Accounting Dictionary: A Simple Guide to Financial Business Terms

Step one in small business financial literacy is knowing the lingo.

This article is like your small business dictionary. Skip to the definition you need help with, or read all the way through if you’re really keen. We’ve also provided some links for further reading if our short definition doesn’t give you enough context.


Bookkeeping

Accounts payable

Accounts payable is made up of money your business owes someone, usually a vendor or supplier. This outstanding expense is listed as as a “liability” on your company’s balance sheet. Accounts payable is a part of accrual basis accounting.

Accounts receivable

Accounts receivable is made up of money owed to your business, usually by customers. This money is typically collected after a period of days or weeks, and recorded as current assets on your company’s balance sheet. Accounts receivable is a part of accrual basis accounting.

Accrual basis accounting

A method of accounting where income and expenses are recorded as they’re incurred—not when money actually enters or leaves a company’s accounts. For example, when your company invoices a customer, the income is recorded immediately, even if the customer hasn’t paid yet.

Further reading: Cash Basis Accounting vs. Accrual Accounting.

Bank reconciliation

The process of making sure your business books show the amount of money you have in your bank account. This is important because sometimes the two get out of sync, and you need to know how much money you have in order to make informed business decisions.

Further reading: The Art of Bank Reconciliations.

Bookkeeper

A professional who prepares your accounts. They track your business’s financial income. A bookkeeper gives an accountant the information they use to prepare financial statements. Bookkeepers focus on day-to-day transactions, rather than long-term forecasting and planning.

Further reading: The Difference Between Bookkeepers and Accountants.

Cash basis accounting

A method of accounting where income and expenses are recorded when cash enters or leaves the company’s accounts—not when they’re incurred. For example, when your company invoices a customer, the income is not recorded until they pay you.

Further reading: Cash Basis Accounting vs. Accrual Accounting.

Chart of accounts

The chart of accounts lists all the different accounts your business uses in its general ledger. Your chart of accounts might look something like this:

  • Assets—equipment
  • Assets—vehicles
  • Revenue—socks
  • Revenue—mittens
  • Expenses—rent
  • Expenses—salaries

If you want a quick glance at how many different types of assets, liabilities, revenue, and expenses you have in your business, you’ll check the chart of accounts.

Credit and debit

In double entry bookkeeping, a credit is generally the amount of money leaving an account. A debit is the amount going into it. Each credit has a matching debit for the same amount, and vice versa.

Further reading: Debits and Credits: A Simple, Visual Guide.

Double-entry bookkeeping

A bookkeeping method where every transaction is recorded twice: once, as money leaving an account; and again, as money entering a different account. These transactions are called debits and credits.

Further reading: A Relatively Painless Guide to Double-Entry Accounting.

General ledger

The general ledger is the summary of all your financial transactions, made up of smaller subledgers. It’s used in double entry bookkeeping. Examples of subledgers in the general ledger include accounts payable and accounts receivable.

Further reading: What is a General Ledger?

Invoice

A document sent by a vendor to a buyer. It lists goods sold or services performed, how much the vendor expects to be paid, and the terms of payment.

Purchase order

A document sent by a buyer to a vendor, outlining exactly what items they expect to get, and on what terms. Once the vendor approves the purchase order, they send the buyer an invoice.

Further reading: What is a Purchase Order?

Single-entry bookkeeping

A bookkeeping method where every transaction is recorded just once, as funds either entering or leaving the business. Typically used for small businesses with very simple structures.


Accounting

Accountant

A professional who handles high-level financial planning. They typically use information provided by a bookkeeper to put together financial statements. Bookkeeping is fairly straightforward and transactional, but accounting is more interpretive. An accountant can use their experience and knowledge to give you advice and help you plan your company’s growth.

Further reading: The Difference Between Bookkeepers and Accountants.

Assets

Anything with economic value held by a business. Assets are reported on a company’s balance sheet. An asset can be anything from a patent you registered for a solar-powered lawn mower, to the money a client owes you for designing their logo, to the frying pans in your grilled cheese sandwich pop-up shop.

Balance sheet

A document that shows your company’s net worth. It’s typically prepared by an accountant. The balance sheet is one of the three major types of financial statements (along with the income statement and cash flow statement). It combines your company’s assets and liabilities, and the owner’s equity, at a specific point in time.

Further reading: Understanding Income Statements vs. Balance Sheets.

Cash flow statement

A document that tracks changes to the balance sheet, showing how and when money enters and leaves your company. It’s typically prepared by an accountant. The cash flow statement is one of the three major types of financial statements (along with the income statement and balance sheet).

Further reading: Cash Flow Statements, Explained.

Cost of goods sold (COGS)

The cost of raw materials used to create a product, plus direct labor costs (e.g. the wages of the workers who manufactured it). COGS doesn’t include indirect expenses, such as the cost of distributing or marketing the product.

For instance, if you sell handmade sweaters for chihuahuas, the cost of hypoallergenic alpaca wool plus the hours you spend knitting are counted as COGS. The full-page ad you take out in Chihuahua Fancier magazine is not.

Further reading: How to Calculate Cost of Good Sold

Equity

The value of assets minus liabilities. Equity appears on your company’s balance sheet. For instance, if your business owns $100,000 worth of real estate, equipment, and inventory, but owes the bank $25,000, the business’s total equity is $75,000.

Expenses

The costs incurred by your company in the course of earning revenue. Examples of expenses include employee wages and payments to suppliers. Some expenses are tax-deductible, and can be written off.

Financial statement

A document that summarizes an aspect of your company’s finances. It’s typically prepared by an accountant. It relies on information found in the general ledger. Examples of financial statements include your balance sheet, income statement, and cash flow statement.

Further reading: How to Read Financial Statements.

Income Statement

An income statement tracks how much money your company has earned and how much it has spent over a specific period of time. It’s one of the three major types of financial statements (along with the balance sheet and cash flow statement). Also known as a profit and loss statement.

Revenue

Money earned by your company. “Revenue” includes discounts and returns, but doesn’t include expenses. It’s gross income, as opposed to net income.

Taxes

CRA Form T4

In Canada, the T4 form is given to an employee by an employer, reporting how much they earned in wages, and how much of that was remitted to the Canadian Revenue Agency (CRA) in the form of pension and Employment Insurance contributions.

CRA Form T4A

In Canada, the form given to an entity reporting non-employment income. Form T4A is most commonly issued to contractors.

Income tax

A tax you pay based on how much money you made during the tax year. If you operate a pass-through entity, your business’s income is one and the same with your own, and you have to pay income tax on it.

IRS Form 1040

The form used by individuals to report their income to the IRS. Owners of pass-through entities report income earned from their business on Schedule C of Form 1040.

Further reading: What Is IRS Form 1040, and How Do You File It?

IRS Form 1065

The form a partnership must submit to the IRS to report its income. In addition to Form 1065, partnerships must submit a Schedule K-1 for each member of the partnership.

Further reading: What is Form 1065?

IRS Form 1099-MISC

The form used to report non-employment income totalling $600 or more. One copy is submitted by the payer to the payee, another is submitted by the payer to the IRS. Form 1099-MISC is typically used to report payment to contractors.

Further reading: What is a 1099?

IRS Form 1120

The form used by C corporations to report their income to the IRS.

Further reading: Tax Form 1120—What It Is, How to File It?

IRS Form 1120S

The form used by S corporations to report their income to the IRS.

Further reading: What is Form 1120S, and How Do You File It?

IRS Form W-2

The form given by employers to employees, reporting how much they earned in wages, and how much was withheld in the form of federal, state, and other taxes.

IRS Schedule K-1

The form submitted for each member of a partnership as part of regular annual tax filing, in order to report the percentage share each member has in the partnership. Each partner reports their income from the partnership on their own Form 1040 (personal tax return), while the partnership itself reports its total income with Form 1065.

Estimated quarterly taxes

Tax payments made every three months to the IRS. The amount you pay is estimated, and any extra you pay comes back as a tax refund after the end of the tax year. You have to make quarterly estimated tax payments if you expect to owe $1,000 or more in taxes.

Further reading: How to Calculate and Pay Estimated Quarterly Taxes.

Sales tax

Tax charged on sales within a sales tax nexus. It’s typically a percentage of the price being paid by the customer. Once you’ve collected sales tax from your customers, you pay it to the local taxing authorities (states and jurisdictions).The amount varies depending on your state. Whether you have to charge sales tax is determined by your sales tax nexus.

Further reading: Sales Tax Basics: A Guide for New Entrepreneurs.

Sales tax nexus

Your sales tax nexus determines where you need to collect sales tax. You can have nexus in more than one state. Typically, you “trigger” nexus in a state where you have a brick-and-mortar location or employee, or distribute your goods. The way nexus is triggered varies by jurisdiction.

Further reading: Sales Tax Nexus: A Guide for Online Sellers.

Tax deduction

A tax deduction reduces the taxable income of an individual or corporation. It’s usually calculated based on expenses a company has paid in the course of doing business. For instance, if your business consists of sculpting hedges into the shapes of animals, the cost of travelling to a client’s estate would be tax deductible.

Further reading: The Top Small Business Tax Deductions

Tax return

A form submitted (typically once a year) to a tax authority. It reports income, expenses, and other relevant tax information. These forms help taxpayers figure out their tax liability, schedule payments with the tax authority, or request refunds for overpaid taxes.


Business structures

C corporation

A business structure where the business itself is taxed on all income. Other entities may own shares in the corporation. C corporations are not pass-through entities.

Further reading: C Corporations: Everything You Need to Know.

Limited Liability Company (LLC)

A business structure similar to a sole proprietorship. However, with an LLC, the business exists as a separate entity from its owner, and assumes all liability. For instance, an LLC may be sued for damages, without the owner being sued as well. An LLC is a pass-through entity.

Further reading: What is an LLC? And How Do You Form One?.

Partnership

A business structure where multiple individuals share the operational work and financial costs of running a business. Business income passes directly to the partners, making the partnership a pass-through entity.

Further reading: General Partners: A Complete Guide.

Pass-through entity

A business structure in which the tax paid on business income “passes through” to the owner of the business. Sole proprietorships, LLCs, partnerships, and S corporations are pass-through entities.

S corporation

A business structure where income is passed to shareholders, which makes the S corporation a pass-through entity. There can be no more than 100 shareholders for an S corporation.

Further reading: What is an S Corporation?.

Sole proprietorship

A one-person business. Anyone who does business for themselves automatically qualifies as a sole proprietor. The company may operate under the name of its owner, or under its own name. The owner assumes all liability for the actions of the sole proprietorship.

Further reading: What is a Sole Proprietorship?.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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