Bookkeeping Terminology for the Business Owner

As a business owner, understanding the ins and outs of bookkeeping is crucial for maintaining a healthy financial state. From keeping track of expenses to analyzing revenue streams, mastering the terminology associated with bookkeeping can ensure you to make informed decisions for your business. This post will introduce you to some essential terms so that if you hear them, you know what they mean, why it’s important, and how it impacts your business.

Essential Bookkeeping Terminology

Accounts Receivable: money owed to your business by customers

Accounts Payable: money your business owes to suppliers or vendors (accounts payable).

Debit and Credit: Debits and credits are used in double-entry bookkeeping to record transactions. Debits increase assets or expenses, while credits increase liabilities, equity, or revenue

Equity: This refers to the owner's interest in the business. It's calculated as the difference between assets and liabilities and represents the value that would be returned to a business’s shareholders if all the assets were liquidated and all the company's debts were paid off.

Assets and Liabilities: Assets are what your business owns, such as cash, inventory, or equipment. Liabilities are what your business owes, including loans, accounts payable, or accrued expenses.

Reconciling: process of checking and correcting financial records to make sure they are accurate and consistent. It involves comparing two important sources of financial information such as bank statements and internal bookkeeping records. The goal is to find any differences between the two and make the necessary adjustments. Bank reconciliation is important because it ensures that the information in a company's records matches what the bank reports. It helps uncover errors, discrepancies, or possible fraud. Apart from bank statements, other accounts like accounts receivable and accounts payable also need to be reconciled.

Cash Accounting: transactions are only recorded when cash actually changes hands. This means that revenues are recorded when they are received in cash, and expenses are recorded only when they are actually paid.

Accrual Accounting: This is a method of accounting where revenues and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid. This is different from cash basis accounting, where transactions are recorded only when cash changes hands.

Chart of Accounts: A listing of all account titles and numbers being used by a business. You can think of them as the categories in which we organize all financial information into.

Fiscal Year: This is a one-year period that companies use for accounting purposes and preparing financial statements. It might not always align with the calendar year and can vary between businesses.

Depreciation: The systematic allocation of the cost of a tangible asset over its useful life. This is important for understanding how asset values decrease over time due to use and wear and tear.

Budget: A detailed plan of income and expenses expected over a certain period of time. A budget can provide guidelines for managing future investments and expenses.

Payroll: payments you make to your employees

W-2’s: tax form that reports taxable wages paid to an employee during a one-year period, along with employment taxes withheld from paychecks for that year. Employers must also file a copy of employee W-2s with the IRS.

Form W-9: is an information form that collects identification numbers from US citizens or residents. Businesses need to get a completed Form W-9 from anyone they pay if they meet certain criteria, like paying for services or income.

1099-NEC: this is a tax form you need to send to anyone who you paid during the year not on payroll that offered services to your business. In order to know if you need to send a 1099-NEC, you need to have a W-9 on file which will tell you their federal tax classification and you paid them over $600 via cash, check or ACH during the calendar year. Note that only attorneys need to receive a 1099-NEC if you paid them over $600, no matter their tax classification. I have a free flow chart that can help identify who you need to send a 1099 to, which you can access here.

Statement & Reports:

Balance Sheet: provides a snapshot of your business's financial position, showing its assets, liabilities, and equity

Profit and Loss, otherwise known as an Income Statement: reflects the revenue, expenses, and profits or losses over a specific period.

Cash Flow Statement: This statement tracks the inflow and outflow of cash in your business, showing how cash is generated and used over a specific period.

General Ledger: The general ledger is a record where all financial transactions are chronologically recorded and categorized.

Trial Balance: A trial balance is a report that summarizes all debits and credits in the general ledger to ensure they balance.

xx Lotte