Key Bookkeeping Terminology Explained

A guide about various terms used in bookkeeping or that relate to bookkeeping

Hiring an accountant or a bookkeeper can be a very costly option for a startup owner in the initial phases of their business, it is therefore extremely valuable for a business owner to understand the key terms of bookkeeping in order to initially manage their books themselves to reduce the costs of using an accountant. In order to help owners, we have explained key bookkeeping terms below which should help you polish your bookkeeping knowledge.

There are many bookkeeping terms or phrases that are used by bookkeepers on a daily basis and might be unknown to many startup owners, but these bookkeeping terms are of extreme importance when it comes to examining and recording transactions in a financial database on a daily basis.

Clear House Accountants aim to assist startup owners in getting a better understanding of the bookkeeping process, by listing down all the important bookkeeping terms, that may help such owners to successfully keep track of their books, and as a result, take effective financial decisions in the future.

Assets: 

An Asset is anything that a company owns and can earn income through, for instance, cash, land, vehicles, tools, equipment, furniture, house and building.

Liabilities:

Liabilities can be termed as ‘debts’ that the company owes, for instance, loans, bonds, and bills.

Balance Sheet:

A balance sheet is a financial statement that portrays the financial picture of a company at a particular date in time. As the name suggests, the things that a company owns must equal the things that it owes, in other words, assets of the company must equal its liabilities in the balance sheet.

Equity:

Equity represents the amount of money that has been invested in a company. For small businesses, the capital account shows the equity of respective owners, whilst in large businesses or corporations, the owner’s equity may be represented by the value of the shares or stocks he/she owns.

Retained earning is also an equity account that considers and takes into account all of the profits that have not been paid out but instead have been re-invested in the company.

Income statement:

It is a financial statement that depicts the financial activities of the company and focuses on the revenues that have been earned and expenses that have been incurred over a particular period of time such as monthly, quarterly and annually. It is also known as the ‘profit or loss statement’ or the ‘statement of revenue’.

Revenue:

Revenues can also be termed as ‘sales’ or ‘turnover’, it is the amount of money that is collected by selling the company’s goods and services. Revenues can be generated through multiple sources, such as through sales of products, services or assets that are no longer useful for business.

Expenses:

A company’s expense is the money spent by the business in running its operations, expenses which do not directly relate to the revenues are called overheads or operating expenses. Recording expenses correctly can get confusing when doing bookkeeping, a good bookkeeper or a skilled online accountant will help you categorize your expenses correctly and will also make sure that expenses which can and cannot be claimed against tax are clearly identified and recorded properly.

Cost of goods sold:

Any cost that is incurred during the production or manufacturing of a good or service that the company plans to sell or has sold, is the cost of goods sold.

Accounts receivable: 

The business account records all the payments that have yet to be made by the customers for goods and services they have bought and consumed from the business. Controlling your accounts receivable can mean a huge difference between having a positive or negative cash flow, an effective credit controller or accounting firm can help you set up proper credit control measures to improve cash flow.

Accounts payable:

The business account records all of the payments that have yet to be made to the customers, vendors, businesses, contractors or any firm from whom the business has purchased goods and services.

Accounting period:

An accounting period is the particular span of time during which the information has been recorded and tracked in the financial statement. Businesses may track their financial results on a monthly, quarterly or annual basis.

Journal:

A Journal records the daily financial transactions of a business in a timely order, that may be used for future accounting references. Cash, Accounts Receivable and most of the other accounts have their separate journals.

Inventory:

Inventory is an account that lists and tracks all of the items, goods, and products that have been stored by the business, for the purpose of sale.

Depreciation:

Depreciation is an accounting method that is used to determine the reduction in the value of a tangible asset over a period of time, based on its use. For instance, equipment bought for the purpose of manufacturing has a life period during which it will be able to perform its function, equipment will depreciate over time based on its use and as a result, will decrease in value. This is called depreciation. Certain terms and processes can get extremely complicated, it is wise to hire a good bookkeeper or accountant to get the finances sorted properly to avoid errors and mistakes.

Interest:

Interest can be considered as the additional money that has to be paid by a business, on the amount of money that has been borrowed from a bank or another business. For instance, a company takes a loan of £100 with an interest rate of 12%, the company then has to return the £100 loan with an additional £12, that additional £12 you pay to the lender or bank is the ‘interest’.

Trial balance:

Trial balance is a bookkeeping report that ensures that all of the company’s general ledger accounts or books are in balance before extracting any financial information. Trial balance is usually taken into account before closing the book for the particular accounting period

Payroll:

Payroll management is a critical function of the bookkeeping process. Payroll signifies the way the company pays the employees during a time period and also takes their information into account. Taxes that have to be paid, compensations, employment tax and other tax reporting to the government are part of the payroll management. It is advisable to hire a payroll accountant if you are unsure about this process as incorrect payroll submission can end up costing you more than what a good accountant will cost.

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