Unless you have a background in accounting, the majority of bookkeeping terms seem like jargon and can be confusing.
From “general ledger” to “chart of accounts,” these terms require small-business owners to spend time researching just to reconcile their books. It’s added pressure on top of an already complicated and overwhelming process.
In this article, we define 23 common bookkeeping terms into plain English and break down what they mean in terms of your bookkeeping process (and tell you whether they’re necessary) so you can manage your books with confidence.
Accounts refer to the record of financial transactions for your business, whether income or expenses. You group different business transactions under different types of accounts (also known as journals).
You can have a number of accounts, such as revenue and expense accounts. These accounts go into your general ledger, which is then used to create your financial statements (e.g., your profit and loss statement).
2. Accounting period
An accounting period is the time it takes to complete an accounting cycle. You record and report business transactions and turn them into financial statements.
The length of time for an accounting period is normally one year, which means you gather all of your transactions and reconcile them with your bank statements for that year. With Neat, you can manage your accounts year-round. Come tax season, you have all the documents you need to file.
3. Accounts payable
Accounts payable refers to the money that you currently owe vendors or suppliers. In other words, your short-term, unpaid bills for which you’ve already been charged.
You record on your balance sheet the amount that you haven’t paid yet to vendors and suppliers. Accounts payable is categorized as a liability because it’s technically debt.
4. Accounts receivable
Accounts receivable refers to the money that you haven’t received yet from your customers for either your product or service (think of unpaid invoices). Accounts receivable still counts as money your business has earned since the customer will have to pay their bill.
In the traditional accounting process, you would credit your accounts receivable with the amount owed by the customer. Once the customer paid, you would debit the amount and move to your cash accounts.
Accruals refer to expenses that you’ve incurred but haven’t paid yet. Accruals can also be sales that you’ve made, but the customer hasn’t paid their invoice or bill. While accruals and accounts payable are accounting entries, accruals are entries that haven’t been realized yet (aka you haven’t received the bill or haven’t received payment from your customer).
If you use an accrual-basis accounting method, you’ll record accruals, both positive and negative, at the time of the sale. This is the opposite of cash-basis accounting, which means you record revenue and expenses when you’ve made or received payment.
Assets refers to the items — tangible or intangible — that your business owns and that could be turned into cash. These items might be property, vehicles, the cash you have, etc.
Assets are included on your balance sheet. With traditional accounting, you have to add up and record how much you have in assets.
7. Balance sheet
The balance sheet is a comparison between all of your assets (what you own) and all of your equity and all of your liabilities (what you owe). It helps you understand what the overall financial health of your organization should look like.
However, a balance sheet can be difficult to create. Your assets have to equal your equities plus your liabilities, which the average small business owner may or may not track. At Neat, we include within our platform only the financial information you need for the profit and loss statement, simplifying the process.
8. Bank reconciliation
A bank reconciliation is a type of report that checks and explains the difference between the cash balance in your bank account and the balance on your bank statements (e.g., your deposits, withdrawals). There’s traditionally a lot of effort that’s required to reconcile all your transactions down to the penny.
Bank statements never line up with the first of the month and the end of the month, because they’re always on 30-day cycles. You have to get a bank statement that covers the first half of the month and wait for the following month’s bank statement that covers the second half of the month that you’re trying to reconcile. With Neat, there’s no waiting — you can connect your bank account with our software so you can see transactions as they occur.
9. Cash flow
Cash flow refers to the money going in and out of your business (aka your income and your expenses). You want cash flow to be positive, naturally, but with traditional bookkeeping, it’s difficult to track your cash flow on a regular basis.
With Neat, you always have an accurate view of your monthly cash flow.
For many business owners, it’s easy to put off “keeping the books.” It’s overwhelming and intimidating and requires a good deal of manual effort. Ultimately, though, this practice causes you to miss out on insights into the health of your business. You’re not on top of your cash flow, which means that you’re not nearly as profitable as you could be. At Neat, we offer real-time insights into your cash flow so you always understand your business’s financial health.
10. Chart of accounts
A chart of accounts is nothing more than how you categorize your revenue transactions and how you categorize your expense transactions.
A chart of accounts makes sure that your transactions are categorized effectively so you can produce a profit-and-loss statement. However, there’s a lot of effort around not only ensuring that your transactions are legitimate but also cleaning them up if they’re illegitimate. It’s also an effort to categorize transactions by the correct chart of accounts.
11. Cost of goods sold (COGS)
Cost of goods sold is the money that you invest to create your product or service to sell to your customers. In other words, it’s your expense for making a sale.
The cost of goods sold qualifies as an expense (traditionally the largest for your business) and is included on your profit-and-loss statement. When you subtract your cost of goods sold from your net sales, you get your gross profit.
12. Double-entry bookkeeping
Double-entry bookkeeping is where you keep tabs on where your money is coming from and where your money is going. Every transaction is recorded twice — once in your debits account and again in your credits account. Debit entries (money coming into the account) are recorded on the left, credit entries (money going out) are recorded on the right.
For example, say you withdraw $500 from your cash account, and you buy a $500 laptop. You’ll debit your office-supplies account (since you gained the value of a laptop) and credit your cash account (since money is going out). Double-entry bookkeeping is supposed to help you keep track of how much money your business has coming in and going out. However, it can quickly get complicated because the total balance between debit and credit accounts should always be equal. If they don’t match, then you have the task of finding the error and reconciling the two accounts.
Assets (aka what you own) minus your liabilities (aka what you owe) equals your equities. It basically tells you what your business is worth after you’ve paid back your liabilities. This equity might be what you have invested in your business or what others have invested.
Equities typically go on your balance sheet along with your assets and liabilities.
Expenses reflect what you spend to keep your business running. Your expenses might be your cost of goods sold, your building’s rent, your office supplies, your payroll, etc.
Your expenses go on your profit-and-loss statement and can be used for tax deductions. However, it’s essential to keep up with expense documents such as receipts and invoices to ensure that you can back up your claims on your tax forms. Neat makes it easy to keep up with your expense documents — simply scan the document and upload within our cloud-based software. You can then categorize the type of expense.
15. Expense category
An expense category is exactly what it sounds like: you bucket your expenses by different categories,such as “Cost of Goods Sold” or “Office Supplies.” This organization by category makes it easier to track your business’s spending and report on your tax forms.
At Neat, we make the expense categorization process simple. You can first organize your business expenses by just five types — instead of searching for the right category out of dozens. These types include “Receipts,” “Mileage,” “Invoices” “Bills,” and “Statements.” Once you’ve bucketed your expense by item type, it’s easier to categorize, such as by “Gasoline/Fuel,” “Dues and Subscriptions,” or “General Merchandise.”
16. General ledger
Your general ledger is a complete record of all of your business’s accounts (aka your journals). Essentially, it summarizes your journal entries.
With traditional bookkeeping, you’ve got to create and manage this general ledger that houses all of your individual journals. You’ve also got to make sure that all transactions are properly accounted for in each one of those journals and that each one of those transactions is properly categorized by your chart of accounts.
17. Income statement
Also called a profit-and-loss statement, an income statement is nothing more than a way to understand how much money you made and how much money you spent. It shows your profits and losses at the end of a given period.
At Neat, we only work with the income statement (aka the profit-and-loss statement) rather than the balance sheet. We connect to bank accounts and credit card accounts directly where transactions happen. We don’t have an accounts payable or accounts receivable. We don’t have a way for you to create an asset account. Instead, we’re focused on helping you understand how your business is doing at any given time from a cash-flow perspective or a profitability perspective. These things take priority over the balance sheet.
A journal within bookkeeping is another term for “account.” Daily business transactions are placed into journals (e.g., sales journal, cash receipts journal )before they go into the general ledger. This ensures that all transactions are organized and properly accounted for.
A journal entry includes the transaction date, the amount spent, the accounts affected, and a description about the transaction. It’s very important that you maintain the chronological order of all transactions in each journal (which can get tedious if you try to do it manually — the right bookkeeping software makes the process automatic).
Your liabilities are items such as unpaid invoices, balances on your credit cards, and your business loans. Liabilities traditionally go onto your balance sheet with your assets and equities.
With traditional bookkeeping, liabilities are typically known as things like “accounts payable.”
Payroll refers to a list of your employees and how much you pay each one. For example, maybe you have five employees on your payroll. It requires calculating your employees’ compensation, as well as tax and retirement contributions.
When it comes to bookkeeping, it’s important to keep up with employee pay/deductions throughout the year so you can report to the government come tax season.
21. Single-entry bookkeeping
Single entry bookkeeping is an accounting method that means you record one journal entry for each transaction (whether income or expenses). You record each transaction in a journal called a “cash book.” It’s similar to managing a check register.
Single-entry bookkeeping helps you keep up with all transactions line by line. The problem is that accounting errors are easier to make because there’s no matching system in place. It’s also harder to check your business’s financial health.
22. Trial balance
Remember the double-entry bookkeeping method? A trial balance is a statement that tells you if your debit and credits are accurate before you create your financial statements.
When you prepare a trial balance, you’re making sure that your debit and credit accounts match up. If they don’t, you then have the tedious task of going back through, creating a worksheet to make adjustments, and preparing and adjusting the trial balance.
A worksheet is usually a spreadsheet that includes your list of accounts, account balances, adjustments, and adjusted balances.
A worksheet is prepared when your trial balance doesn’t match the bank record. You then have to go in and make adjustments, which are tracked in the worksheet.
Bookkeeping terms made simple
Jargon is overrated when it comes to bookkeeping. At Neat, we believe in keeping the process simple. With our bookkeeping system, the small-business bookkeeping process can be completed in three steps. Transactions must be:
- Recorded and legitimate
- Categorized correctly and automatically
- Right document attached
That’s it. No need to get a degree in accounting or gain an in-depth knowledge of every bookkeeping term in the book. Check us out at Neat as we roll out new features to greatly improve the small-business bookkeeping process.