Accounting / Bookkeeping Basics: Bookkeeping and Accounting Terminology

Accelerated Depreciation: Accelerated depreciation is a depreciation technique whereby an asset drops its book value faster than the conventional straight-line technique. Typically, this approach allows for greater reductions of assets in earlier years and is used to reduce taxable income.
Account: An account is a database in an accounting system that monitors the financial actions of a specific asset, liability, equity, income, expenses, or other activities that may alter these resources and charges.
Account Payable: Accounts payable are the amount business owners owe creditors for delivered goods or services offered.
Accounts Receivable: These are claims against the debtor for unpaid bills, usually based on a successful transaction of sales or services delivered.
Accountant: The person who sorts and enters financial data into the accounting system.
Accounting: The method of collecting and recording financial data into a bookkeeping system. It also relates to finalizing the end of the year accounts, generating financial statements, and estimating tax payable by a certified practicing accountant.
Accounting Equation: The accounting equation is the basic accounting theory and a basic balance sheet feature. The equation is given as follows: Assets = Liabilities + Shareholder's Equity. This equation lays the basis for double-entry accounting and illustrates the layout of the balance sheet.
Accrual Accounting: Accrual accounting is an accounting method in which transactions are recorded as they occur, regardless of when the cash is exchanged. For example, if Mr. Smith purchases a book in February, and gets the bill in March, the accounting system used is an accrual accounting system. In the accounts, the purchase is documented and included on the Income Statement in February, on the billing date, rather than when it was paid in March.
Accrued Expenses: These are amounts owed by a company to its distributors or workers, which pertain to the current cycle but have not yet been invoiced.
Assets: Assets are those valuable items that are owned by a business. They are usually reported on the balance sheet and include current assets such as cash in bank accounts, cash in small cash boxes, accounts receivable, and non-current assets such as machinery, assets, and trucks.
Bad Debts: Those are sales invoices that have been written off specifically because payments are due and may never be paid. Sales invoices are only written off after some attempt has been made to recover the amount owed, often by debt collection agencies. Bad debts are usually expensed on the accounts.
Balance Sheet: The balance sheet report tells the owners and managers of the company the amount of equity they have in the company, the number of assets the business has, and what the business owes in debts. The balance sheet works hand in hand with the accounting equation.
Bank: A safe financial institution where business owners deposit their revenues and pay their debts. Banks offer financial strategies and also provide expansion loans to companies.
Bank Statement: A detailed printout of the balance in a bank account that displays the amounts deposited and withdrawn from the bank account, given to the owner of the account.
Billing: An invoice or other document obtained from a manufacturer, supplier, etc., typically for products or services received.
Bookkeeping: The process of collecting, documenting, and reporting financial transactions during a given period, usually monthly, quarterly, or yearly.
Bookkeeper: A qualified and experienced person whose duty is to perform financial reporting tasks.
Bookkeeping Cycle: A bookkeeping cycle is a looping procedure the bookkeeper follows when recording and reporting transactions. They are generally structured from the first day to the last day of the month and repeated monthly. During this period, bank reconciliations, financial reports, income tax, and payroll tax will be calculated. The end of the month is 'closed,' and the financial transactions for that month will not be altered in any way other than by trying to reverse/correct the journals, and that to be carried out only in the next month. This will continue until the end of the financial year when all data is submitted to the accountant in charge.
Budget: The financial plan where a company plans the amount it expects to accumulate in the coming year and what those projected earnings will be spent on and then compares/tracks the actual figures with the projected plan.
Capital: The personal funds the actual owner of business incorporates into a business.
Cash Accounting: Recognizes revenue and costs as they are paid or incurred, not when they are accumulated. This accounting system is the reverse of the accrual accounting system.
Cash book: The primary record that shows monies in and out of the business via the bank accounts. This report highlights the cash flow in and out of business and what it was spent on. Estimates will also be provided in the cash flow projections of profits and expenditure for the coming year. The estimates would be focused on actual profits and losses and will enable the company to meet its sales and budget objectives.
Chart of Accounts: This represents a quick outline of accounts set up in the accounting system where certain financial transactions are grouped. The main categories are as follows: Equity, Assets, Liabilities, Expenses, Cost of Goods, and Income.
Checks: Special pre-printed paper slips in a book format designed by your bank, used by a corporation rather than cash or internet banking to pay debts. Such notes are finalized by entering the date, the name or initials of the person/business getting paid, the amount in figures, and the value in words.
Closing Balance: The total and ultimate balance on the bank statement or in the ledgers account at the end of any specific day.
Cost of Goods Sold: Often recognized as cost of sales, this is the cost to the company of any part or stock sold to customers. This could also involve the cost of producing these goods.
Credits: Credits are located on the right-hand side of the double-entry bookkeeping system bookkeeping. A credit entry lessens assets and expenses and boosts income, liabilities, and equity.
Creditor: The person or company to whom the business owes money.
Debit: Debits are located on the left-hand side of a double-entry bookkeeping system. A debit entry boosts the assets and expenses of a business and lessens the liabilities, income, and equity.
Debtor: A client who owes money to your company.
Depreciation: Most assets closely related to a company drop in value over time due to wear and tear and everyday use – this is known as depreciation. The value that is used to depreciate the assets is measured with special rates, usually set by the tax department. It is given as the percentage of the cost price, less pre-calculated depreciation. Depreciation is often claimed as a business expense to lessen the income tax.
Double-Entry: The bookkeeping system whereby all financial transactions are recorded twice – once as a debit and the other as a credit. The debits must be equal to the credits. When they aren't, it is labeled as being out of balance. When this occurs, it implies that there is an error somewhere, and the error must be located and corrected.
Drawings: Funds withdrawn from the company by the owner of a business for personal use.
Entry: Every financial transaction recorded in a bookkeeping system.
Equity: Equity is a business’s net assets or, in other words, assets less liabilities. The Equity category is listed on the Balance Sheet, which shows how much the company's owner allocated to the company through personal assets (capital) and how much they borrowed from the business for personal use (drawings).
Expenses: Most transactions made by a company are expressed as an expense. Expenses are often recorded on the profit and loss report and can be used to lessen the amount of tax owed to the government.
Filing: Filing is an act of putting away documents in a standardized way.
Financial Statement: Reports that are generated by a tax accountant at the close of a financial year focused on all the data entered into the bookkeeping system by the bookkeeper. Such reports reflect how well the company progresses, the company value, and are used to determine income tax that should be paid to the government.
Fiscal Year: A fiscal year is a financial year of 12 consecutive months, which can start from any month of the year.
Gross Profit: This is given as business income less the cost of sales; if the value is higher than the income, gross liability results.
Income: The amount earned by a business through product sales and services rendered.
Inventory: A compilation of products that a business buys and sells. Such products are stored, and a detailed record kept of the number of items on hand at a given period.
Invoice: A document outlining the sales or purchase of stock, parts, or services. The invoice shall contain necessary details, like date, invoice number, quantity, description, cost, total, and payment terms. Any time a business purchases products or services, it receives a purchase invoice, and when it sells goods or renders services, it provides a sales invoice to the customer.
Journal: An entry made to the accounts using a double-entry bookkeeping system to make changes to the accounts. It outlines the account debited and credited, the date, and the rationale behind the journal, accompanied by a reference.
Ledger: A ledger outlines all the entries made against the accounts, either as credits or debits.
Liabilities: The debt that the company owes to other businesses.
Loan: Funds, assets, or other material goods are given to a party, which ought to be paid back with interest or, in some cases, financial charges.
Loss: A loss occurs when the company's overall income is less than that of the expense that the company needs to pay to keep the business running. Typically, this is considered a net loss.
Net Profit: The result after deducting the business expenses from the gross profits.
Opening balance: The total amount in the company's account which is brought forward at the beginning of the accounting period.
Profit: The difference between the revenue made and the expense incurred.
Purchase: If a business buys goods and/or services, it is regarded as purchases.
Reconcile: The process of reconciling one set of figures or documents with another.
Recurring: A transaction that occurs regularly every week or month for the same amount at the same location is recurring or repetitive.
Salary: A salary is a fixed sum paid to an employee for his or her work. Salary earners do not earn extra pay like a wage earner when they work longer than regular hours.
Sales: All products or services offered to consumers fall under the category of sales.
Single-Entry: A bookkeeping system whereby all financial transactions are to be made only once. Normally, this is done in a cash book system that does not include journals and ledgers.
Wages: An hourly payment made to an employee in exchange for the work they do.
Withdrawal: This simply occurs when funds are taken out of a business or personal account.
Write-Off: This is commonly used by businesses that intend to account for outstanding receivables and loans, and in some cases, the cost incurred on stored business inventory.