Basic Accounting Definitions

Understanding the language of bookkeeping and accounting helps you make better business decisions and communicate more effectively with your bookkeeper or accountant. As a leading bookkeeping service based in Kennett Square, we are sharing a few of the most common bookkeeping terms every business owner or nonprofit leader should know.

These are sales invoices that have been written off because the payments are overdue and never likely to be paid. Sales invoices are only written off after some effort to retrieve the funds including going through debt collection agencies. Bad debts are expensed in the accounts.

A balance sheet report shows the business owners and managers how much equity is in the business, how many assets the business owns, and what the business owes in liabilities. The balance sheet falls in line with the accounting equation (Assets minus Liabilities equals Equity).

A bookkeeping cycle is usually based from the 1st day of the month to the last day of the month, and repeats every month. Bank reconciliations are done to the end of the month, financial reports produced for the month, sales tax and payroll tax calculated for the month. This goes on for 12 months until the end of the financial year when all the data is sent to your accountant.

The personal funds a business owner or investor introduces to their business so that it can operate.

The list of accounts set up in a bookkeeping system into which all the financial transactions are categorized. The main categories are:

1. Assets,
2. Liabilities,
3. Equity,
4. Income, and
5. Cost of Goods Sold and Expenses.

An entry that is made into the accounts utilizing double entry bookkeeping to make an adjustment to the accounts such as if a correction has to be made. The journal describes which account is being debited and which account is being credited, the date, the reason for the journal and a reference.

Each account on the chart of accounts has a ledger page. The ledger lists all the entries made against the account either as a debit or a credit. The ledger is totaled at the end of every month.

An asset account in the bookkeeping system in which is entered money that has not yet been deposited to the bank.

A business might receive cash and checks from several different customers in one day. The bookkeeper can receive these payments against each individual invoice in the bookkeeping system and receive each payment into the undeposited funds account. The bookkeeper will then total up the payments and write out a deposit slip for the bank with the total and will take that to the bank.

Once the bank has placed it into the account, the bookkeeper can move it in the bookkeeping system from the undeposited funds account to the bank account.

Understanding these accounting basics is an important first step, but keeping your books accurate and up to date takes time and expertise. If you’d like the confidence that comes from knowing your financial records are accurate and up-to-date, contact Paisley Solutions to learn how our bookkeeping services can help your business or nonprofit stay organized, compliant, and ready for growth.