Welcome back! We’re so glad to see that you’re invested in understanding your business and all the jargon that comes with it. Sometimes just trying to remember all of the different terminology is enough to make your head spin! Understanding bookkeeping terms is a vital part for business owners who want to stay on top of their finances in order to stay in the know and in turn – make better business decisions. Whether you’re tracking expenses, managing cash flow, or preparing financial statements, having a solid grasp of key terms will help you keep your business on the right track. Let’s break down some of the most important bookkeeping terms that every business owner should know.
Financial Statements & Reports
Balance Sheet
A Balance Sheet provides a snapshot of your company’s financial health at a given moment. It lists assets (what you own), liabilities (what you owe), and equity (the value left after liabilities are subtracted from assets).
Chart of Accounts
A list of all accounts used in a company’s accounting system, categorized by assets, liabilities, equity, revenue, and expenses.
General Ledger
The General Ledger is the master record of all financial transactions within a business. It categorizes transactions into different accounts, forming the foundation for financial reports.
Profit and Loss Statement (P&L)
The Profit and Loss Statement (also called an Income Statement) summarizes your revenues, expenses, and profits over a specific period. This report helps business owners assess profitability and identify areas for improvement.
Statement of Cash Flows
A financial statement that shows how cash moves in and out of a business, divided into operating, investing, and financing activities.
Trial Balance
A report that ensures total debits and credits in the general ledger are equal, helping to catch errors before financial statements are prepared.
Revenue & Expense Management
Accounts Payable (AP)
Accounts Payable refers to the money your business owes to vendors or suppliers for goods and services received but not yet paid for. Keeping track of AP ensures that your bills are paid on time, avoiding late fees and maintaining strong vendor relationships.
Accounts Receivable (AR)
Accounts Receivable represents the money owed to your business by customers who haven’t yet paid for your goods or services. Monitoring AR helps ensure a steady inflow of cash and prevents overdue accounts from disrupting your financial stability.
Cash Flow
Cash Flow is the movement of money in and out of your business. Positive cash flow means more money is coming in than going out, while negative cash flow could signal trouble. Tracking cash flow regularly helps prevent financial shortfalls.
Cost of Goods Sold (COGS)
The direct costs associated with producing goods or services sold by a business, including materials and labor.
Fixed vs. Variable Costs
Fixed costs (e.g., rent, salaries) remain constant, while variable costs (e.g., materials, commission) fluctuate with business activity.
Gross Profit
Revenue minus the cost of goods sold, before deducting operating expenses.
Net Profit (Net Income)
The final profit after all expenses, taxes, and deductions have been subtracted from revenue.
Operating / Overhead Expenses
Operating Expenses include costs necessary to run the business, such as rent, utilities, payroll, and marketing. Keeping these expenses in check is key to maintaining profitability.
Operating Income
The profit earned from core business operations, excluding interest and taxes.
Revenue vs. Profit
Revenue is the total income generated by a business before expenses, while profit is what remains after all expenses are deducted. Understanding the difference helps business owners gauge financial performance accurately.
Accounting Methods & Principles
Accruals
Accruals refer to revenues and expenses that have been earned or incurred but not yet recorded. Accrual accounting recognizes financial events when they happen, rather than when cash changes hands.
Cash Accounting
A method where revenue and expenses are recorded when cash is received or paid.
Double-Entry Accounting
A bookkeeping system where each financial transaction is recorded in at least two accounts (debits and credits) to maintain balance.
Fiscal Year
A 12-month period used for financial reporting that may or may not align with the calendar year.
Taxes & Compliance
1099 vs. W-2 Employees
1099 workers are independent contractors responsible for their own taxes, while W-2 employees have payroll taxes withheld by employers.
Estimated Taxes
Quarterly tax payments made by businesses and self-employed individuals to cover income and self-employment taxes.
Payroll Taxes
Taxes employers must withhold and pay on behalf of employees, including Social Security, Medicare, and unemployment taxes.
Sales Tax
A percentage-based tax collected on sales of goods and services, which businesses must report and remit to the government.
Tax Deduction
Expenses that can be subtracted from taxable income, reducing the amount owed in taxes.
Business Finance & Cash flow
Break-Even Point
The point at which total revenue equals total costs, meaning no profit or loss is made.
Burn Rate
The rate at which a business spends its available cash before reaching profitability.
Line of Credit
A flexible loan that provides access to funds up to a certain limit, helping businesses manage cash flow fluctuations.
Liquidity
The ability of a business to meet its short-term obligations with available cash and assets.
Working Capital
Working Capital is the difference between current assets and current liabilities. It measures a company’s short-term financial health and ability to cover immediate expenses.
Business Valuation & Investment
Capital Expenditures (CapEx)
Funds spent on acquiring or upgrading long-term assets, such as equipment or real estate.
Depreciation
Depreciation accounts for the decrease in value of assets over time. This is important for tax deductions and accurately reflecting the value of long-term investments like equipment and property.
Dividends
Payments made to shareholders from a company’s profits.
Equity
Equity represents the owner’s stake in the business, calculated as total assets minus total liabilities. Positive equity indicates financial stability, while negative equity may signal financial trouble.
Retained Earnings
Retained Earnings are the profits a company keeps instead of distributing as dividends. They are reinvested into the business for growth and expansion.
Return on Investment (ROI)
A measure of profitability that calculates the return generated from an investment relative to its cost.
Mastering these bookkeeping terms will help you make sound financial decisions and keep your business running smoothly. If you need expert bookkeeping support, Moose Creek Bookkeeping is here to help. Please give us a call or schedule a free discovery call.
