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Back to Basics: Bookkeeping Terms Every Small Business Owner Should Know

July 12, 2023
Bill Kimball

If they don’t, you then have the tedious task of going back through, creating a worksheet to make adjustments, and preparing and adjusting the trial balance. Your expenses might be your cost of goods sold, your building’s rent, your office supplies, your payroll, etc. For many business owners, it’s easy to put off “keeping the books.” It’s overwhelming and intimidating and requires a good deal of manual effort. Ultimately, though, this practice causes you to miss out on insights into the health of your business.

Rasmussen University may not prepare students for all positions featured within this content. Rasmussen University does not guarantee, approve, control, or specifically endorse the information or products available on websites linked to, and is not endorsed by website owners, authors and/or organizations referenced. Rasmussen University is accredited by the Higher Learning Commission, an institutional accreditation agency recognized by the U.S. Because of the confusing credentials, different accounting myths and these industry terms, it’s not uncommon for people to think working in accounting is inaccessible when really it just has its own unique language. Knowing how to “talk the talk” will allow you to focus less on accounting definitions and more on the important training you’ll need to launch a successful accounting career.

  • The non technical term used by some to describe any cash or other property that is received in exchange of property that would be otherwise nontaxable.
  • BOND on which the holder receives only one payment at maturity which includes both PRINCIPAL and INTERESTfrom issuance to maturity.
  • Any amount a corporation pays to a shareholder to directly or indirectly buy back its stock.
  • Accounts payable is categorized as a liability because it’s technically debt.

This is the opposite of cash-basis accounting, which means you record revenue and expenses when you’ve made or received payment. Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance. It includes the understanding that there is a remote likelihood that material misstatements will not be prevented or detected on a timely basis. If you buy a building that will last for many years, you don’t write off the cost of that building all at once. Instead, you take depreciation deductions over the building’s estimated useful life.

A red herring is not an offer to sell or the solicitation of an offer to buy. Downturn in economic activity, defined by many economists as at least two consecutive quarters of decline in a country’s gross national product. An entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors. A qualified REMIC is generally taxed like a partnership, unless it takes contributions after its start up day or engages in a prohibited transaction.

Mixing ASSETS, e.g. customer-owned SECURITIES, with those owned by a firm in its proprietary accounts. MUTUAL FUND with a fixed number of shares outstanding that may be bought or sold. Executive officer who is responsible for handling funds, signing CHECKS, keeping financial records, and financial planning for a CORPORATION. ACCOUNTANT who has satisfied the education, experience, and examination requirements of his or her jurisdiction necessary to be certified as a public accountant. Short-term (generally less than three months), highly liquid INVESTMENTS that are convertible to known amounts of cash. Amount, net or CONTRA ACCOUNT balances, that an ASSET or LIABILITY shows on the BALANCE SHEET of a company.

Excluded Income

Value assigned to ASSETS or LIABILITIES that is not based on cost or market (e.g., the value of a service not yet rendered). Any citizen that is not a resident or citizen of the United States. Income of such individuals is subject to taxation if it is effectively connected with a United States trade or business. Excess of the value of SECURITIES owned, cash, receivables, and other ASSETS over the LIABILITIES of the company.

bookkeeping terms

INTEREST rate on a DEBT SECURITY the ISSUER promises to pay to the holder until maturity, expressed as an annual percentage of FACE VALUE. DEBT instrument issued by a private CORPORATION, as distinct from one issued by a government agency or a municipality. Exchange of a convertible security such as a BOND into another security such as a fixed number of shares of the issuing CORPORATION’s COMMON STOCK. In general, agreement by which rights or acts are exchanged for lawful consideration. A deduction from a LIABILITY, such as discounts on notes payable, which is a deduction from the balance of notes payable. Educational programs for CERTIFIED PUBLIC ACCOUNTANTS (CPAs) to keep informed on changes that occur within the profession.

Securities and Commodities Exchanges

Funds used by a not-for-profit organization to account for all resources used for the development of a land improvement or building addition or renovation. Financial plan that serves as an estimate of future cost, REVENUES or both. Amount, net or CONTRA ACCOUNT balances, that an ASSET or LIABILITY shows on the BALANCE SHEET of acompany. Individuals responsible for overseeing the affairs of an entity, including the election of its officers.

bookkeeping terms

Collective term for written promissory notes that are due in less than one year and are held by the entity to whom payment is promised. Activities that occur only periodically, the data involved are generally not part of the routine flow of transactions. The goods on hand at any one time that are available for sale to customers in the regular course of business.

Net Sales

The following sections list bookkeeping terms that you’ll use on a daily basis. Depreciation is an accounting method used to allocate the cost of a long-term asset over its useful life. Businesses depreciate assets for both tax and financial reporting purposes. For tax purposes, businesses can deduct the depreciation expense from their income, which reduces their taxable income and, as a result, their taxes.

A BOND that gives the bondholders a pledge of certain company assets as a guarantee of repayment. Agency authorized by the United States Congress to regulate the financial reporting practices of most public corporations. Business or other transaction between persons who do not have an arm’s-length relationship (e.g., a relationship with independent, competing interests). The most common is between family members or controlled entities. For tax purposes, these types of transactions are generally subject to a greater level of scrutiny.


Financial contract in which two parties agree to exchange net streams of payments over a specified period. The payments are usually determined by applying different indices (e.g., interest rates, foreign exchange rates, equityindices) to a NOTIONAL amount. The term notional is used because swap contracts generally do not involve exchanges of PRINCIPAL. A formal STATEMENT summarizing the flow of all manufacturing costs incurred during an accounting period. Method of ACCOUNTING for SECURITIES whereby transactions are recorded on the date the securities settle by the delivery or receipt of securities and the receipt or payment of cash.

  • For instance, the annual STRAIGHT-LINE DEPRECIATION of a $2,500 asset expected to last five years is $500.
  • MUTUAL FUND that does not have a fixed number of shares outstanding, offers new shares to the public, and buys back outstanding shares at market value.
  • Person who is responsible for the administration of property owned by others.
  • Excess of actual REVENUE over projected revenue, or actual costs over projected costs.
  • It’s time to roll up those sleeves and start building your accounting vocabulary.

Legal instrument evidencing a security interest in ASSETS, usually real estate. Control of the production and distribution of a product or service by one firm or a group of firms acting in concert. Definite fixed amounts stated in terms of dollars, either by law or by contract agreement. A mandatory system of DEPRECIATION for income tax purposes, enacted by Congress in 1986. Designing and manipulating a mathematical representation of an economic system or corporate financial application so that the effect of changes can be studied and forecast.

In other words, the seller offers the buyer credit terms to pay later. Average accounts receivable provides a snapshot of how much each customer owes on average. It is calculated by dividing the total accounts receivable by the number of customers.

Deferred Income Taxes

The beginning point for the determination of income, including income from whatever sources derived. Assumption that a business can remain in operation long enough for all of its current plans to be carried out. Standards set by the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) which concern the AUDITOR’S professional qualities and judgment in the performance of his or her AUDIT and in the actual report. The amount that an investment will be worth at a future date if it is invested at compound interest.