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Common accounting terms defined

Find definitions for common accounting terms used in QuickBooks Online.

There are a number of accounting terms used within QuickBooks Online. We define several of the most common ones for you.

Chart of Accounts (non-balance sheet accounts)

Chart of Accounts account types are non-balance sheet accounts. This means they don't have their own register or account history.

Income (Revenue)
Money earned from the sale of your products or services is recorded as income.Your company might have one income account or several, depending on the detail needed for your financial analysis.

Another category of income is Other Income, or income generated from the sale of a product or service that is not typical of your normal operations. Interest Income is an example of an Other Income account type.

Expense
Money that leaves the company is recorded as an expense. An Expense account tracks and categorises what your company is spending. An Other Expense is money spent on something other than normal business operations, such as corporate income taxes.
Cost of Goods Sold (COGS, Cost of Sales, COS)
Costs directly related to producing a service or good for sale are recorded as Cost of Goods Sold. There is a direct relationship between these costs and your revenue.

If your company sells a product, your cost of goods sold expenses would be the material, labour, and other costs incurred to make and sell the product.

By contrast, your office expenses for rent or advertising are considered indirect, and should not be posted to the Cost of Goods Sold account type.

Balance Sheet Accounts

Asset
Something you have purchased in the past that will be used in the future to generate economic benefit is an asset. QuickBooks Online offers the following asset categories based on how liquid the asset is (how quickly you can turn the asset into cash):
  • Current asset (Other current asset): Assets that are likely to be converted to cash or used up within one year. Examples include petty cash, notes receivable due within a year, pre-paid expenses (pre-payments), and security deposits. This account type is used for the QuickBooks Inventory Asset account and the Undeposited Funds account. The Undeposited Funds account is a default account in QuickBooks Online that holds funds from payments to your company until you deposit them to your bank account.Think of it as an envelope where you keep cheques from customer payments until you take them to the bank and total them on a single deposit ticket.
  • Fixed asset (Tangible Asset, Property, plant and equipment): Tangible, depreciable property that will have a useful life of longer than one year, such as equipment or furniture, is called a Fixed asset.Fixed asset account types track the purchases of such assets, and also hold Accumulated Depreciation totals as a negative fixed asset.
  • Other assets (Non-current asset): Intangible assets with a life of more than one year are considered Other assets. This category also includes any asset that is not a Fixed Asset or Current Asset, such as a long-term notes receivable.
Bank (Cash at hand and in hand, Cash and cash equivalents)
Used to track your cash in and out of the business.
Credit card
Credit card purchases, bills, and payments.
Liability
Your company's debts are called liabilities. In a sense, liabilities represent the credit extended to your business.

Liabilities include the bills you've received, money you owe on credit cards, sales tax you owe the government, employee withholdings you owe the government, and both short-term and long-term debts.

QuickBooks Online distinguishes between two types of liabilities:

  • Current liabilities: Debts your company expects to pay within a year, such as bills, sales tax, payroll taxes, accrued or deferred salaries, and short-term loans.
  • Long-term liabilities (Non-current liability, Long-term creditors): Debts your company expects to pay off in more than one year, such as long-term loans and mortgages.
Equity (Equity Capital)
The net worth of your company is your equity.

Equity represents the difference between what you owe (liabilities) and what you have (assets). Your equity represents the health of your business, since it is the amount of money left after all of your debts are satisfied. If you sold all your assets today, and paid off your liabilities with the money received from the sale of your assets, the money left would be equity.

Equity comes from two sources:

  • Money invested in your company
  • Profits or losses from your business

This account type is used for Opening balance equity and Retained Earnings, which QuickBooks Online adds when you create a new company. It's also used for Owner's equity accounts (including capital investments and drawings). An owner can also take money out of the company. Such withdrawals, called owner's draws, reduce the company equity.

Accounts Receivable (A/R, Debtors, Trade and other debtors, Trade and other receivables)
Money that comes in to your company is defined as Accounts Receivable. Use this account type when generating an invoice or adjustment note transaction, or when receiving a customer payment.

This account type tracks how much money you are owed by your customers, and requires a Customer with each entry.

Accounts Payable (A/P, Trade and other creditors, Trade and other payables)
Money that goes out of your company is defined as Accounts Payable. Use this account type when generating a bill or supplier/supplier credit transaction, or when paying a bill.

This account type tracks how much money you owe your suppliers, and requires a supplier/supplier with each entry.

People

Customers
People who owe you money.
Suppliers/Suppliers
People you owe money to.
Employees
People who work for you, whom you pay regularly

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