Accounting glossary
46 accounting terms explained in plain English, for freelancers, small business owners and anyone who has nodded along when their accountant said "accrual".
A
- Accounts payableAP
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Money your business owes to suppliers for goods or services you've received but not yet paid for. It is recorded as a liability on the balance sheet.
- Accounts receivableAR
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Money customers owe your business for goods or services you've delivered and invoiced but haven't been paid for yet. It is recorded as an asset.
- Accrual accounting
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A method that records income when it is earned and expenses when they are incurred, regardless of when cash changes hands.
- Aging report
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A report that groups unpaid invoices (AR aging) or unpaid bills (AP aging) by how long they have been outstanding, usually in 30-day bands.
- Asset
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Something your business owns that has value, such as cash, money owed by customers, inventory or equipment.
- Audit trail
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A record of who created, changed or deleted each transaction and when. It lets you and your accountant trace any figure back to its source.
B
- Balance sheet
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A report showing what a business owns (assets), what it owes (liabilities) and the owner's stake (equity) on a specific date. Assets always equal liabilities plus equity.
- Bank reconciliation
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The process of matching the transactions in your books to your bank statement, so the two balances agree for the same date.
- Base currency
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The main currency a business reports in. Transactions in other currencies are converted to the base currency for reports.
- Bill
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A request for payment that your business receives from a supplier. Recording bills keeps track of what you owe and when it's due.
- Billable expense
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A cost you pay on a client's behalf that you then charge back to them on an invoice, such as travel or materials.
C
- Cash accounting
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A method that records income when money is received and expenses when money is paid out.
See also Accrual accounting - Cash flow statement
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A report showing how cash moved into and out of a business over a period, split into operating, investing and financing activities.
- Chart of accountsCOA
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The complete list of accounts a business uses to categorise its transactions, grouped into assets, liabilities, equity, income and expenses.
- Compound tax
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A tax calculated on an amount that already includes another tax, so the second tax is charged on top of the first.
- CreditCR
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An entry on the right-hand side of an account. Credits increase liabilities, equity and income, and decrease assets and expenses.
- Credit note
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A document that reduces the amount a customer owes, issued for a return, an overcharge or a cancelled order.
D
- DebitDR
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An entry on the left-hand side of an account. Debits increase assets and expenses, and decrease liabilities, equity and income.
- Depreciation
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Spreading the cost of a long-lived asset, such as a computer or vehicle, over the years you use it.
- Double-entry bookkeeping
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A system where every transaction is recorded in at least two accounts, with equal debits and credits, so the books always balance.
E
- Equity
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The owner's share of the business: total assets minus total liabilities. It includes money the owner put in and profits kept in the business.
- Exchange rateFX rate
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The price of one currency in terms of another, used to convert foreign-currency invoices and bills into your base currency.
- Expense
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A cost of running the business, such as rent, software or travel. Expenses reduce profit.
F
- Fiscal year
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The 12-month period a business uses for its accounts and taxes. It doesn't have to match the calendar year.
See also Profit and loss statement - Foreign exchange gain or loss
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The difference that arises when the exchange rate changes between the date you invoice or are billed in a foreign currency and the date it's paid.
G
- General ledgerGL
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The master record of every account and transaction in a business. Reports such as the trial balance and balance sheet are built from it.
- Gross profit
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Revenue minus the direct cost of the goods or services sold, before overheads like rent and salaries.
- GST
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Goods and Services Tax, a consumption tax charged on most goods and services in countries such as Australia, Canada, India and New Zealand.
I
J
- Journal entry
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A record of a transaction in the general ledger, listing the accounts debited and credited. Manual journals are used for adjustments such as opening balances or depreciation.
L
- Liability
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Something your business owes, such as unpaid bills, loans or sales tax collected but not yet paid.
N
- Net profit
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What's left after all expenses, including overheads, taxes and interest, are taken away from revenue. Also called the bottom line.
O
- Opening balance
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The balance of an account at the start of a period, or when you first move your books into new accounting software.
P
- Payment terms
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The conditions on an invoice that say when payment is due, such as Net 30 (within 30 days), and any late fees or early-payment discounts.
See also Invoice - Profit and loss statementP&L
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A report showing income, expenses and profit over a period such as a month or year. Also called an income statement.
Q
- Quotation
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A document that tells a potential customer what a job will cost before work starts. Also called a quote or estimate. Once accepted, it's usually turned into an invoice.
R
- Recurring invoice
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An invoice that is created automatically on a set schedule, such as monthly, for retainers, subscriptions or rent.
- Retained earnings
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The total profit a business has kept over time rather than paying out to its owners. It is part of equity.
- Revenue
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Money a business earns from selling goods or services, before any expenses are deducted. Also called income or sales.
S
- Sales tax
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A tax charged to customers on the sale of goods and some services, collected by the seller and paid to the tax authority.
T
- Tax-exclusive price
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A price shown before tax. Tax is added on top to reach the total the customer pays.
- Tax-inclusive price
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A price that already includes tax. The tax portion is worked out from the total rather than added on top.
- Trial balance
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A list of every account in the general ledger with its debit or credit balance. If total debits equal total credits, the books are in balance.
V
- VAT
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Value Added Tax, a consumption tax charged at each stage of the supply chain, used in the UK, the EU and many other countries.
W
- Write-off
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Removing an amount from the books that won't be collected, such as an unpaid invoice from a customer who can't pay.
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