1.02 – Basic Bookkeeping Terminology
Before diving into the world of bookkeeping, it’s crucial to get familiar with key accounting terms. Here’s a handy guide to the terminology that bookkeepers use daily.
Accounts for the Balance Sheet
Balance Sheet
This financial statement offers a snapshot of a company’s financial position at a specific point in time. It’s called a balance sheet because assets must equal liabilities plus equity.
Assets
These are the resources a company owns, like cash, buildings, land, tools, equipment, vehicles, and furniture.
Equity
This includes all the money invested in the company by its owners. For small businesses, owner’s equity is shown in a Capital account, while larger businesses show equity in shares of stock. Another important equity account is Retained Earnings, tracking profits reinvested in the company. Money paid out to owners in small businesses is tracked in a Drawing account, while incorporated businesses pay dividends to owners.
Liabilities
These are the resources a company owns, like cash, buildings, land, tools, equipment, vehicles, and furniture.
Accounts for the Income Statement
Income Statement
This financial statement summarizes a company’s financial activity over a period, such as a month, quarter, or year. It starts with revenue, subtracts costs of goods sold and expenses, and ends with net profit or loss.
Revenue
All money collected from selling goods and services, along with other income sources like selling unneeded assets or earning interest.
Costs of Goods Sold
Money spent on purchasing or producing products or services to be sold.
Expenses
Money spent on operating the company not directly tied to the sale of goods or services.
Other Common Terms
Accounting Period:
The time frame for tracking financial information. Most businesses track monthly, but some use quarterly or yearly periods.
Accounts Receivable
Tracks customer sales made on store credit, where payment is collected later.
Accounts Payable
Tracks outstanding bills from vendors and service providers.
Depreciation
An accounting method for tracking the aging and use of assets. Over time, assets like cars, buildings, and equipment lose value.
General Ledger
A summary of all the company’s accounts, the cornerstone of the bookkeeping system.
Interest
Money a company pays when borrowing from a bank or another company. This is calculated as a percentage of the borrowed amount.
Inventory
Tracks all products to be sold to customers.
Journals
Records of daily transactions, kept in chronological order. Active accounts like cash, Accounts Payable, and Accounts Receivable each have their own journal.
Payroll
The system for paying employees, including reporting taxes and other deductions to the government
Trial Balance
A test to ensure the books are balanced before preparing financial reports and closing the accounting period.
