Basic Bookkeeping Terms
By Monica Javier
I know a lot of people who started their small businesses because of the pandemic. This gave a lot of people opportunities that were not there before. Some of them immediately hired a bookkeeper, some tried to do bookkeeping on their own. Bookkeeping helps you keep an accurate financial record to help you run your business, plan for growth or make sure that it will survive beyond the pandemic.
My background was not bookkeeping. Getting into the bookkeeping business made me realize that every business owner should be aware of these bookkeeping terms to feel confident talking about their business and talking with their bookkeeper and people who are in the field of finance.
Chart of account
This is a set of categories that describes your business activity. It will help you organize your business transactions. The same categories would build your financial statements. A good example is when you eat at a restaurant with a client it is Client Meals, or if you post an ad on Facebook it is Advertising.
Accounts Payable
This is the process of handling your bills. It includes receiving and categorizing the bills or expenses from your vendors, reviewing your cash flow, planning to pay them, and paying the bill. Usually, if you have a vendor or supplier you will get an invoice from your client, create a check, then schedule when to pay it and make sure it gets paid.
Accounts Receivable
This is the process of handling income coming in. It involves invoicing your clients and collecting from them. When a service is rendered or a product is delivered you should send your client an invoice. You then arrange to collect from the client. You have to make sure to remind your clients about open invoices on a set schedule. Clients get busy so they need reminders but you don’t want to bombard them with calls as well.
Accrual Basis
This is an accounting method used when income and expenses are recorded when a transaction occurs but is not necessarily received yet. Accrued revenue is when the revenue is recognized when you do the job or you make the sale. Accrued expense on the other hand is when the expense is recognized when you receive goods and services from your vendor.
Cash Basis
The term says it all. It means recording transactions, recognizing revenues and expenses when cash is received or paid out.
Liabilities
This refers to a company’s financial obligations and/or money that a business owes. This may include money owed to suppliers, wages that need to be paid, loans owed by the company. There are liabilities like accounts payable or income taxes payable which are essential parts of day-to-day operations.
Equity
This refers to what a business owner owns. It represents the value that would be returned to a company’s owners if all assets were liquidated and all of the company’s debts were paid off.
Assets
Assets refers to everything that the company owns that has value. Examples of assets are cash in the bank, investments, accounts receivable, inventory, properties, and even vehicles.
Net Income
It is the total amount of money earned minus all the costs of running the business. Like direct product costs, general business expenses, and taxes.
Inventory
This refers to items available for sale or raw materials used to make a product that a company is selling or manufacturing. For a clothing manufacturer, this may include textile and thread used to make their product. It is important to know your inventory levels so you know if you have enough to sell or when it’s time to order.
Reconcile
This refers to the process of matching your bookkeeping records with statements from the bank, creditors, or vendors. This way you are making sure that everything in your statements are actually your transactions. I would liken this to reviewing your receipts when you buy something from the store.
I hope this helps you understand terms used in bookkeeping and equip you with information that will make you feel more confident the next time you talk with other business owners or even when you talk to finance people about your business.
