Learn common accounting terms

A

Accounts receivable (A/R)

Accounts receivable is an account that tracks the money that's owed to your business. Usually, this means unpaid customer invoices. It's sometimes written as A/R. QuickBooks tracks your unpaid invoices in your accounts receivable account. Example: You sent out ten invoices last week. You haven't been paid yet, so they're part of your accounts receivable.

Accounts payable (A/P)

Accounts payable is an account that tracks the money your business owes to others. Usually, these are bills from your suppliers you still need to pay. It's sometimes written as A/P. QuickBooks tracks your unpaid bills in your accounts payable account. Example: You purchased 100 kg of coffee from different suppliers last week. You now have several unpaid bills on your desk. These bills are part of your accounts payable.

Accrual method accounting

If you use the accrual method, your business reports income and expenses for completed and pending transactions. That means you also report transactions in accounts payable (A/P) and accounts receivable (A/R). If you use the accrual method in QuickBooks, completed and pending transactions show up on financial reports. You see customer transactions even if you haven't been paid and bills you haven't paid yet. The accrual method gives you a complete view of your finances since you track current and future transactions. However, keep an eye on what you actually have in the bank. Since you also count unpaid transactions as income, it may seem like you have more money than you actually have. Example: Your business uses the accrual method. You just got a $100 invoice payment, but you didn't deposit it. You also have an unpaid invoice for $100. If you run a Profit and Loss report, you'll see both transactions. (Also see cash method accounting)

Assets

Assets are items you own and use to run your business. They generally keep their value for a year or more. There are a few types of assets:

• Long-term Assets: assets that you don't plan to sell for cash or use in less than one year of purchasing. Examples are property, land, and equipment.
• Current assets: These are physical assets you own and expect to sell or use within one year. This includes things like inventory, petty cash, prepayments for expenses, and security deposits.

B

Balance sheet

C

Cash Flow

Cash flow is the movement of money in and out of your business. Cash inflows are income while exchange gain or loss is an expense. You want to have a positive cash flow. That means making more money than you’re spending. However, it's normal for new businesses to go through periods of negative cash flow, especially when they're growing. Example: You own a pie shop. The income from pie sales is part of your cash inflow. The cost of pie ingredients is part of your cash outflow.

Cash on Hand/Petty Cash

Cash method accounting

Cost of goods sold

D

Depreciation

E

Equity

Equity is the potential value of your business. Equity includes investments in the business and accounts for all profits and losses. It's basically the net worth of your business. To calculate your equity, subtract what your business owes (liabilities) from what it owns (assets). Many people use equity to measure the health of a business. A healthy business makes more than it spends. Remember, you don't actually need to sell anything to have equity. Example: You have $5,000 worth of business assets. You owe $2,000 for a bank loan. This month your business made $1000. Your current equity is $4,000 ($5000 – 2000 + 1000 = $4,000).

Expense

Expenses are the costs of things you use for your business. This includes products and services you use to run your business as well as things like utilities. In QuickBooks, you categorize your expenses into different expense accounts for better tracking. Example: Your work phone is an asset. Your power and phone bills are expenses.

I

Income (also known as revenue)

Income is the money you make from selling products and services. In QuickBooks, you use income accounts to track your income. Use multiple separate income accounts to track different streams of income. Tip: Use Other Income account/Other Revenue to track the income you get from outside your normal business operations. Interest is an example of other income (other revenue).

L

Liabilities

A liability is money you currently owe to other people. They're basically your debts. This includes rent, outstanding bills, credit card debt, taxes you owe, and loan debt. It also includes things you pay on a regular basis, like employee withholdings. In QuickBooks, there are two types of liabilities:

• Current Liabilities: These are short-term debts you expect to pay within a year. This includes bills, sales and payroll taxes, deferred salaries, and short-term loans.
• Long-term liabilities (also known as non-current liabilities): debts you expect to pay off for longer than one year. Large loans and mortgages fall into this category.

O

Owner’s equity

Owner's equity is the personal cash or assets an owner has directly invested in their business. When an owner takes money from the business, it's known as owner's draw. There are many ways to account for owner's equity. It mostly depends on how you set up your business (sole proprietor, partnership, corporation).

R

Retained Earnings

Retained earnings is an account used to track profits from earlier periods, and which have not yet been distributed to owners.
At the beginning of the fiscal year, QuickBooks automatically transfers net income; that is net profit or loss of the previous year and which has not been taken out of the business by the owner; into the retained earnings account.

T

Trial balance

A trial balance is a report accountants use to make sure accounts are balanced at the end of the fiscal year. It lists all accounts on a chart of accounts and their totals as either debits or credits. This lets accountants compare everything side-by-side and quickly catch errors. When the credits from one account don't match the debits in a related account, they know there's a problem. Unlike a balance sheet, a trial balance doesn't group accounts by type and shows totals as debits and credits. (Also see balance sheet).