Basic Bookkeeping Terms and Phrases

In this article, we’ll walk you through the most important bookkeeping concepts, explain why they matter, and help you avoid common mistakes. An IPO is when a company sells shares of its stock to the public for the first time. IPOs are a way for companies to raise capital and generate interest in their business. They can be a risk for investors because there is often little information about the company before the IPO.

Balance Sheet and Its Components

Shareholders’ equity represents the difference between a bookkeeping terms company’s assets and liabilities. A positive shareholders’ equity would infer the company has greater assets than its liabilities. It is useful as a measure of the company’s financial performance before the impact of tax and interest costs which are not directly related to the operations of the company. It is often used by investors in ratios such as EBIT margin or EV/EBIT to compare companies’ financial performance. Earnings before interest and taxes (EBIT) shows how profitable the company is from its operations. It does not include expenses related to taxes and capital structure, such as interest and tax expenses.

At Trustway Accounting, we believe that financial clarity starts with knowledge. That’s why we created this guide—to simplify the essential terms and definitions that form the backbone of good bookkeeping. Whether you’re managing your own books or preparing to hand them off to a professional, knowing these basics will help you feel more in control of your financial future. At LedgersOnline, we can help you streamline your bookkeeping processes, marrying human expertise with the latest technology.

A bill of lading is a document that lists the goods being shipped to your business and serves as a contract to help ensure that the correct goods are delivered. These documents should be filed accordingly and may be used to verify that purchases are received before payment is made. Join over 1 million businesses saving on taxes by scanning receipts, creating expense reports, and reclaiming multiple hours every week—with Shoeboxed. A trial balance is the comparison of the balances of the total of the debits and credits in the general ledger to make sure they are equal. Net income represents total revenue minus the expenses, taxes, and interest. Accounts receivable is the balance of money owed to a business for goods or services delivered or carried out, but not yet paid for by customers.

• A worksheet is prepared when your trial balance doesn’t match the bank record.
• For instance, if an employee works 40 hours, their gross pay might be $600.
• A type of accounting system that records the financial transactions of a business.
• Income Statement (Profit & Loss Statement)Summarizes your revenues and expenses over a period of time—usually monthly, quarterly, or annually—so you can see if you’re making a profit.
• A cash receipts journal is a journal that is used to record the receipt of cash from other businesses or individuals.
• Liquidity ratios, like the current ratio, measure our ability to cover short-term obligations with our current assets.

Accounts Receivable Collection Tips for Small Business Owners

It also helps investors to compare your company to others in your industry. Bank reconciliation is the process of comparing your bank account statements to your financial records to ensure they match. You can use your bank statement to reconcile your records every month. An accounting period is a length of time used for reporting financial information. Accounting periods are important because they help you track your business’s financial performance over time.

Trial balance

• It’s an accounting entry that’s typically recorded as current assets on your balance sheet.
• When you understand your financial reports and the terms used in them, you’re no longer left guessing about the health of your business or personal finances.
• If a company was liquidated the shareholder’s equity would the amount available to the shareholders after all the company debts and obligations had been paid.
• If your business has $10,000 in cash and $5,000 in easily sellable inventory, you’re in a strong liquidity position to cover a $12,000 bill.

Depreciation spreads the cost of expensive assets—like equipment or vehicles—over their useful lifespan. Instead of expensing it all at once, you allocate the cost over time to reflect wear and tear. Let’s chat about how we can help get your business accounting back on track and getting you back to doing what you do best.

The length of time for an accounting period is normally one year, which means you gather all of your transactions and reconcile them with your bank statements for that year. From “general ledger” to “chart of accounts,” these terms require small-business owners to spend time researching just to reconcile their books. It’s added pressure on top of an already complicated and overwhelming process. A bookkeeping system in which all financial transactions only have to be entered once. This is usually within a cash book system and does not utilize journals and ledgers for the process of balancing. Credit cards enable individuals or businesses to purchase goods or pay for services in person or online using the money of the credit card company, up to a set limit.

Dividends are typically paid out quarterly for listed companies but can also be annually. A special dividend refers to a one-off payment which may be linked to a specific event such as an asset sale or some kind of M&A. Dividends are payments that companies or funds make as a way of returning earnings to their shareholders.

Money a business owes to its suppliers, vendors, or creditors for goods or services bought on credit; considered a short-term debt. Accounts payable is a crucial concept for any business operating with credit—every time a business purchases from a supplier on credit, an accounting entry is made in accounts payable. The cash flow statement is one of the key financial statements a company needs to prepare in line with US GAAP and IFRS. It presents the cash flows for the designated period and it reconciles to the cash and cash equivalents number on the balance sheet. Balance sheets are a snapshot of what a company owns at a specific date in time, usually the end of an accounting period.

Unearned Revenue, or deferred revenue or advance payments, represents the money a company receives for goods or services not yet delivered. It is considered a liability until the company fulfills its obligations. Unearned Revenue is gradually recognized as Revenue as the goods or services are provided.