20 Bookkeeping Terms Every Business Owner Should Know
Bookkeeping can feel like a completely different language when you're first running a business. Accounts payable, assets, COGS… And you probably feel like it’s impossible to learn because it’s too confusing.
You don’t need to become an accountant, but as a business owner, you should be able to navigate some financial conversations.
Understanding basic terminology can help you make better financial decisions and communicate more effectively with your bookkeeper or accountant.
Once you understand your books, finances might even become fun to talk about! These are the financial terms you should know.
1. Accounts Payable
Accounts payable refers to money your business owes to vendors, contractors, or other businesses for products or services you've already received but haven't paid for yet. Keeping track of accounts payable helps you know which bills are coming so you can avoid late payments.
Examples:
An unpaid invoice from a web designer
A monthly software bill that hasn't been paid yet
An invoice from a supplier
A contractor's outstanding invoice
2. Accounts Receivable
Accounts receivable is the opposite of accounts payable. It’s the money that is owed to your business. When you send a client an invoice and haven't been paid yet, that unpaid invoice becomes an accounts receivable. Tracking these outstanding payments helps you understand when money is expected to come into the business.
3. Assets
People tend to think of assets as material items. But even if you are a fully online business, you still have assets.
Assets are things your business owns that have financial value. Some assets are easy to convert to cash, while the business uses others over a longer period.
Examples:
Cash in your business bank account
Business equipment
Computers and technology
Company vehicles
Inventory
Property
4. Liabilities
Liabilities are financial obligations your business owes to someone else. While expenses represent the costs of running your business, liabilities are amounts you currently owe and have to pay in the future.
Examples:
Business loans
Credit card balances
Unpaid vendor invoices
Payroll taxes owed
Equipment financing
5. Equity
Equity represents the owner's financial interest in the business after subtracting what the business owes from what it owns.
An easier way to think about it? Equity is what's left over after liabilities are taken away from assets.
For business owners, equity can change as the business earns money, takes on debt, or the owner contributes or withdraws money from a business bank account.
6. Revenue
Revenue is the money your business earns from selling its products or services before expenses are taken out. You may have heard it called your "top line" because it appears near the top of an income statement. Strong revenue is a good thing, but it doesn't necessarily mean your business is profitable (more on that in a minute!)
Examples:
Client payments
Service fees
Consulting income
Course or digital product sales
7. Expenses
Expenses are the costs your business incurs to operate. If you have to buy something for your business, it’s an expense. Tracking and categorizing expenses helps you understand where your money is going and gives you a clearer picture of your profitability.
Examples:
Software subscriptions
Office supplies
Advertising
Computer
Professional services
Office rent
Business insurance
Internet and phone costs
8. Cost of Goods Sold (COGS)
Cost of goods sold (COGS) refers to the direct costs associated with producing the products or services your business sells. This is especially important for product-based businesses, but some service businesses may also have direct costs that qualify as COGS.
Examples:
Materials used to manufacture a product
Packaging
Wholesale inventory
Direct labor involved in producing a product
Ingredients for products sold
What’s the Difference Between Expenses and Cost of Goods Sold?
A business expense would be Xero, for example. You need accounting software to organize your books.
COGS would be a cost specific to the product or service you provide. A good example would be the cost of printing wedding invitations if you're a stationery designer. The printing cost is directly tied to the cost of creating the product you're selling to your client.
9. Gross Profit
Gross profit is the money your business has left after subtracting the Cost of Goods Sold from revenue. It gives you a look at how profitable your products or services are before other operating expenses are considered.
Here’s a basic formula to help you calculate gross profit:
Revenue − Cost of Goods Sold = Gross Profit
10. Net Profit
Net profit is what's left after all of your business expenses have been deducted from your revenue. It's one of the most important numbers to understand because it gives you a clearer picture of whether your business is actually making money.
Here’s a basic formula to help you calculate net profit:
Revenue − All Expenses = Net Profit
11. Cash Flow
Cash flow refers to the money moving in and out of your business.
Positive cash flow means more money is coming in than going out during a given period.
Negative cash flow means you're spending more cash than you're bringing in.
Cash flow isn't the same thing as profit (are these financial terms getting confusing yet?)
Profit tells you how much money your business has earned after expenses.
Cash flow looks at when money is actually moving in and out of your bank account.
For example, you might send a $10,000 invoice to a client, so that revenue is recorded and your business looks profitable, but if the client doesn't pay for 60 days, you don't actually have that $10,000 available in your bank account yet.
At the same time, you may have bills, payroll, or other expenses that need to be paid now. This is why a business can be profitable on paper while still experiencing cash-flow challenges.
Examples of cash coming in:
Client payments
Product sales
Loan proceeds
Examples of cash going out:
Vendor payments
Payroll
Software subscriptions
Rent
Loan payments
12. Balance Sheet
A balance sheet is a snapshot of your business's financial position at a specific point in time. It shows what your business owns, what it owes, and the owner's equity. Reviewing your balance sheet regularly can help you understand your business's overall financial health.
A balance sheet includes:
Assets
Liabilities
Equity
13. Profit and Loss Statement (P&L)
A profit and loss statement (P&L) shows your business's revenue, expenses, and resulting profit or loss over a specific period. Unlike a balance sheet, which is a snapshot at a particular point in time, a P&L shows what happened financially during a period such as a month, quarter, or year.
A P&L typically includes:
Revenue
Cost of goods sold
Operating expenses
Net profit or loss
I provide clients with a balance sheet and P&L every month.
14. General Ledger
The general ledger is the central record of your business's financial transactions. It organizes transactions into different accounts, so your financial statements can be created and reviewed.
You probably won't spend much time looking at your general ledger if you have a bookkeeper, but your bookkeeper is working behind the scenes to keep your financial records organized.
Examples of accounts found in a general ledger:
Revenue
Advertising expenses
Office expenses
Accounts payable
Cash
Business loans
15. Reconciliation
Reconciliation is the process of comparing your bookkeeping records with your bank and credit card statements to ensure they match. Regular reconciliation can help identify missing transactions, duplicate entries, errors, or unauthorized charges before they become bigger problems.
Accounts commonly reconciled:
Business checking accounts
Business savings accounts
Business credit cards
Payment processing accounts
16. Chart of Accounts
The chart of accounts is the organized list of financial accounts your business uses to categorize its transactions. Think of it as the filing system for your bookkeeping. A well-organized chart of accounts makes it easier to create accurate financial reports and understand where your business is making and spending money.
Common categories include:
Income
Cost of goods sold
Operating expenses
Assets
Liabilities
Equity
17. Accrual vs. Cash Basis Accounting
Cash basis and accrual basis accounting are two different ways of recording income and expenses.
Cash-basis accounting: Transactions are recorded when money actually changes hands (this is what most business owners do).
Accrual accounting: Income and expenses are recorded when they're earned or incurred, even if payment hasn't happened yet.
The method your business uses can affect how your financial statements look. A bookkeeper can recommend the best option for your business.
18. Accounts Receivable Aging
An accounts receivable aging report shows how long your outstanding customer invoices have been unpaid. It typically groups invoices based on how many days they've been outstanding, making it easier to spot overdue payments and follow up with clients.
Common aging categories:
Current
1–30 days overdue
31–60 days overdue
61–90 days overdue
90+ days overdue
19. Owner's Draw
An owner’s draw means you’re getting paid! It’s the money an owner takes from the business for personal use.
It's important to record an owner's draw correctly because it isn't the same thing as a business expense. Taking money out of the business doesn't reduce the business's profit in the same way that purchasing a legitimate business expense does.
Examples:
Transferring money from a business account to your personal checking account
Taking cash from the business for personal spending
Paying a personal bill directly from the business account
20. Depreciation
Depreciation is an accounting method used to spread the cost of certain long-term business assets over their useful life. Instead of treating the entire purchase price as an expense at once, the cost is allocated over time according to applicable accounting and tax rules.
Examples of assets that may be depreciated:
Business equipment
Computers
Machinery
Furniture
Vehicles
Buildings
When Should You Talk to a Bookkeeper or Accountant?
Is your head hurting yet? You don't need to understand every financial term before getting professional help. No one is going to judge you for not understanding what every accounting or bookkeeping term means.
And you definitely don’t have to do everything yourself. If you are:
Falling behind on reconciliations
Unsure how profitable your business actually is
Mixing personal and business expenses
Preparing for tax season and don't know where to start
Your bookkeeping may need professional attention.
You Don't Have to Speak "Accounting" to Understand Your Business Finances
You don't need to do your own bookkeeping to be financially informed. As a business owner, it’s important to at least know what these financial terms mean because it will make your financial reports less intimidating.
Your books can become a tool for making decisions, not just something you worry about at tax time.
And when you’re ready to hand over your books to someone who can help you learn, not just hand you reports without explaining what they mean, let’s talk!
