25 Accounting Terms

All Small Business Owners Need to Know

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small businesses need to achieve success. So, we created a
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have enough of … time and money.

Patriot Software, LLC provides fast, simple, and affordable

accounting and payroll software for American small businesses.
We also offer 1099 software, a payroll tax-filing service for
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Learn more about our software at www.patriotsoftware.com

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 25 Accounting Terms All Small Business Owners Need to Know 2

Overview
For many small business owners, accounting can be like a foreign language. With all
the numbers and unknown terms, it can be difficult to understand. Even if you use an
accountant, you might want to better understand the information given to you about
your finances. To help you out, here are explanations of 25 common accounting terms.

Contents
The terms are listed in alphabetical order. Scroll through this document or click on a
specific term to learn more about it.

1. Accounting 14. Depreciation

2. Accounts payable 15. Expenses
3. Accounts receivable 16. General ledger
4. Assets 17. Generally Accepted Accounting Principles
5. Balance sheet 18. Inventory
6. Bookkeeping 19. Invoice
7. Capital 20. Liabilities
8. Cash flow 21. Net income
9. Chart of accounts 22. Owner’s equity
10. Closing the books 23. Profit and loss statement
11. Cost of goods sold 24. Revenue
12. Credit 25. Vendor
13. Debit

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 25 Accounting Terms All Small Business Owners Need to Know 3

1 Accounting
Accounting is the process of recording your business’s financial transactions.
Accounting also involves analyzing and reporting your accounts. You can determine
your business’s health and make good financial decisions with your accounting data.
To learn more, read “Accounting Basics: What Do Small Business Owners Need to
Know?”

2 Accounts payable
Accounts payable refers to the money your business owes to vendors for items or
services bought on credit. You should record your accounts payable on your balance
sheet as a short-term operating liability.
To learn more, read “What Are Accounts Payable?”

3 Accounts receivable
Accounts receivable is money customers owe to your business for goods or services
you provided on credit. You should record accounts receivable on your balance sheet as
a short-term asset.
To learn more, read “What Are Accounts Receivable?”

4 Assets
Assets are items that you own that bring value to your business. Assets can be either
current or fixed. Current assets can be turned into cash within one year—accounts
receivable, inventory, cash. Fixed assets continually bring value to your business beyond
a year—buildings, tools, vehicles. Assets can also be tangible or intangible. Tangible
assets are things you can touch—vehicles, equipment, property. Intangible assets are
things you cannot touch—patents, trademarks, customer lists. You should record your
business’s assets on your balance sheet.
To learn more, read “What Are Assets?”

5 Balance sheet
A balance sheet is a financial snapshot of your business. It lists your business’s assets,
liabilities, and equity. On the balance sheet, your assets must equal the amount of
liabilities and equity you have. You can use the balance sheet to determine your
business’s health.
To learn more, read “What Is a Balance Sheet?”

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 25 Accounting Terms All Small Business Owners Need to Know 4

6 Bookkeeping
Bookkeeping is the record-keeping process of accounting. You use bookkeeping to
prepare financial statements and for everyday business operations. Bookkeeping does
not involve reporting or analyzing the financial information.
To learn more, read “Bookkeeping for Your Small Business.”

7 Capital
Capital is the money your business needs to produce goods or services. You can use
capital to buy inventory and other assets. You can gain capital by taking on loans or by
increasing equity.
To learn more, read “Understanding How Capital Works With Your Small Business
Accounting.”

8 Cash flow
Cash flow is the amount of cash moving into and out of your business. Cash flow
indicates the change in your business’s liquid assets over time. If your business has a
positive cash flow, your business’s liquid assets are increasing (you are bringing in more
than you are paying out). If your business has a negative cash flow, liquid assets are
decreasing (you are paying out more than you are bringing in).
To learn more, read “How to Find Your Projected Cash Flow.”

9 Chart of accounts
A chart of accounts lists all your business’s accounts and account types. A chart of
accounts can include your assets, liability, equity, revenue, and expenses.
To learn more, read “What Is a Chart of Accounts (COA)?”

10 Closing the books

Preparing your business accounts for the coming bookkeeping period is called closing
the books. You will update and reconcile all accounts. Closing the books is commonly
done monthly, quarterly, and yearly.
To learn more, read “9 Tips to Close Your Books Monthly.”

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 25 Accounting Terms All Small Business Owners Need to Know 5

11 Cost of goods sold (COGS)

The expenses directly involved in producing goods, along with indirect expenses that
are allocated to the production of goods (allocated overhead), is called cost of goods
sold (COGS). Direct expenses includes the cost of all materials, labor, and shipping
expenses. Indirect expenses that are allocated to production include overhead
expenses like rent, utilities, and production equipment maintenance. You record COGS
on your business’s profit and loss statement. You subtract your business’s COGS from
your revenue to calculate your gross profit.
To learn more, read “What Is Cost of Goods Sold (COGS)?”

12 Credit
Credit is a type of accounting journal entry. A credit indicates a decrease in assets. A
credit also indicates an increase in liabilities and equity.
To learn more, read “Accounting Basics: Debits and Credits.”

13 Debit
Debit is a type of accounting journal entry. It is the opposite of a credit. A debit
indicates either an increase in assets, or a decrease in liabilities and equity.
To learn more, read “Accounting Basics: Debits and Credits.”

14 Depreciation
Some assets loses value over time—meaning they depreciate. Use book depreciation
to record the asset in your accounting books. Use tax depreciation to report the asset
on your business’s income tax returns. Book depreciation and tax depreciation can be
different if you and the IRS assign an asset a different useful life.
To learn more, read “What Is Depreciation?”

15 Expenses
Expenses could be payments for vendors, employee wages, advertising, office
equipment, or utilities. Business expenses are usually tax deductible.
To learn more, read “What Are Business Expenses?”

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 25 Accounting Terms All Small Business Owners Need to Know 6

16 General ledger
A general ledger contains your business’s complete financial records. A general ledger lists
all the entries that affect assets, liabilities, equity, revenue, and expenses. You can use
information on your business’s general ledger to create financial reports.
To learn more, read “A Closer Look at General Ledger.”

17 Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) are accounting rules for creating
financial statements. GAAP make it easier for others to understand and use your financial
statements. Following GAAP are not required for all businesses, but you may want to
consider preparing financial statements using GAAP.
To learn more, read “GAAP: Your Accounting Rulebook.”

18 Inventory
Your inventory is the raw materials, items in the production process, and finished products
that you have on hand. Inventory is a large asset for many businesses. Inventory also
tends to be a primary source of revenue for businesses that sell goods.
To learn more, read “What Is Inventory?”

19 Invoice
An invoice is a document that shows a transaction between a buyer and a seller. Invoices
might include purchased items, services provided, prices, transaction dates, payment due
dates, buyer and seller information, and invoice numbers.
To learn more, read “Collections Problem? Your Invoice Is to Blame…”

20 Liabilities
A liability is money your business owes to others. Your liabilities increase as you take
on more debt. Your liabilities decrease as you make payments toward your balance due.
Short-term liabilities are due within one calendar year. Long-term liabilities, such as a
mortgage or other loan, will take you more than one year to pay.
To learn more, read “What Are Liabilities?”

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 25 Accounting Terms All Small Business Owners Need to Know 7

21 Net income
Net income is your business’s revenue minus expenditures. Expenditures include
operating costs, taxes, and employee wages. Net income can give you a better financial
picture of your business than gross profit can.
To learn more, read “What Is Net Income?”

22 Owner’s equity
Owner’s equity is the capital the owner invests in the business, plus any profit. Equity can
help determine your business’s value. If your business is profitable, you will generally have
positive equity. If your business is losing money, you will generally have negative equity.
To learn more, read “What Is Owner’s Equity?”

23 Profit and loss statement

A profit and loss statement summarizes your income and expenses during a specific time.
The profit and loss statement records two types of income and expenses: operating and
non-operating. The operating section contains income and expenses related to business
activities (e.g., inventory sales, utility payments). The non-operating section contains
income and expenses not related to business activities (e.g., earned interest).
To learn more, read “You Need a Profit and Loss Statement for Small Business!”

24 Revenue
Revenue is the total amount a business receives from selling goods or providing services.
You will include revenue on your business’s profit and loss statement.
To learn more, read “Net Revenue and Discounts.”

25 Vendor
A vendor is a person or business that provides goods or services to your business. Vendors
generally send you invoices for the goods or services they provide to your business.
To learn more, read “What Is a Vendor? - Overview for Small Business Owners.”

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