Bookkeeping Terms and Accounting Definitions

Bookkeeping terms

There are many bookkeeping terms which you may be unfamiliar with, here we list most of the terms that are used. There are also some accounting definitions to make a list complete. Some have links included so that you can research the subject further.

If you cannot find bookkeeping terms or definitions that you need, please get in contact, and we will try and add it in.

List of Bookkeeping Terms

Bookkeeping TermsDescription of Bookkeeping Terms
AccountantThe person who looks after or inspects the business accounts. They are normally qualified by one of the regulatory bodies.
AccountingProcess of keeping the business financial records. Read our accounting basics section.
AccountsThe 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 PayableMoney owed to a supplier from bills or invoices that have been received. An Accounts receivable report shows all amounts owning and how overdue they are.
Accounts ReceivableMoney owed from a customer for a sales invoice. Accounts receivable report will show the total amount owing to customers.
Accounting EquationThere 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
AccrualsExpenses that relate to an accounts period but have not been billed. A journal is normally raised to add it to the accounts.
Aged CreditorsSee Bookkeeping term – Accounts Payable definition
Aged DebtorsSee Bookkeeping Term – Accounts Receivable definition
AssetsItems that a business owns that has a value. These can be both fixed assets computers, equipment and buildings or intangible assets like patents, copyright and trademarks.
Bad DebtsAn amount owing from a customer that will not be paid, there can be several reasons for debts not being paid including the customer has gone into liquidation.
Balance sheet A financial statement that shows a snapshot of the company’s financial position. It shows all the assets, liabilities and equity.
BankPart of the balance sheet (current assets) report shows how much money is in the bank.
BookkeepingThe process of preparing the accounts and recording the financial transaction, it includes purchases sales, receipts and payments.
Bookkeeping CycleThe process of steps from entering a transaction to preparing the financial statements, includes Documents, journals, ledger, trial balance, adjustments, closing accounts and preparation of final accounts.
BudgetIs a financial plan for a future period usually a year; it will show where financially the business is expected to be and future.
CapitalThe wealth of the business, whether in money or property, owned or employed in the business. It can be found on the balance sheet.
Cash-flowThe movement of money in and out of the business. A cash flow forecast shows future income and expenditure over a period of time.
Chart of AccountsThe list of all accounts within an accounting software package. They include Assets, liabilities, capital, income, cost of sales and expenses.
Contra EntryFor every transaction in the accounts, a reverse entry needs to be made. Therefore a debit entry in one account will have a credit entry in another.
Corporation TaxIn the UK tax is paid on profits of the company.
Cost of Goods SoldIs the cost price of goods sold and is shown on the Profit and Loss account.
Credit Note
If a refund is due to a customer a credit note will be raised in the accounts to reduce the sales invoice.
CreditorsCan be a bank, supplier or person that has given credit to the company. Therefore the business would owe money to its creditors.
DebitDouble entry accounts are made up of debits and credits. A debit is on the left side of accounts. An example is on the cash account if money is received it is recorded on the left side of the cash account.
DebtorsA 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.
DepositMoney paid into a bank or building society. It can also be an initial payment made for goods that are going to be paid in instalments.
DepreciationEquipment that is purchased for use in the business is reduced by value over a period of time. An example of this is that a computer is purchased for £300 and reduced in value over three years, the depreciation will be £100 per year under straight-line depreciation.
DividendsA 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 EntryEach transaction needs to be entered as a credit on one account and a debit to the other account. This is the basis of double entry bookkeeping.
DrawingsIf you are a sole trader or partnership, when you withdraw money from the business it is known as drawings.
EquityThe word equity is the bookkeeping term used to refer to an ownership interest in a business. It can include stockholders’ equity or owner’s equity.
ExpenseAn expense to the business is money paid for items or services. The Profit and Loss account shows income and expenses.
ExportCan either mean to export goods to a foreign county or to export transactions from software this can include downloading to Excel or PDF.
Financial StatementsThe financial statements are Profit and Loss, Balance Sheet and Cash Flow. The statements are used by company owners and lenders to make financial decisions about the business.
GoodwillIs 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.
GoodsProducts that are purchased and sold within a business.
Gross ProfitTotal Sales less the cost of goods sold equals gross profit. Cost of goods sold includes the cost of the goods and all costs in making it.
ImportCan either mean to bring in transactions to an accounting package, an example of this is to download your bank transaction from your bank and import them into accounts software. Import can also mean bringing goods into the country.
IncomeAll revenue for the business is shown at the top of the profit and loss account.
Indirect costsAre cost that does not relate directly to a specific project. An example is advertising the business, which promotes the whole business.
InvoiceA document that states what goods or services have been provided and how much is due. Sales invoices are sent to your customers, and purchase invoices are received from suppliers.
Intangible AssetsAn intangible asset is an asset that is not physical. Examples of intangible assets are goodwill, trademarks and patents.
JournalA 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.
LedgerIs a book or computer file used for maintaining the accounts. It holds all the information to prepare the financial statements.
Are things that the business owes to other organisations and people; they can include loans, overdrafts and money owed to suppliers.
Limited CompanyIs formed in the UK and is limited by the shares. Any legal action is taken against the company rather than the individuals. Limited companies details are held on Companies House.
Long-term LiabilitiesPart of the Balance sheet and they are money owing over one year; they can include long-term loans and mortgages.
LossIf 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.
MarginIs 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.
MarkupMarkup is the difference between the cost and the selling price.
Net AssetsThe total assets less liabilities. The figure equals equity, if it is a sole partnership, it is the owner’s equity and if a corporation its stockholder’s equity.
Net Book ValueIs 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 ProfitGross profit less expenses equal your net profit. Revenue minus cost of goods equals gross profit minus expenses equals net profit.
Nominal AccountsEach transaction of revenue, expenses, gains and losses are 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.
Opening BalancesTo 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.
OverdraftIf a bank balance is negative then you have gone overdrawn. There will typically be fees attached to the overdraft, and it is best to arrange terms before using an overdraft.
PAYEPay as You Earn is the UK payroll that deducts tax and NI each time you get paid.
Petty CashA small amount of cash is kept to purchase sundry items. For a more significant business, procedures need to be in place for issuing money.
PrepaymentsIf 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 prepayment account.
ProfitIf the revenue of the business is more than the cost of sales and expenses a profit will have been made.
Profit and LossA financial statement which shows the revenue and expenditure over a period.
Purchase LedgerRecords all of the purchase 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.
ReceiptA document of having received money for the sale of goods or services.
ReconcileTo reconcile an account you need to provide evidence that the account balance is correct.
Record KeepingIn 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.
RecurringA 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
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.
RemittanceA sum of money that you send a customer for goods or services; remittance advice is a document that you submit with it.
Retained EarningsRetained earnings are money that is kept in the business rather than paid to the shareholders as a dividend.
RevenueThe amount of money that a business receives in any period and is shown at the top of the profit and loss account report.
Sales LedgerA 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 EmployedIs 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.
ShareholdersAre 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 EntryTransactions are only recorded once in the ledger. For most, this system is too simple and double entry is required.
StatementA 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 BasisA 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 useful life).
SubsistenceMoney paid to cover travelling on business, it can cover the cost of travel, overnight stay, meals and other expenses which relate to the trip.
Tangible AssetsAre physical items that the business owns and can include computers, equipment, furniture, fixtures, stock and buildings. It is recorded on the balance sheet.
TransferThe movement from one account to another or change in ownership for an asset.
Trial BalanceAn 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.
TurnoverThe value of goods or services sold in a period.
VATValue 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 ProgressThe value of work that has not yet been completed. An example is a manufacturing company at the period end would calculate the amount of any unfinished work.
Write OffRefers 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-EndThe 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 and is suitable for both business owners and students.

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