depreciation:

This is similar to amortization. It allocates the cost of tangible assets, like machinery or equipment, over their useful life. The reason for this is to take into account their gradual wear and tear.

Accounts Receivable:

Accounts Receivable refers to any money that is owed to your business by customers. This could be money for a product or service that you have provided but not yet paid for.

Accounts Payable:

This refers to money that your business owes to suppliers or vendors. This could be for any goods or services that you have already received but not yet paid for.

Cash Flow Statement:

A cash flow statement tracks the inflow and outflow of cash over a period of time. This gives you an insight into your financial patterns and your liquidity and financial health.

Balance Sheet:

A snapshot of your business’s financial position at a specific moment, detailing assets, liabilities, and equity. It gives you a quick overview of your company’s overall financial health.

General Ledger:

The central accounting record contains all of your business’s financial transactions, organized by accounts. This document will be used by your bookkeeper or accountant as the primary source of information for preparing financial statements.

Chart of Accounts:

This is a comprehensive list of all of the accounts used in your accounting system.

Trial Balance:

This refers to the report that lists the balances of all of the general ledger accounts at a specific point in time. The main purpose of a trial balance is to make sure that the business’s total amount of debits equals the total amount of credits. It is the preliminary checkpoint for the bookkeeper before they begin preparing the financial statements.

Financial Ratios:

These are calculations that are supposed to provide information on the performance of the business. It generally measures liquidity and profitability. An example would be gross profit margin and return on investment.

Double-Entry Accounting:

This refers to the accounting method where each financial transaction has equal and opposite effects. This ensures that Assets = Liabilities + Equity.

Liabilities:

These are any financial obligations your business has to any external parties. This would include any loans, expenses, and accounts payable.

Equity:

This is the remaining interest in the assets of your business after deducting all of your liabilities. This represents what the owner can claim from the business’s assets.

Income Statement:

This is also known as the profit and loss statement. In this financial statement revenues, expenses, and profits or losses are summarized over a specific period.

Variance Analysis:

This is the comparison of your actual financial performance and the expected performance. It helps you identify areas where your business strayed from the budget or goals

Internal Controls:

These are the procedures or policies implemented with the purpose of safeguarding your assets, ensuring accurate financial reporting, and preventing fraud.

Navigating bookkeeping and accounting and the jargon that comes with it can feel daunting. At LedgersOnline, we specialize in providing bookkeeping support to business owners. We have experience managing the bookkeeping of our clients and communicating with them in a way that gets the key takeaways across better.

Whether you’re wrestling with bookkeeping jargon or simply need more time to focus on your core operations, LedgersOnline is here to support your success. Schedule a call with us and learn how we can help.

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