Do you ever read thru some accounting instructions and wish they’d explain what all the terms mean?
Well, here is an accounting glossary of some basic accounting terms and concepts that are applicable to most standard accounting systems.
The basic accounting terms I’m listing here are the ones I think most small business owners would need to reference.
If you find a term you think I should add here, let me know by visiting my contact page!
Accounting Glossary Terms
Accounting – The process of recording, classifying, reporting, and interpreting financial data of an organization.
Account – An accounting devise used to record and summarize increases and decreases in revenue, expense, asset, liability, and equity items.
Accounting equation – An expression stating the equality of assets and equity, stated as such: Assets = Liabiilites + Owner’s Equity.
Account Payable – A debt owed to a creditor for goods or services purchased on credit.
Account Receivable – An amount due from a debtor for good or services sold on credit.
Asset – A property or resource owned by an individual or organization.
Balance Sheet – A basic accounting financial report showing the assets, liabilities, and owner equity if an organization on a specific date.
Bookkeeping – The record making phase of accounting. Entering transactions into journals. Paying bills. Preparing sales invoices.
Budgeting – The phase of accounting that deals with planning the activities of an enterprise and then comparing actual performance to those plans.
Business Transactions – An exchange of goods, services, money, or the right to collect money.
Capital Stock – Ownership equity in a corporation, the result of selling shares of corporate stock to its shareholders.
Chart of Accounts – A list of all accounts being used in a particular standard accounting system, in this order: assets, liabilities, equity, revenue, expenses. See a sample Chart of Accounts here.
Controller – The top accounting officer of a large enterprise. Would be responsible for the entire accounting function, and would report directly to the owners, or possibly to a VP of Finance.
Cost accounting – The part of basic accounting that focuses on collecting and controlling the costs of producing a certain product or service.
Cost of Goods Sold – The cost of producing a good to sell, or the cost of offering a service to your customer. It includes materials to make the goods, labor costs to manufacture the goods (not administrative labor), subcontracted services costs, and freight or postage costs to deliver – whatever specific costs you have to buy to make a good or provide the service.
Equity – A right, claim, or interest in a property. As it pertains to Owner’s Equity, it would be an interest in the organization.
Expense – Goods or services consumed in operating an enterprise.
Income Statement – A basic accounting financial statement showing revenues earned by a business, the expenses incurred in earning that revenue, and the corresponding net income or loss.
Invoice – An itemized statement of goods or services bought and sold.
Journal – Book of original entry in your standard accounting system, in which business transactions are first recorded, and from which transactions are posted to ledger accounts. (think checkbook)
Ledger – A group of accounts used by a business to record its transactions. (like summarizing your checkbook entries into separate lists by name or type of entry)
Liability – A debt owed by the organization.
Posting – The act of transcribing amounts from a journal to a ledger account.
Purchase order – A standard accounting system form. This business form is used by a purchasing department to place an order. It authorizes the supplier to ship the merchandise ordered.
Trial Balance – You probably won’t use this, but you may here it from your CPA. It is a list of your ledger accounts with the balance in each account, and the total of all debit and credit balances, which should equal zero. This is a Chart of Accounts with balances.
Voucher – A business form on which a transaction is summarized, its correction verified, and its recording and payment approved. I think the most widely used voucher is a bill received for goods or services purchased. The bill would be compared to the purchase order, if applicable, verifying that the bill is correct, then the information would be entered into an accounting software system as a voucher, to be paid at a later date.
Hope that helps. If you still have questions on certain terms, send me an email, I’d be glad to explain. When you run a small business, it’s important to understand the mechanics of accounting so you can run your business more profitably.
Having trouble finding the time (or the desire) to do your own bookkeeping? Give me a call. I provide bookkeeping and accounting services via my company, Small Business Accounting Solutions. Spend your time growing your business and let me take care of the books.