Bookkeeping Terms and Accounting Definitions
Welcome to our complete guide to bookkeeping and accounting definitions! Whether you’re a seasoned business owner, an aspiring entrepreneur, a diligent student, or simply someone seeking to understand the financial world, this resource is designed to clarify the often-complex language of accounting.
Our comprehensive list offers clear and concise definitions of the fundamental terms that shape businesses and drive financial reporting. From understanding assets and liabilities to deciphering income statements, this glossary will enhance your knowledge and empower you to make informed financial decisions.
If you cannot find the bookkeeping terms or definitions you need, please contact us, and we will try and add them.
List of Bookkeeping Terms
| Bookkeeping Terms | Description of Bookkeeping Terms |
|---|---|
| Accountant | Money owed from a customer for a sales invoice. The accounts receivable report will show the total amount due to customers. |
| Accounting | Process of keeping the business financial records. Read our accounting basics section. |
| Accounts | The financial statement of a business in a given period (week, month, quarter or year). The reports will include a balance sheet and Profit and Loss. |
| Accounts Payable | Money owed to a supplier from bills or invoices that have been received. An Accounts receivable report shows all amounts owed and how overdue they are. |
| Accounts Receivable | Money owed from a customer for a sales invoice. The accounts receivable report will show the total amount owing to customers. |
| Accounting Equation | There are several accounting equations that help show how well a company is performing. An example is the current ratio, which shows how solvent the business is short term. Current assets divided by current liabilities = current Ration |
| Accrual Accounting | A method where revenues and expenses are recognised when they are earned or incurred, regardless of when the cash is exchanged. |
| Accruals | Several accounting equations help show how well a company is performing. An example is the current ratio, which shows how solvent the business is short term. Current assets divided by current liabilities = current Ration |
| Aged Creditors | See Bookkeeping term – Accounts Payable definition |
| Aged Debtors | See Bookkeeping Term – Accounts Receivable definition |
| Amortisation | The process of spreading the cost of an intangible asset over its useful life (similar to depreciation for tangible assets). |
| Assets | Items that a business owns that have a value. These can be fixed assets like computers, equipment and buildings or intangible assets like patents, copyrights and trademarks. |
| Bad Debts | Bad debts are money that a business does not expect to receive. A bad debt is written off using a journal. |
| Balance sheet | A financial statement that shows a snapshot of the company’s financial position. It shows all the assets, liabilities and equity. |
| Bank | Part of the balance sheet (current assets) report shows how much money is in the bank. |
| Bank Reconciliation | The process of comparing the bank statement with the accounting system to identify and resolve differences. |
| Bookkeeping | A business or person that has borrowed money from your business. It may be that you have supplied work on credit and, therefore, issued a sales invoice; this is money that is owed to you. |
| Bookkeeping Cycle | The process of steps from entering a transaction to preparing the financial statements, including documents, journals, ledger, trial balance, adjustments, closing accounts and preparation of final accounts. |
| Budget | The process includes steps from entering a transaction to preparing the financial statements, including documents, journals, ledger, trial balance, adjustments, closing accounts, and preparation of final accounts. |
| Capital | The wealth of the business, whether in money or property, owned or employed in the business. It can be found on the balance sheet. |
| Capital Allowance | A small business can claim capital allowances on items it has purchased for long-term use to help reduce its tax liability. |
| Cash Basis | Records income and expenses when it is earned or spent. |
| Cash-flow | The movement of money in and out of the business. A cash flow forecast shows future income and expenditure over a period of time. A cash flow statement shows the changes in cash for an accounting period. |
| Chart of Accounts | Records income and expenses when they are earned or spent. |
| Contra Entry | The list of all accounts within an accounting software package includes Assets, liabilities, capital, income, cost of sales, and expenses. |
| Corporation Tax | In the UK, tax is paid on the profits of the company. |
| Cost of Goods Sold | The direct costs involved in producing the goods or services sold by a company. It is shown on the Profit and Loss account below income. |
| Credit | An accounting entry that increases liabilities, equity, or revenue accounts and decreases asset or expense accounts. |
| Credit Note | If a refund is due to a customer, a credit note will be added to the accounts to reduce the sales invoice. |
| Creditors | It can be a bank, supplier or person that has given credit to the company. Therefore the business would owe money to its creditors. |
| Debit | Double entry accounts are made up of debits and credits. A debit is on the left side of the accounts. An example is on the cash account: if money is received, it is recorded on the left side of the cash account. |
| Debtors | In the accounting and business world, a debtor is simply someone who owes money to another person or entity. |
| Deposit | Money that is paid into a bank or building society. It can also be an initial payment made for goods that will be paid in instalments. |
| Depreciation | Equipment (assets) purchased for use in the business is reduced in value over time. For example, a computer purchased for £300 will reduce in value over three years; under straight-line depreciation, the depreciation will be £100 per year. |
| Dividends | A percentage of profits paid to shareholders. An example is a business that made a profit of £10,000 and paid two shareholders £5000 each as they both hold 50% of the shares. |
| Double Entry | A percentage of profits is paid to shareholders. For example, a business that made a profit of £10,000 paid two shareholders £5000 each as they both hold 50% of the shares. |
| Drawings | If you are a sole trader or partnership, when you withdraw money from the business, it is known as drawings. |
| Equity | Equity is the bookkeeping term for an ownership interest in a business. It can include stockholders’ equity or owner’s equity. |
| Expense | An expense to the business is money paid for items or services. The Profit and Loss account shows income and expenses. |
| Export | Export refers to selling and transporting goods or services produced in one country to a buyer in another. Or exporting transactions from a program or accounting software. |
| Financial Statements | The financial statements are the Profit and Loss statement, Balance Sheet, and Cash Flow statement. Company owners and lenders use these statements to make financial decisions about the business. |
| General Ledger | The master record contains all the accounts used to summarise a company’s transactions. |
| Goodwill | Goodwill is an intangible asset on the Balance Sheet. It is normally calculated when a business is sold and will include a cost for the brand, customers and business value. |
| Goods | Products that are purchased and sold within a business. |
| Gross Profit | Total Sales less the cost of goods sold equals gross profit. The Cost of goods sold includes the cost of the goods and all costs of making it. |
| Import | Import can mean bringing in transactions to an accounting package: an example of this is downloading your bank transactions from your bank and importing them into accounts software. Import can also mean bringing goods into the country. |
| Income | All revenue for the business is shown at the top of the profit and loss account. |
| Income Statement | A financial statement that reports a company’s revenues, expenses, and net income (profit/loss) over a specific period. |
| Indirect costs | An intangible asset is a nonphysical asset. Examples of intangible assets are goodwill, trademarks, and patents. |
| Invoice | These are costs that do not relate directly to a specific project. An example is advertising the business, which promotes the whole business. |
| Inventory | The raw materials used to produce goods as well as the goods that are available for sale. |
| Intangible Assets | The ledger is a book or computer file used to maintain the accounts. It holds all the information to prepare the financial statements. |
| Journal | A transaction in accounts software that moves an amount from one account code to another. It can also be a place where you record all the business financial transactions in either a book, spreadsheet or software. |
| Ledger | The ledger is a book or computer file used for maintaining the accounts. It holds all the information to prepare the financial statements. |
| Liabilities | These are things that the business owes to other organisations and people; they can include loans, overdrafts and money owed to suppliers. |
| Limited Company | Is formed in the UK and is limited by the shares. Any legal action is taken against the company rather than the individuals. Limited company details are held on Companies House. |
| Long-term Liabilities | Each transaction of revenue, expenses, gains and losses is posted to a code in computerised accounts, and each code is a nominal account. All the nominal codes are held in a chart of accounts. |
| Loss | If the income is less than the outgoings, then a loss has been made. A loss can also be made if you sell a fixed asset for less than its value. |
| Margin | Margin is the difference between the selling price of goods and the cost price. An example is goods are purchased for £80 and sold for £100; the margin is £20. |
| Markup | Markup is the difference between the cost and the selling price. |
| Net Assets | The total assets less liabilities. The figure equals equity; if it is a sole partnership, it is the owner’s equity and if a corporation it’s the stockholder’s equity. |
| Net Book Value | NBV is the net value of assets. Assets are purchased at a price, and depreciation is deducted over a period; the purchase price less depreciation equals the net book value. |
| Net Profit | Gross profit less expenses equals your net profit. Revenue minus cost of goods equals gross profit minus expenses equals net profit. |
| Nominal Accounts | A method of depreciation that reduces an asset for the same amount each period. For example, a computer is purchased for £360 and will be depreciated over three years; the depreciation posted to the accounts is £10 per month (this assumes that the asset has no value at the end of its useful life). |
| Opening Balances | To transfer your accounts from one system to another, you will need to post the closing balances from one to the opening balances of the other. It can also be the case if you are switching from paper-based or Excel spreadsheets. |
| Operating Expenses | Costs incurred in the normal course of business operations, such as rent, salaries, and utilities. |
| Overdraft | If your bank balance is negative, you have gone overdrawn. Overdrafts typically have fees attached, and it is best to arrange terms before using one. |
| PAYE | Pay as You Earn is the UK payroll that deducts tax and NI each time you get paid. |
| Payroll | The process of calculating and disbursing employee wages and salaries, including withholdings for taxes and benefits. |
| Petty Cash | A small amount of cash is kept to purchase sundry items. For a more significant business, procedures need to be in place for issuing money. |
| Prepayments | If you pay for something in advance, you are prepaying for it and should only post the amount that relates to the period. An example is an insurance policy purchased for a year for £100, but only £30 relates to this financial year; the remaining balance of £70 is transferred to the prepayment account. |
| Profit | If the revenue of the business is more than the cost of sales and expenses, a profit will have been made. |
| Profit and Loss | A financial statement which shows the revenue and expenditure over a period. |
| Purchase Ledger | Records all of the purchases and expenses. It will show a list of all the outstanding invoices and how much you owe. An account for each supplier is set up. |
| Receipt | A document of having received money for the sale of goods or services. |
| Reconcile | To reconcile an account, you need to provide evidence that the account balance is correct. |
| Record Keeping | In bookkeeping and accounting, it is important to keep your information up to date. Records need to be kept for a certain length of time and should be organised in an easy-to-use system. |
| Recurring | A transaction that is completed on a weekly, monthly or annual basis for the same amount is called a recurring transaction. Most accounting packages will set up a template and automatically produce the document. |
| Reducing Balance | A method where an asset is reduced by depreciation each year. Reducing balance means that you reduce the balance more in the early years. An example is an asset of £20,000 is reduced by 40% (£8,000), leaving a value of £12,000 in the second year it is 40% of the remaining value of £12,000. |
| Remittance | A sum of money that you send a customer for goods or services; remittance advice is a document that you submit with it. |
| Retained Earnings | Retained earnings are money kept in the business rather than paid to the shareholders as a dividend. |
| Revenue | The amount of money that a business receives in any period and is shown at the top of the profit and loss account report. |
| Sales Ledger | A record of all the sales, if the money has been received and any amounts that are still outstanding. Each customer has an account with all the details recorded. |
| Self Employed | Is someone who runs their own business and is responsible for its success or failure. They are not paid under the PAYE system but instead registered for self-assessment tax. |
| Shareholders | Are the people or businesses that have invested in the company. The shareholder funds are calculated by assets less liabilities. Shareholders can take money out of the company by dividends. |
| Single Entry | Transactions are only recorded once in the ledger. For most, this system is too simple and double entry is required. |
| Statement | A document that sets out transactions between debits and credits. There are bank, supplier and customer statements, which will show transactions for a given period. |
| Straight Line Basis | Money paid to cover travelling on business can cover the cost of travel, overnight stay, meals and other expenses which relate to the trip. |
| Subsistence | Are allowances provided to employees to cover the costs of food, drinks, and sometimes overnight accommodation when they travel on company business. |
| Tangible Assets | At the end of a financial year, accounts will need to be produced at the end of each year. |
| Transfer | The movement from one account to another or change in ownership for an asset. |
| Trial Balance | An accounting report which lists all the debits and credits of all the general ledger accounts. It is typically run by an accountant at the year-end to review all the accounts. |
| Turnover | The value of goods or services sold in a period. |
| VAT | Value Added Tax – If you are VAT registered, you will need to add VAT to your sales invoices and claim back from purchases. There are several different VAT schemes, and it is worth finding the best one to suit the business. |
| Work in Progress | The value of work that has not yet been completed. For example a manufacturing company at the period end would calculate the amount of unfinished work. |
| Write Off | Refers to debt from a customer that you do not expect to be able to collect; the debt needs to be written off from the sales ledger. |
| Year-End | The end of a financial year, accounts will need to be produced at the end of each year. |
This is a fairly comprehensive list of bookkeeping terms in accounting, suitable for both business owners and students.
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