Common Accounting Terms Explained!

As they say, knowledge is power, so it only makes sense that the more you know, the more powerful you become! Bring that knowledge and power over to your books, even if you’re not the one working on them every day. We’ve compiled some accounting and bookkeeping terms that are commonly used but may not be commonly known. You should know what your books and your accountant are telling you, and that starts with breaking down some of the key terms. If you run into a term you’re unfamiliar with, always ask your accountant. 

Accounts Payable

A/P includes all of the expenses that a business has incurred but not yet paid. This is recorded as a liability on your Balance Sheet, since it’s a debt owned by the company. 

Accounts Receivable

A/R includes all of the revenue/sales that a business has made but not yet collected payments on. On the Balance Sheet, this is recorded as an asset since it will likely convert to cash in the short-term. 

Assets

This is a term that encompasses everything a business owns that holds some sort of monetary value. This could be cash, land, vehicles, buildings, and so on. 

Balance Sheet

This is a financial statement that reports all of a company’s assets, liabilities, and equity. You can look at this as a basic equation: Assets = Liabilities + Equity. 

Cash Flow

Cash Flow looks at the in’s and out’s of where a company’s cash goes. Positive cash flow obviously means there is more cash flowing into the business than out, and negative means the opposite. 

Chart of Accounts

A Chart of Accounts is just that - a quick breakdown of all the financial accounts a company has. 

Equity

Equity refers to the value of the shares issued by a company. To measure equity, a company should subtract their liabilities from their assets - refer to the equation: Assets = Liabilities + Equity. 

General Ledger

The General Ledger is the ultimate document that contains a complete record of a company’s financial transactions. This is used to prepare all other financial statements. 

Liabilities

This can be described simply as the debts a business still owes. This usually comes in the form of payroll, loans, or A/P. Keep in mind: Assets = Liabilities + Equity. 

Overhead

When you hear the term “overhead,” know that it’s referring to all the expenses related to running a business, not including what it says to make the product or deliver the service. This is things like rent, executive salaries, and more. 

Profit & Loss Statement

Also known as an Income Statement, this is a financial statement that summarizes a company’s revenues, expenses, and profits over a certain period of time. 

Reconcile

When a bookkeeper reconciles an account, this means they went through the process of ensuring the book records and bank records match for all of the accounts a company has. This should be done regularly to catch any mistakes early. 

The more you know, the better off you’ll be, especially when it comes to making informed decisions on your business. Review these terms until you become comfortable with them, as they’re important to your books and business.