As with all industries, bookkeeping comes with its own unique language and lingo. It’s full of terms and phrases that the average business owner or layperson may not be familiar with, and so as a professional bookkeeping firm, we’ve decided to create this glossary, which we hope will help shed some light on the more commonly used ones. Some you may know, some you may have heard of but are unsure of their definition, and others may be brand new to you.
If you have additional questions about any of these terms and phrases, feel free to contact us and let us know.
Bookkeeping and Accounting Glossary
Accounts Payable: Money that is owed to suppliers and creditors for various expenses, such as overhead or purchasing of inventory.
Accounts Receivable: The records of customer credit accounts and the amounts they owe to you or your business.
Acquisitions: Any goods, services or other items, including property, purchased for a business.
Assets: Refers to any and all items of value owned by a business, such as money you have in the bank, equipment, inventory, etc.
Audit: A thorough, detailed analysis of a business’s financial records by an independent 3rd party. Usually audits are completed on larger organizations by an accounting firm for an independent opinion of the accuracy of the financial statements to the shareholders. An audit can also refer to a review by an official government agency to ensure there are no errors or fraud. In Canada, audits are performed by the Canada Revenue Agency (CRA).
Balance Sheet: A business financial document that lists the assets owned by a business, the liabilities owing by the business, and the owners’ equity. The balance sheet represents a single point in time.
Bank Reconciliation: Comparing the bank’s records of transactions with that of the firm’s. The end result should be that both records have the same balance or variances are clearly defined
Bookkeeping: The process of keeping records of all business transactions in an organized, efficient and easily accessible manner for future reference.
Budget: A projection of your revenue or expenses over a set amount of time.
Capital: The total amount of a business’s borrowed and owned funds.
Capital Gain: A financial gain obtained from selling fixed assets, such as property, buildings or even an entire business for more than it was originally bought for.
Capital Requirement: A list of expenses required to start a business and the funds that will be required.
Cash Flow: The internal flow of funds within a business, generated from sales and payments.
Collateral: Something of value offered when taking out a loan, to be delivered in lieu of payment if it cannot be made.
Cost of Goods Sold: These are the costs that are directly related to the production of the product that you sell. They can be direct costs, such as purchasing the products from your wholesaler, or indirect costs, such as labour costs in assembling the product. Although this is typically used for businesses that have products, many industries that are service based will have the same category of expenses called Cost of Services, and track expenses related to providing the service offering. It is this number, in conjunction with your sales that enables you to calculate your Gross Profit Margin.
Creditor: An individual or business who is owed money by another individual or business.
Credits: This term is one of the fundamentals used in double entry accounting. There are always two types of transactions in an account, either an increase or a decrease. In traditional accounting, this was all done through T-accounts. A credit would be a number posted on the right side of the T-Account. Depending upon the type of account that it is, a credit can either increase or decrease the balance of the account.
Debits: This term is one of the fundamentals used in double entry accounting. There are always two types of transactions in an account, either an increase or a decrease. In traditional accounting, this was all done through T-accounts. A debit would be a number posted on the left side of the T-Account. Depending upon the type of account that it is, a debit can either increase or decrease the balance of the account.
Default: The failure to meet payment from a loan on time.
Depreciation: An accounting method that is used to track the value of an item over time. Depreciation is usually calculated on asset purchases for which the business will receive more than a single year’s value from it. An example is a desk, which will be used for more than one year.
Dividend: The distribution of a company’s profits amongst members and shareholders.
Entrepreneur: An individual that has started and currently manages their own business/enterprise.
Equities: Stocks and shares that are invested in a company but do not bear fixed interest.
Equity Capital: Money that is provided by the business owner with the purpose of financing the business.
Financial Statements: Reports created from accounting records to outline a business’s financial performance and position.
Fixed Assets: Properties owned by a business, such as land, facilities, vehicles, supplies and equipment that are utilized for the purposes of earning revenue, not sold as part of their regular business transactions..
Fixed Costs: Expenses that must be paid, regardless of what the business performs, such as overhead.
General Ledger: A general ledger holds a complete record of the financial transactions of a business. It represents the opening balance of an account, lists all of the transactions that have taken place within the account, and then provides a closing balance of that account, which is what flows into your financial statements.
Goodwill: A price asked for the sale a business versus the actual value of its physical assets. It is intended to represent any existing client base, as well as future profits accrued as a result of the sale.
Gross: The total overall amount before deductions from additional expenses are taken into account.
Gross Profit: The amount accrued from net sales versus cost of goods sold.
Income Statement: A financial statement that shows a company’s financial activity over a set amount of time, such as a month, quarter or year. It includes revenue earned, costs of goods sold, expenses, and net profit or loss. Also called a Profit and Loss Statement
Interest: Refers to the costs that come with borrowing money and must be paid on top of the original loan.
Inventory: The value of items a business purchases as part of its services and of goods they have for sale.
Investment: Money used with the intention of building the business in some form (i.e., new equipment) with an income expected in return.
Invoice: A document that shows charges accrued for goods delivered or work performed.
Lease: A legal contract regarding the possession and use of property and equipment between the owner (lessor) and another individual (lessee), in return for a specified amount of rent and for a specified length of time.
Liquidate: To settle a debt or convert assets to cash.
Loan: Money that is lent with interest, to be paid back in full and on time with interest.
Margin: The difference between the selling price and the purchase price of an item.
Mark-up: An increase in the price of an item between buying at wholesale and selling at retail.
Net Profit: The amount that is left over once all expenses from an accounting period are deducted from all revenue from the same period.
Net Worth: The owner’s interest in a business. Calculated when all liabilities are subtracted from the business’s assets.
Non-Cash Working Capital: Non-cash working capital is a calculation of taking all current assets net of cash and subtracting all current liabilities. This is one of the ratios which are examined by banks or investors in determining how much working capital is required by the business to support ongoing operations.
Operating Expenses: Expenses incurred from running a business during an accounting period. Does not include the cost of any goods sold.
Overdraft: A type of loan that allows an individual to continue withdrawing money up to an agreed limit, even after the balance has reached zero.
Overhead: Building expenses incurred in the day-to-day running of a business, such as electricity and rent.
Payable: Refers to amounts that are ready to be paid.
Payee: The individual to whom money is to be paid.
Payroll: The method by which a company pays its employees.
Petty Cash: A small amount of money businesses keep on hand for minor expenses.
Posting: Putting information from financial documents, such as invoices, into an accounting software system or ledger for future records.
Profit and Loss Statement: A statement of revenue and expenses that shows profits and losses over a certain amount of time. Used interchangeably with the term “Income Statement”
Profit Margin: The amount that the price of something, such as a product, is increased above its cost in order to make a profit.
Projection: A forecast regarding future trends and performance of a business.
QuickBooks: An industry standard accounting software developed and marketed by Intuit.
Receipt: A confirmation, in writing, of a transaction that has taken place, specifying the amount of money transacted.
Residual: An estimated value, agreed upon prior to the end of a leasing period, of an item that has been subject to a leasing agreement.
Return on Investment (ROI): Net profit vs. invested amount, after income tax.
Sage 50: An industry standard accounting and business management software.
Simply Accounting: An industry standard accounting software that has been discontinued and replaced by Sage 50.
Statement of Cash Flows: Although this is one of the most important financial statements, it is often ignored. The Statement of Cash Flows fundamentally shows the flow of cash in and out of the business. These inflows/outflows are typically aggregated into 3 main categories – Operating, Financing and Investing. This is the statement which reflects a firm’s liquidity.
Term Loan: A loan that is given for a fixed period of time and is paid in regular installments.
Trial Balance: A report which lists all of the accounts in a company’s financial record keeping system and their respective balances. In a balanced set of financials, the net figure of adding all of the account balances should be zero.
Unsecured Loan: A loan which has no collateral associated with it from the party receiving the money.
Variable Costs: Costs associated with running a business that vary from month to month, such as advertising or commission costs, unlike fixed costs which are consistent over time and not dependent on sales.
Vendor: A seller of goods and/or services.
Venture Capital: Capital that is invested in a business that has an unknown chance for success.
Working Capital: Current assets versus current liabilities of a business.