Basic Bookkeeping Terminology
Understanding key bookkeeping terms is essential for effective financial management. This guide covers the fundamental concepts you'll encounter.
Core Accounting Concepts
Assets
Resources owned by the business that have economic value.
Examples:
- Cash and bank accounts
- Accounts receivable (money owed to you)
- Inventory
- Equipment and property
- Investments
Liabilities
Obligations or debts the business owes to others.
Examples:
- Accounts payable (money you owe suppliers)
- Loans and mortgages
- Credit card balances
- Accrued expenses
- Deferred revenue
Equity
The owner's stake in the business (Assets - Liabilities).
Components:
- Owner's capital/contributions
- Retained earnings
- Distributions/draws
The Accounting Equation
The fundamental principle of bookkeeping:
Assets = Liabilities + Equity
This equation must always balance in your books.
Income Statement Accounts
Revenue (Income)
Money earned from business activities.
Types:
- Sales revenue
- Service income
- Interest income
- Other income
Expenses
Costs incurred to operate the business.
Categories:
- Cost of goods sold (COGS)
- Operating expenses
- Administrative expenses
- Interest expense
Net Income (Profit)
The bottom line: Revenue - Expenses
Key Bookkeeping Terms
Debit and Credit
The two sides of every transaction.
- Debit (Dr): Left side of an account
- Credit (Cr): Right side of an account
Debits and credits don't mean "increase" or "decrease" universally. Their effect depends on the account type:
| Account Type | Debit | Credit |
|---|---|---|
| Assets | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Equity | Decrease | Increase |
| Revenue | Decrease | Increase |
| Expenses | Increase | Decrease |
Chart of Accounts
A complete listing of all accounts used in your bookkeeping system, organized by category.
General Ledger
The complete record of all financial transactions, organized by account.
Journal Entry
A recorded transaction showing debits and credits.
Trial Balance
A report showing all account balances to verify debits equal credits.
Transaction Cycle Terms
Posting
Transferring journal entries to the general ledger.
Reconciliation
Comparing and matching two sets of records (e.g., bank statements to your books).
Adjusting Entries
End-of-period entries to record accruals, deferrals, and corrections.
Closing Entries
Year-end entries to transfer temporary account balances to permanent accounts.
Financial Periods
Fiscal Year
A 12-month period used for financial reporting (may or may not match the calendar year).
Accounting Period
Any defined time period for financial reporting (monthly, quarterly, annually).
Reporting Period
The specific timeframe covered by a financial report.
Common Abbreviations
| Abbreviation | Meaning |
|---|---|
| A/R | Accounts Receivable |
| A/P | Accounts Payable |
| COGS | Cost of Goods Sold |
| P&L | Profit and Loss (Income Statement) |
| B/S | Balance Sheet |
| GL | General Ledger |
| JE | Journal Entry |
| YTD | Year-to-Date |
| QTD | Quarter-to-Date |
Practice Exercise
Test your understanding:
Scenario: You purchase $500 of office supplies on credit.
Question: How would you record this transaction?
Click to see the answer
Answer:
- Debit: Office Supplies (Asset) $500
- Credit: Accounts Payable (Liability) $500
This increases both assets (supplies) and liabilities (amount owed).
Next Steps
With these fundamental terms under your belt, you're ready to learn about accounting methods and how they affect your bookkeeping.