Glossary of Accounting & Bookkeeping Terms
This glossary provides clear, practical definitions of common accounting and bookkeeping terms that business owners, bookkeepers, and finance professionals should know. The focus is on everyday usage, with light technical context where helpful to bridge the gap between "bookkeeper speak" and business reality.
Overview
Use this glossary to decode the most common bookkeeping terms in plain English. Each entry explains not just what the term means, but why it matters to your business.
A
Accounts Payable (A/P) Accounts Payable represents the money a business owes to its vendors and suppliers for goods or services that have been received but not yet paid for. Think of it as a stack of unpaid bills sitting on your desk. In accrual accounting, this liability is recorded the moment the invoice is received, not when the check is written. Managing A/P is a balancing act: pay too fast, and you might drain your cash reserves; pay too slow, and you risk damaging vendor relationships or incurring late fees.
Accounts Receivable (A/R) Accounts Receivable is the money owed to your business by customers for goods or services you have already delivered. It is an asset on your balance sheet because it represents future cash inflows. While having high A/R might look good on paper (showing strong sales), it can be dangerous if that money isn't collected quickly. The goal of managing A/R is to shorten the time between making a sale and actually getting paid, ensuring your business has the cash flow needed to operate.
Accrual Accounting Accrual Accounting is a method of recording financial transactions when they happen, regardless of when money actually changes hands. If you send an invoice today, you record the income today, even if the customer pays next month. This method provides a more accurate picture of a business's financial health by matching revenues earned against expenses incurred during a specific period. It contrasts with Cash Accounting, which only tracks money as it enters or leaves the bank account.
Accruals Accruals are adjustments made to the books to account for revenue or expenses that have been earned or incurred but not yet recorded in the daily transactions. For example, if you incur a utility bill in December but don't receive the invoice until January, an accrual ensures the expense is counted in December's financial reports. This practice ensures that financial statements reflect the true economic activity of a period, adhering to the matching principle.
Accumulated Depreciation Accumulated Depreciation is a contra-asset account that tracks the total amount of depreciation expense allocated to a fixed asset since it was purchased. Instead of directly reducing the asset's value on the balance sheet, this account grows over time, showing how much of the asset's cost has been "used up." Subtracting accumulated depreciation from the asset's original cost gives you its "book value"—a rough estimate of what the asset is worth on paper today.
Adjusted Trial Balance The Adjusted Trial Balance is a report run after all adjusting entries (like accruals and depreciation) have been made but before financial statements are prepared. It serves as a final check to ensure that total debits equal total credits. If this report balances, it signals that the bookkeeping for the period is mathematically correct and ready to be transformed into formal reports like the Balance Sheet and Income Statement.
Aging Report An Aging Report categorizes outstanding balances (either A/R or A/P) based on how long they have been open. Typically, it breaks them down into buckets like 0–30 days, 31–60 days, 61–90 days, and 90+ days. For receivables, this report is a critical tool for collections, highlighting which customers are slow to pay. For payables, it helps prioritize which bills need immediate attention to avoid penalties.
Amortization Amortization is the process of spreading the cost of an intangible asset (like a patent, trademark, or software license) over its useful life. It is conceptually similar to depreciation, which applies to physical assets. Amortization also refers to the schedule of paying off debt over time, where each payment is split between principal and interest. Understanding amortization helps businesses accurately report the cost of long-term investments and manage debt repayment strategies.
Assets Assets are resources owned or controlled by a business that are expected to provide future economic value. They can be tangible, like cash, inventory, and equipment, or intangible, like patents and trademarks. Assets are the foundation of a business's operations; they are what you use to generate revenue. On the Balance Sheet, assets are listed in order of liquidity, or how easily they can be converted into cash.
B
Balance Sheet The Balance Sheet is a financial snapshot of a business at a specific moment in time. It details what the company owns (Assets), what it owes (Liabilities), and the owner’s stake in the company (Equity). The fundamental equation that governs this report is Assets = Liabilities + Equity. It tells you about the company's financial strength, liquidity, and leverage, answering the question: "If we closed the business today, what would be left?"
Bank Reconciliation Bank Reconciliation is the process of matching the transactions in your accounting software with the transactions on your bank statement. It ensures that every deposit and withdrawal is accounted for and identifies discrepancies such as bank fees, missing checks, or data entry errors. Regular reconciliation is the single most important control for preventing fraud and ensuring the accuracy of your financial data.
Bookkeeping Bookkeeping is the systematic recording, organizing, and maintaining of a business's financial transactions. It is the groundwork upon which all accounting and financial analysis is built. While accounting focuses on interpreting and reporting data, bookkeeping is about the daily grind of ensuring that data is complete, accurate, and categorized correctly. Without solid bookkeeping, tax returns and financial decisions are based on guesswork.
Break-Even Point The Break-Even Point is the sales volume at which total revenues equal total costs (both fixed and variable). At this point, the business is neither making a profit nor suffering a loss. Knowing your break-even point is crucial for setting prices and sales targets. It tells you exactly how much you need to sell just to keep the lights on, providing a baseline for profitability planning.
Burn Rate Burn Rate is a metric used primarily by startups to track the rate at which a company is spending its cash reserves before generating positive cash flow from operations. It is usually expressed as a monthly figure (e.g., burning $50,000 per month). Monitoring burn rate is critical for calculating "runway"—the amount of time the business can survive before running out of money. It forces founders to make tough decisions about spending and fundraising.
C
Capital Capital refers to the financial resources available to a business for use in producing goods or services. It typically comes from two sources: debt (money borrowed) and equity (money invested by owners or shareholders). In a broader sense, capital can also refer to the physical assets like machinery and factories used in production. It is the fuel that allows a business to start, operate, and grow.
Capital Expenditure (CapEx) Capital Expenditures are funds used by a company to acquire, upgrade, or maintain physical assets such as property, buildings, or equipment. Unlike operating expenses, which are deducted fully in the year they occur, CapEx is capitalized—meaning the cost is spread out over the useful life of the asset through depreciation. This distinction is vital for accurate profit reporting and tax planning.
Cash Accounting Cash Accounting is a simple accounting method where revenue is recorded when cash is received, and expenses are recorded when cash is paid. It is straightforward and easy to track, making it popular among small businesses and freelancers. However, it doesn't give a complete picture of long-term financial health because it ignores unpaid bills and uncollected invoices, potentially masking future cash flow problems.
Cash Flow Cash Flow describes the net amount of cash and cash equivalents moving into and out of a business. Positive cash flow indicates that a company's liquid assets are increasing, allowing it to settle debts, reinvest in the business, and pay expenses. Negative cash flow means money is leaving faster than it's coming in. It is often said that "cash is king" because a profitable business can still fail if it runs out of cash to pay its bills.
Chart of Accounts (COA) The Chart of Accounts is the backbone of your accounting system. It is an organized list of every account used to record transactions in the General Ledger, categorized into Assets, Liabilities, Equity, Revenue, and Expenses. A well-structured COA provides the framework for meaningful financial reporting, allowing you to track exactly where money is coming from and where it is going with granular detail.
Closing Entries Closing Entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts (Revenue, Expenses, and Dividends) to permanent equity accounts (Retained Earnings). This process "resets" the temporary accounts to zero, readying them to track the next period's activity. It essentially moves the net profit or loss from the Income Statement onto the Balance Sheet.
Contra Account A Contra Account is an account that reduces the balance of another account. It has a balance opposite to the normal balance of its related account. For example, "Accumulated Depreciation" is a contra-asset account because it lowers the book value of an asset. "Sales Returns and Allowances" is a contra-revenue account because it reduces total sales. These accounts allow businesses to report the net value of an item while keeping the original historical cost visible.
Cost of Goods Sold (COGS) Cost of Goods Sold (COGS) refers to the direct costs attributable to the production of the goods sold in a company. This includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses, such as distribution costs and sales force costs. Calculating COGS accurately is essential for determining Gross Profit and Gross Margin.
D
Debit In the language of double-entry accounting, a Debit is an entry made on the left side of an account. Debits increase asset and expense accounts but decrease liability, equity, and revenue accounts. It is simply a directional indicator of value flow. For every transaction, the total dollar amount of debits must equal the total dollar amount of credits, keeping the accounting equation in balance.
Credit A Credit is an entry made on the right side of an account. Credits increase liability, equity, and revenue accounts but decrease asset and expense accounts. Like debits, credits are not inherently "good" or "bad"—they just describe the movement of value. For instance, when you receive cash (Debit Asset), you recognize revenue (Credit Revenue).
Deferred Revenue Deferred Revenue (or Unearned Revenue) refers to money received by a business for goods or services that have not yet been delivered or performed. Although cash has come in, it is recorded as a liability because the business still "owes" the customer the product or service. Once the obligation is fulfilled, the liability is reduced, and revenue is recognized. This is common in subscription models and advance retainers.
Depreciation Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It recognizes that assets like machinery, vehicles, and computers lose value over time due to wear and tear or obsolescence. By spreading the cost, depreciation matches the expense of using the asset with the revenue it generates over time, preventing a massive hit to profitability in the year of purchase.
Double-Entry Accounting Double-Entry Accounting is the global standard system for recording financial information. It is based on the principle that every financial transaction has equal and opposite effects in at least two different accounts. For example, buying a laptop for cash reduces the "Cash" account and increases the "Equipment" account. This system provides a built-in error detection mechanism: if debits don't equal credits, you know a mistake has been made.
E
EBITDA EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is an alternate measure of profitability to Net Income. By stripping out the impacts of financing (interest), government (taxes), and accounting decisions (depreciation/amortization), EBITDA provides a clearer view of a company's operational performance. It is widely used by investors and analysts to compare the profitability of companies across different industries.
Equity Equity represents the owner's residual interest in the assets of the business after all liabilities have been deducted. It is essentially the "net worth" of the company belonging to the owners or shareholders. Equity comes from two main sources: capital contributed by investors and retained earnings (profits kept in the business). If a business is sold, equity is what the owners would walk away with after paying off all debts.
Expense An Expense is the cost incurred by a business in the process of earning revenue. Expenses can be direct costs related to producing goods (COGS) or indirect operating costs like rent, salaries, and marketing. Recording expenses accurately in the correct period is vital for calculating true profitability. In accounting terms, an expense is an outflow of value that decreases equity.
F
Financial Statements Financial Statements are formal records of the financial activities and position of a business. The three main statements are the Balance Sheet (position at a point in time), the Income Statement (performance over a period), and the Statement of Cash Flows (movement of liquidity). Together, they tell the complete story of a business's financial health to investors, creditors, and management.
Fiscal Year A Fiscal Year is a one-year period that companies use for accounting and financial reporting purposes. It does not necessarily align with the calendar year (January 1 to December 31). For example, many retail companies end their fiscal year in January after the holiday rush, while governments often use a fiscal year starting in July or October. Choosing the right fiscal year helps align reporting with the natural business cycle.
Fixed Assets Fixed Assets are long-term tangible items that a business owns and uses in its operations to generate income. They are not expected to be converted into cash within a year. Examples include real estate, manufacturing plants, vehicles, and office furniture. Because they provide value over many years, their cost is depreciated over their useful life rather than expensed all at once.
G
GAAP (Generally Accepted Accounting Principles) GAAP refers to the standard framework of guidelines for financial accounting used in any given jurisdiction (most notably the U.S.). It includes the standards, conventions, and rules that accountants follow in recording and summarizing and in the preparation of financial statements. Following GAAP ensures consistency, clarity, and comparability of financial information, which is critical for investors and lenders.
General Ledger (GL) The General Ledger is the master set of accounts that summarizes all transactions occurring within a business. It is the central repository for accounting data. Every transaction flows from a journal entry into the General Ledger. The GL tracks the history of every account (Cash, Sales, Rent Expense, etc.) and is the primary source for creating the Trial Balance and ultimately the Financial Statements.
Goodwill Goodwill is an intangible asset that arises when a buyer acquires an existing business. It represents the excess of the purchase price over the sum of the fair value of the net identifiable assets acquired. Goodwill reflects the value of the company's brand name, solid customer base, good employee relations, and proprietary technology. Unlike other assets, it is not amortized but is tested annually for impairment.
Gross Margin Gross Margin is a profitability ratio that shows the percentage of revenue that exceeds the Cost of Goods Sold (COGS). It is calculated as (Gross Profit / Revenue) × 100. This metric reveals how efficiently a company produces its goods or services. A higher gross margin means the company keeps more of each dollar of sales to cover operating costs and profit.
Gross Profit Gross Profit is the absolute dollar amount of profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. It is calculated as Revenue minus Cost of Goods Sold (COGS). Gross Profit measures the core profitability of the business model before administrative and overhead expenses are considered.
I
Income Statement (Profit & Loss Statement) The Income Statement is one of the three major financial statements, reporting a company's financial performance over a specific accounting period. It summarizes how the business incurs revenues and expenses through both operating and non-operating activities. The bottom line of the statement shows the Net Income (profit) or Net Loss, which is the ultimate measure of a company's success for that period.
Internal Controls Internal Controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. Examples include segregation of duties (so the person writing checks isn't also reconciling the bank account), regular audits, and password-protected access to financial systems. Strong internal controls are the immune system of a healthy business.
Inventory Inventory refers to the raw materials used to produce goods as well as the goods that are available for sale. It is classified as a current asset on the balance sheet because it is expected to be sold within a year. Managing inventory is a critical aspect of business; holding too much ties up cash and risks obsolescence, while holding too little risks stockouts and lost sales.
Invoice An Invoice is a commercial document issued by a seller to a buyer, relating to a sale transaction and indicating the products, quantities, and agreed prices for products or services the seller had provided the buyer. From the seller's perspective, it is a sales invoice; from the buyer's perspective, it is a purchase invoice. It serves as the primary record for requesting payment and recording revenue or expenses.
J
- Journal Entry A Journal Entry is the raw record of a financial transaction entered into a business's accounting system. It consists of the transaction date, the accounts involved, the amounts to be debited and credited, and a brief description. Journal entries are the first step in the accounting cycle, capturing the economic events that are later summarized in the General Ledger.
L
Liabilities Liabilities are a company's financial debts or obligations that arise during the course of business operations. They are settled over time through the transfer of economic benefits including money, goods, or services. Liabilities are divided into Current Liabilities (due within one year, like A/P) and Long-Term Liabilities (due after one year, like mortgages). They represent the claims of creditors on the company's assets.
Liquidity Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. In a business context, it measures the ability to meet short-term financial obligations. Cash is the most liquid asset, while tangible items like real estate or equipment are less liquid. High liquidity means a business can easily pay its bills as they come due.
M
Matching Principle The Matching Principle is a fundamental concept in accrual accounting which dictates that expenses should be recorded in the same period as the revenues they helped generate. For example, if you sell a product in January, the cost of the goods sold and any sales commissions should also be recorded in January, regardless of when cash is paid. This ensures that the financial statements accurately reflect the profitability of the period's activities.
Materiality Materiality is the accounting concept that allows for some flexibility in following strict accounting rules if the amount in question is insignificant. An item is considered "material" if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. If a cost is immaterial (like buying a stapler), it can be expensed immediately rather than depreciated, simplifying the bookkeeping without distorting the financial picture.
N
Net Income Net Income, often called the "bottom line," is the total profit of a business after all expenses, including operating costs, interest, taxes, and preferred stock dividends, have been deducted from total revenue. It is the most common measure of a company's profitability and is used to calculate earnings per share. Positive net income increases Retained Earnings and thus owner's equity.
Net Loss A Net Loss occurs when a company's total expenses exceed its total revenues for a given period. It is the opposite of Net Income. While occasional net losses are common for startups or businesses in transition, sustained net losses can deplete a company's cash reserves and equity, threatening its ability to continue operations.
O
- Operating Expenses (OpEx) Operating Expenses are the costs associated with running a business's core operations on a daily basis. These include rent, utilities, payroll, insurance, and marketing. Unlike Cost of Goods Sold (COGS), which are directly tied to production, OpEx are the overhead costs required to keep the business functional. Controlling OpEx is often the quickest way for a company to improve its profit margins.
P
Payroll Liabilities Payroll Liabilities are the amounts a business owes but has not yet paid related to payroll. This includes net wages owed to employees, as well as withholdings for income taxes, Social Security, Medicare, and other benefits like 401(k) contributions. These funds are held in trust by the employer until they are remitted to the appropriate government agencies or providers, making accurate tracking essential to avoid severe penalties.
Prepaid Expenses Prepaid Expenses are payments made in advance for goods or services to be received in the future. Common examples include paying a year's worth of insurance or rent upfront. In accounting, these are recorded as Current Assets, not expenses. As the benefit is used up over time (e.g., each month of insurance coverage passes), the asset is reduced and an expense is recognized.
Prior Period Adjustment A Prior Period Adjustment is a correction made to the beginning balance of Retained Earnings to fix a material error from a previous year's financial statements. This is a rare and significant event, indicating that past reports were incorrect. It ensures that the current year's income statement isn't distorted by mistakes that belong to history.
R
Reconciliation Reconciliation is the process of comparing two sets of records to ensure the figures are in agreement and are accurate. The most common type is bank reconciliation, but you can also reconcile vendor statements, credit card bills, and inter-company accounts. Reconciliation acts as a "truth serum" for your books, proving that the balances in your accounting software match reality.
Retained Earnings Retained Earnings refers to the cumulative net income that a business has earned and kept (retained) since its inception, rather than distributing it to owners as dividends. This account connects the Income Statement to the Balance Sheet. Positive retained earnings represent money that has been reinvested into the business to fuel growth, pay down debt, or build a reserve.
Revenue Revenue (or Sales) is the income generated from normal business operations, such as selling goods or services. It is the "top line" figure on an Income Statement. Revenue is distinct from "income" or "profit" because it does not account for any costs. Tracking revenue trends is vital for understanding market demand and business growth.
Run Rate Run Rate is a method of forecasting future financial performance based on current data. For example, if a company generates $100,000 in revenue in Q1, its "annualized run rate" would be $400,000. It is a useful shorthand for understanding the current trajectory of a business, assuming current conditions continue. However, it can be misleading for businesses with high seasonality or lumpy sales cycles.
S
Statement of Cash Flows The Statement of Cash Flows is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. It breaks analysis down into three sections: Operating Activities (day-to-day business), Investing Activities (buying/selling assets), and Financing Activities (borrowing/repaying debt or equity). It bridges the gap between the accrual-based Income Statement and the actual cash balance.
Subsidiary Ledger A Subsidiary Ledger is a detailed subset of accounts that supports a control account in the General Ledger. For example, the "Accounts Receivable" control account in the GL shows the total amount owed by all customers. The A/R Subsidiary Ledger breaks that total down by individual customer. This detail is essential for tracking who owes what and managing relationships.
T
- Trial Balance A Trial Balance is an internal report that lists the balances of all general ledger accounts at a specific point in time, separating them into debit and credit columns. The primary purpose is to verify that the total value of all debits equals the total value of all credits. While it proves mathematical balance, it doesn't guarantee the data is correct (e.g., a transaction could be balanced but posted to the wrong account).
U
- Unearned Revenue See Deferred Revenue. This term is often used interchangeably with Deferred Revenue to describe money received before a service is performed. It represents a liability—a debt of service owed to the customer.
V
- Variance Analysis Variance Analysis is the quantitative investigation of the difference between actual behavior and planned (budgeted) behavior. It answers the question, "Did we spend more than we planned, and why?" By analyzing variances, management can identify operational inefficiencies, pricing errors, or unexpected market changes, allowing them to adjust strategy in real-time.
W
- Working Capital Working Capital is a measure of a company's operational liquidity and short-term financial health. It is calculated as Current Assets minus Current Liabilities. Positive working capital means the company has enough liquid assets to pay its short-term bills and invest in growth. Negative working capital indicates potential liquidity trouble and a risk of insolvency.
Z
- Zero-Based Budgeting Zero-Based Budgeting is a method where the budget for a new period starts from "zero," rather than using last year's budget as a baseline. Every expense must be justified and approved for each new period. This approach encourages a critical review of all costs and prevents "budget creep," where unnecessary expenses persist simply because they were there before.
Next steps
- See common bookkeeping questions: FAQ
- Apply terms in context: Bookkeeping Basics
This glossary is intended as a practical reference. Accounting standards, tax rules, and terminology can vary by jurisdiction and circumstance—consult a qualified professional when needed.