Whether you’re a trained-on-the-job bookkeeper or someone just dipping their toes into the world of accounting, understanding the language of finance is key to keeping your books straight and business thriving. Knowing these terms can make your job easier and conversations with clients and accountants much smoother. Plus, when you decide to implement some much-needed automation tools, a solid grasp of accounting terminology helps you get the most out of those tools.
In this post, we’ll break down these essential accounting terms every bookkeeper should know—with clear definitions and real-world examples. Let’s get to it!
1. Accounts Payable (AP)
Definition: Accounts Payable represents the money your business owes to suppliers or creditors. It’s the running tally of your unpaid bills and expenses—essentially, your short-term liabilities.
Example: If your office received a $500 invoice for new supplies, that $500 is recorded in Accounts Payable until you pay it. Tracking AP helps you manage cash flow by knowing what bills are coming due.
2. Accounts Receivable (AR)
Definition: Accounts Receivable is the flip side of AP—it’s the money owed to your business by customers. When you send an invoice and wait for payment, that amount sits in AR. It’s essentially sales you’ve made on credit, waiting to be collected.
Example: Imagine you completed a project for a client and sent a $1,000 invoice due in 30 days. Until the client pays, that $1,000 is part of your Accounts Receivable. Keeping an eye on AR (and collecting on time) is crucial for healthy cash flow. Tip: Many bookkeepers use AR automation tools to send reminders and schedule follow-ups, ensuring they get paid faster.
3. Accrual Basis Accounting
Definition: Accrual basis accounting means recording revenues and expenses when they’re earned or incurred, not necessarily when cash changes hands. This method follows the matching principle, aligning income with related expenses in the same period.
Example: Suppose you provided a service in December but won’t get paid until January. Under accrual accounting, you still record the revenue in December (when you earned it) and record any related expenses in December too. This gives a more accurate financial picture for that period, even though the cash comes later.
4. Cash Basis Accounting
Definition: Cash basis accounting is a simpler method where you record revenues and expenses only when cash is received or paid out. No cash in or out means nothing gets recorded, regardless of when the sale or expense occurred.
Example: Using the same scenario as above, if you’re on cash basis, you wouldn’t record the December sale until January when the money actually arrives. Small businesses often start with cash basis for its simplicity—you recognize income when the money hits your account and expenses when you actually pay the bill.
5. Asset
Definition: An asset is anything the company owns that has value. Assets can be tangible or intangible resources that will provide future benefit. Common types include current assets (like cash and accounts receivable) and long-term assets (like equipment or property).
Example: Your business’s checking account balance, the company laptop, and even the outstanding invoices clients owe you (AR) are all assets. If your company bought a delivery van, that van is recorded as an asset on the books because it’s a resource with value that the business owns.
6. Liability
Definition: A liability is a financial obligation or debt that the company owes to others. This includes short-term liabilities like accounts payable or credit card balances, and long-term liabilities like loans.
Example: If your business took out a $10,000 small business loan, that loan amount is a liability on your balance sheet. Similarly, the $500 invoice you haven’t paid yet (from the Accounts Payable example) is a liability until it’s settled. Liabilities show who you owe money to—be it suppliers, lenders, or other creditors.
7. Equity
Definition: Equity represents the owner’s share of the business’s assets after all liabilities are paid off. It’s often referred to as owner’s equity or shareholders’ equity and includes things like capital contributions and retained earnings (profits reinvested into the business).
Example: If all your assets minus all your liabilities leaves $50,000, that $50,000 is the owner’s equity in the business. For a sole proprietor, this might be shown as the owner’s capital account. In practical terms, equity is what portion of the company you truly own free and clear. (It’s the value that would be left for the owners if the company sold all assets and paid off all debts.)
8. Balance Sheet
Definition: The balance sheet is one of the main financial statements that provides a snapshot of the company’s financial position at a given moment. It lists assets, liabilities, and equity, following the equation: Assets = Liabilities + Equity.
Example: At the end of the year, you prepare a balance sheet for your business. It might show $100,000 in assets (cash, equipment, receivables), $40,000 in liabilities (a loan, unpaid bills), and $60,000 in equity (your invested capital plus retained earnings). The balance sheet lets you quickly see what the business owns versus what it owes, and the net worth (equity). If assets don’t equal liabilities + equity, something’s off in your books!
9. Income Statement (Profit & Loss Statement)
Definition: The income statement (or Profit & Loss, P&L for short) summarizes the company’s revenues and expenses over a period, revealing the profit or loss earned in that time. It shows how your revenues are transformed into net income (or net profit) after accounting for all expenses.
Example: For the quarter, your income statement might list $50,000 in sales (revenue) and $30,000 in total expenses (rent, salaries, supplies, etc.), resulting in a net profit of $20,000. Bookkeepers prepare P&L statements monthly or quarterly to gauge profitability. If expenses were higher than revenues, the P&L would show a net loss—a signal to review costs or boost income.
10. Cash Flow
Definition: In bookkeeping terms, “cash flow” refers to the movement of actual cash in and out of the business. It’s the lifeblood of a company’s finances. Positive cash flow means more money came in than went out; negative cash flow means the opposite. Formal financial statements include a Cash Flow Statement, which breaks down cash flows from operations, investing, and financing.
Example: Even if your business is profitable on the books, you need cash flow to pay the bills. Let’s say in a given month you made a lot of sales on credit (so profit looks good) but few customers actually paid yet—you might have a cash flow crunch. For instance, you spend $5,000 on expenses in June but only $3,000 cash came in from customers in that month; that’s a negative cash flow of $2,000 for June. Monitoring cash flow helps ensure you have enough cash to cover day-to-day operations.
11. General Ledger
Definition: The General Ledger (GL) is the master record of all your financial transactions, organized by accounts. Each account (cash, revenue, expenses, etc.) has its own section in the ledger where all debits and credits to that account are recorded. The GL is the backbone of your accounting system, ultimately used to prepare your financial statements.
Example: When you record transactions in bookkeeping software like QuickBooks, behind the scenes those entries post to the General Ledger. If you ever export a General Ledger report, you’ll see every transaction affecting each account and the running balance. Think of the GL as the big book that contains all the accounts and their activity.
12. Chart of Accounts
Definition: The chart of accounts is the organized list of all accounts that your business uses to record transactions. Each account in the chart has a name, a type (asset, liability, equity, revenue, or expense), and often a reference number. This serves as the framework for your accounting system.
Example: A simple chart of accounts for a small business might include accounts like: 1000 Cash, 1100 Accounts Receivable, 1500 Equipment (assets); 2000 Accounts Payable, 2100 Loan Payable (liabilities); 3000 Owner’s Equity; 4000 Sales Revenue; 5000 Rent Expense, 5100 Utilities Expense, and so on. When setting up accounting software, one of the first steps is customizing the chart of accounts to fit the business—ensuring you have an account for each major category of transaction you need to track.
13. Journal Entry
Definition: A journal entry is a recorded transaction in the accounting journal that indicates which accounts are debited and credited for a given transaction. In double-entry bookkeeping, every transaction is first recorded as a journal entry, then posted to the ledger. Journals can be general (for miscellaneous transactions) or specialized (sales journal, purchase journal, etc.).
Example: Let’s say you receive a $1,000 payment from a client for an invoice. The journal entry would debit Cash $1,000 (increasing your cash account) and credit Accounts Receivable $1,000 (decreasing the amount the client owes). Bookkeeping software often logs these entries for you when you fill out forms (like writing a check or issuing an invoice), but as a bookkeeper you might sometimes enter adjustments manually via a general journal entry.
14. Bank Reconciliation (Reconciliation)
Definition: Reconciliation is the process of matching your accounting records to external records—usually bank statements—to ensure everything lines up. A bank reconciliation involves checking that every transaction in your books for a bank account matches the bank’s records, and explaining or fixing any differences.
Example: At month-end, you perform a bank reconciliation for the business checking account. Your books show an ending balance of $5,250, but the bank statement shows $5,500. On investigation, you find a $250 deposit made on the last day of the month that you recorded, but the bank didn’t process it until the next day (an outstanding deposit). After accounting for that timing difference, the balances agree. Regular reconciliations help catch errors (like a double-entered expense or a bank fee you didn’t record) and give confidence that your financial statements are accurate.
15. Depreciation
Definition: Depreciation is the method of allocating the cost of a tangible asset over its useful life. Instead of expensing a large asset’s cost all at once, you spread it out, recognizing a portion of the cost as expense each accounting period. This reflects wear and tear or usage of the asset over time.
Example: If your company buys a delivery van for $30,000 and expects to use it for 5 years, you might depreciate it using straight-line depreciation at $6,000 per year. Each year, you’d record $6,000 as “Depreciation Expense” on the income statement, and reduce the book value of the van on the balance sheet accordingly. This way, the expense of the van is matched to the periods it’s helping you earn revenue (rather than taking a $30,000 hit all in one year).
16. Amortization
Definition: Amortization is similar to depreciation, but typically refers to spreading the cost of an intangible asset or a loan over time. For intangibles (like patents, trademarks, or goodwill), it’s the gradual write-off of their cost. For loans, an amortization schedule outlines how each payment is split between interest expense and reducing the principal balance.
Example (intangible asset): Your business purchased a software license for $12,000 with a 3-year useful life. You amortize that cost at $4,000 per year as an expense, rather than expensing $12,000 immediately, reflecting the software’s usage over three years.
Example (loan): You take out a $50,000 business loan at a fixed interest rate, payable over 5 years. The bank provides an amortization schedule showing that each monthly payment of $943 is part interest and part principal. In month one, maybe $200 is interest and $743 reduces the loan principal. In month two, interest might be a bit less and principal payoff a bit more, and so on. Recording loan payments according to the amortization schedule ensures your books correctly show interest costs as expenses and the loan balance steadily dropping.
17. Revenue
Definition: Revenue is the income a business earns from its normal activities, typically from sales of products or services. It’s often called the “top line” figure because it’s at the top of the income statement. (Note: revenue is distinct from profits; profits are what’s left after expenses.)
Example: If you run a bookkeeping service, the fees you charge clients are your revenue. So if in July you sent out invoices totaling $5,000 for your services, you’ve generated $5,000 in revenue for that month. Revenue can also include other income like interest earned or rental income, but usually the focus is on core operating revenue.
18. Expenses
Definition: Expenses are the costs incurred in the process of earning revenue—basically, the bills and costs you have to pay to keep the business running. Common expense categories include rent, utilities, salaries, supplies, and marketing. Expenses are matched against revenues to figure out profit.
Example: In a given month, your business might have the following expenses: $1,200 for office rent, $300 for utilities, $4,000 in employee wages, and $500 in various office supplies and software subscriptions. These total $6,000 in expenses. If your revenue that month was $8,000, your profit (before taxes) would be $2,000. As a bookkeeper, you carefully categorize expenses so the business can see where the money is going and also claim deductions at tax time where appropriate.
19. Invoice
Definition: An invoice is a bill sent to a customer detailing goods or services provided and requesting payment by a certain date. Invoices typically include information like the items or services, quantities, prices, the total amount due, payment terms, and due date. In accounting terms, sending an invoice usually creates an entry in Accounts Receivable for the amount owed.
Example: If you complete a web design project for a client, you might issue an invoice for, say, $2,000 with payment terms of Net 30 (meaning the client should pay within 30 days). The invoice serves as both a record for the client of what they owe and for you as a record of future cash inflow. Bookkeepers often use invoicing systems (sometimes integrated with payment platforms) to automate sending invoices and even enabling online payments, making it easier to get paid on time.
20. Installment Plan
Definition: An installment plan is an agreement that allows a customer to pay off what they owe over time in multiple smaller payments, rather than one lump sum. Businesses offer installment plans to make high-priced products or large invoices more affordable by breaking them into monthly or periodic payments. Installment plans might or might not involve interest, depending on the terms.
Example: A client owes $1,200 for a service package, but you agree they can pay it in 12 monthly installments of $100 each. This is an installment plan. You, as the bookkeeper, will record each $100 payment as it comes in, and you’ll keep track that the remaining balance gets smaller each month. Offering an installment plan can help secure a sale that might not happen if the client had to pay all at once. (Many accounting software and payment platforms, including some automated billing tools, can help set up and track installment plan payments so nothing falls through the cracks.)
21. Surcharging (Surcharge Fee)
Definition: A surcharge is an additional fee added on to a transaction, often to cover specific costs. Businesses commonly use surcharges to offset processing fees—for example, adding a small percentage to credit card transactions to cover the card processing fees. This extra fee is known as a surcharge fee. It’s important to handle surcharges carefully, as there are rules and regulations (and customer expectations) around when and how you can apply them.
Example: Think of a utility company adding a small charge to cover the cost of paper billing—that’s a type of surcharge. In a bookkeeping context, a very common example is a credit card surcharge: if a customer pays a $100 invoice with a credit card, the business might add, say, a 3% surcharge fee, making the total $103, to help cover the merchant processing fee. As a bookkeeper, you’d need to properly record that $3 (usually as additional revenue to offset the processing expense). Many payment systems now can automatically calculate and add surcharges to invoices, but you should know the concept and ensure it’s done in compliance with laws and card network rules. Some states prohibit credit card surcharges, and card companies have guidelines too!
22. Payment Gateway
Definition: A payment gateway is a service that securely processes credit card or electronic payments for businesses. It acts as the intermediary between your business’s website or point of sale and the bank/credit card networks, ensuring the customer’s payment information is transmitted securely and the payment is approved. In short, it’s like a digital cashier that says, “Transaction approved, money is on the way.”
Example: Popular payment gateways include Stripe, PayPal, Authorize.Net, and Square. If your small business accepts online payments, when a customer enters their card details on your site, the payment gateway is what takes that info, encrypts it, sends it to the processor/bank for approval, and then returns a confirmation that the payment went through. For a bookkeeper, understanding which payment gateway is used can help in reconciling transactions. For instance, you might integrate a gateway with your accounting software so that when a customer pays an invoice online, it automatically marks the invoice as paid in your books. Chargezoom, for example, allows businesses to connect multiple payment gateways and even sync those payments back to accounting systems in real-time, so bookkeeping stays up-to-date.
23. PCI Compliance
Definition: PCI Compliance refers to meeting the Payment Card Industry Data Security Standards (PCI DSS)—a set of security guidelines required for any business that handles credit card information. Being PCI compliant means you follow best practices to protect customers’ card data (think encryption, secure networks, regular security checks, not storing sensitive data unnecessarily, etc.). This is crucial to prevent data breaches and avoid hefty fines for non-compliance.
Example: If your company accepts credit card payments, you likely use compliant payment systems that tokenize or encrypt card numbers. As a bookkeeper, you might not be configuring firewalls, but you should know the basics: for instance, never email full credit card numbers or write them down insecurely, and ensure your payment processor or gateway is PCI Level 1 compliant (the highest security level). Why it matters: A business that isn’t PCI compliant could face penalties—some processors charge PCI non-compliance fees every month until you fix the issues. In real terms, imagine your merchant services provider charging an extra $20 monthly fee because you haven’t completed an annual PCI compliance questionnaire—that’s a non-compliance fee. It pays (literally) to be PCI compliant for safety and to avoid surcharges from your providers.
24. Double-Entry Bookkeeping (Debits & Credits)
Definition: Double-entry bookkeeping is the foundation of modern accounting, requiring that every financial transaction is recorded in at least two accounts: a debit in one and an equal credit in another. This system keeps the accounting equation (Assets = Liabilities + Equity) in balance. Debits and credits might seem confusing at first, but they are simply the language we use to note increases or decreases in accounts, depending on the account type.
Example: If you buy $500 of office supplies with cash, you would debit the Office Supplies Expense account $500 (recording the increase in expenses) and credit the Cash account $500 (recording the decrease in your cash asset). After the entry, your books remain in balance because one account’s value went up while another’s went down by the same amount. For every transaction—whether it’s paying a bill, invoicing a client, or taking a loan—there will be at least two entries. This might sound technical, but if you’ve ever wondered why your software asks for two sides or automatically makes two entries when you record a sale, it’s because of double-entry bookkeeping. It ensures accuracy and makes it easier to catch errors; if at any point your total debits don’t equal total credits, you know something was recorded incorrectly.
25. Trial Balance
Definition: A trial balance is a report that lists all accounts and their balances (debits or credits) at a given time, used to verify that total debits equal total credits. It’s an internal report that bookkeepers prepare at the end of a period (before making adjusting entries and drafting financial statements) to check that the books are in equilibrium. If the trial balance doesn’t “balance” (i.e., the totals don’t match), it signals that there may be an error in the ledger.
Example: After posting all transactions for the month of September, you run a trial balance report. It shows the ending balances of every account from your chart of accounts. You then sum up all the debit balances and all the credit balances: suppose each side comes to $150,000—great, it balances! This means the entries are likely recorded correctly (at least in terms of debits and credits). If the debits summed to $149,000 and credits $150,000, you’d know there’s a $1,000 discrepancy. Maybe a transaction was only half-entered, or perhaps an extra zero was added somewhere. You’d then hunt for and correct the error before proceeding to create the final financial statements. In essence, the trial balance is a checkpoint that helps ensure your books’ integrity.
26. Interchange-Plus Pricing
Definition: Interchange-Plus Pricing is a transparent credit card processing fee structure where a business pays the exact interchange fee set by the credit card networks (like Visa or Mastercard), plus a fixed markup (the “plus”) from the payment processor. The interchange fee varies by card type and transaction risk, but the processor’s markup remains consistent, making this model more predictable and often more cost-effective than flat-rate pricing.
Example: Let’s say a customer pays a $100 invoice with a credit card. The interchange fee (determined by the card network) might be 1.8% + $0.10. Your payment processor adds their markup—say, 0.3% + $0.10. Here's the math:
- Interchange Fee: $1.80 + $0.10 = $1.90
- Processor Markup: $0.30 + $0.10 = $0.40
- Total fee you pay = $2.30, or 2.3% of the transaction.
27. Dunning Sequence
Definition: A dunning sequence is a systematic series of communications (emails, letters, or calls) sent to customers with overdue invoices to remind them to pay. These reminders escalate in tone and urgency over time—from friendly nudges to final warnings—while aiming to maintain professionalism and customer relationships. Dunning sequences are an essential tool in accounts receivable management, helping businesses recover payments without immediately resorting to collections.
Example: Despite your best efforts, a customer’s invoice is 30 days overdue. You decide it’s time to implement your dunning sequence. It might look like this:
- Day 1: A polite reminder email that payment is due.
- Day 7: A second reminder with a direct payment link and contact info for questions.
- Day 14: A firmer notice mentioning late fees may apply.
- Day 30+: A final notice stating the account may be sent to collections.
28. Invoice Factoring
Definition: Invoice factoring is a financial arrangement where a business sells its outstanding invoices (accounts receivable) to a third-party company (called a factor) at a discount in exchange for immediate cash. The factoring company then takes on the responsibility of collecting payment from the customer. It’s a way—albeit a slightly dangerous one—for businesses to improve cash flow quickly, especially if they’re waiting on slow-paying clients.
Example:
Imagine you have $10,000 in unpaid invoices that are 30 to 60 days out. Instead of waiting, you work with a factoring company that agrees to buy those invoices for 90% of their value, granting $9,000 in cash. Once the factor collects from your customers, they release the remaining 10% (minus their fee, which might be 1-5% of the invoice value—with additional fees accumulating the longer your customer takes to pay).
So, in the end, you get:
- $9,000 upfront
- $400 after collection (assuming a 5% fee and a $100 late-payment penalty for one particularly slow customer)
Totaling $9,400 instead of $10,000, but with faster access to working capital
29. AR Turnover / Days Sales Outstanding (DSO)
Definition: Accounts Receivable Turnover (AR Turnover) and Days Sales Outstanding (DSO) are two metrics used to evaluate how efficiently a business collects payments from customers.
- AR Turnover measures how many times receivables are collected during a specific period.
- DSO translates that into the average number of days it takes to collect payment after a sale.
Both are key indicators of your collections performance and overall cash flow health. The higher your AR Turnover, the better. The lower your DSO, the faster you're getting paid.
Example:
Let’s say your business has $120,000 in total credit sales for the year and an average accounts receivable balance of $20,000.
- AR Turnover = $120,000 / $20,000 = 6
→ You collect your receivables 6 times a year on average.
To get DSO:
DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days
DSO = ($20,000 ÷ $120,000) × 365 = 60.8 days
→ On average, it takes about 61 days to collect from customers.
30. GAAP Compliance
Definition: GAAP compliance refers to following the Generally Accepted Accounting Principles—a standardized set of rules, guidelines, and best practices established by the Financial Accounting Standards Board (FASB) that govern how financial statements should be prepared in the United States. GAAP ensures consistency, transparency, and comparability of financial data across businesses.
Example:
Your business prepares a Profit & Loss (P&L) statement using accrual accounting, recognizing revenue when earned—not just when paid. You also apply depreciation to allocate the cost of a machine over its useful life instead of expensing it all at once. These practices align with GAAP principles.
Conquer Your Books
Mastering these accounting terms will empower you as a bookkeeper to handle the financial side of the business with confidence. You’ll not only ensure the books are accurate, but also communicate more effectively with business owners, accountants, or financial software support when issues arise.
Remember, even as modern software and free automation tools (like Chargezoom) handle more of the number-crunching, your understanding of concepts like accrual vs. cash accounting, how an installment plan or surcharge is applied, or what it means to stay PCI compliant is invaluable. This knowledge lets you interpret reports correctly and catch anomalies before they become problems.
So keep this list handy as a reference, and over time you’ll find these terms becoming second nature!
