Bookkeeping is an essential aspect of running a successful business. As a business owner, having a solid grasp of some key bookkeeping terms and concepts can help you make more informed financial decisions and set your company up for growth and profitability.

In this blog post guide, we will cover 20 must-know bookkeeping terms to boost your financial literacy.

What is Bookkeeping?

Bookkeeping refers to the organized process of tracking and recording all financial transactions for a business. This includes everything from sales, purchases, and expenses to assets and liabilities.

While accounting focuses more on analyzing financial data, reporting, and making recommendations, bookkeeping centers on logging daily entries to paint an accurate picture of the overall financial health of a business.

Key Responsibilities of a Bookkeeper

Some of the most common bookkeeping tasks include:

– Recording day-to-day financial transactions
– Updating general ledgers
– Preparing invoices
– Tracking accounts payable and receivable
– Calculating total sales or profits
– Reconciling bank statements

Core Financial Statements

Financial statements are the primary outputs leveraged to communicate the financial position of a company. Mastering the major reports is key for business owners.

1. Balance Sheet

A snapshot of assets, liabilities, and equity at a specific point in time. Assets should equal the sum of a business’s liabilities and total equity.

2. Income Statement

Shows profitability over a set period of time, such as over a quarter or year. Calculate this by subtracting expenses from revenues.

3. Cash Flow Statement

Tracks the actual flow of cash in and out of your business to identify trends and predict future cash needs.

Key Accounting Concepts

Getting familiar with foundational accounting concepts is essential for correctly tracking finances:

Double-Entry Bookkeeping

The practice of making at least two entries—a debit and a credit—for every transaction. This creates a balanced record.

GAAP – Generally Accepted Accounting Principles

The standardized guidelines that shape overall accounting practices and financial reporting standards. Following GAAP lends credibility.

Fiscal Year

A 12-month reporting period set by each business to outline financial performance. Does not have to follow the calendar year.

Accrual vs. Cash Basis Accounting

Accrual accounting records income and expenses when transactions occur. Cash basis accounting records them when payment exchanges hands.

Accounts Payable and Accounts Receivable

Managing who your business owes and tracking outstanding customer payments is crucial:

Accounts Payable

This records the short-term outstanding payments your business owes to vendors and suppliers. It appears as a liability on the balance sheet.

Accounts Receivable

Tracks customer invoices issued by your company that have not yet been paid. It appears as an asset on the balance sheet since money is still owed.

Key Bookkeeping Ledgers

Ledgers allow businesses to log and categorize transactions, drill into specifics, track historical data, and get different reporting views.

General Ledger

The master ledger providing an aggregated overview of all financial transactions pulled from journal entries across sub-ledgers and accounting cycles.

Accounts Receivable Ledger

Tracks individual customer accounts and outstanding invoices owed to the company.

Accounts Payable Ledger

Records money owed to individual vendors with itemized detail on terms.

Understanding Financial Ratios

Financial ratios use key figures from statements to assess profitability, liquidity, leverage, and other aspects:

Profitability Ratios

Show how well a company utilizes assets and manages costs. Common examples include gross, operating, and net profit margins.

Liquidity Ratios

Help gauge a company’s ability to cover short-term financial obligations. The current and quick ratios are prime examples.

Leverage Ratios

Provide insight into debt levels and how a company finances assets or operations. The debt-to-equity ratio is one metric.

Accounting Best Practices

Adopting sound accounting practices leads to cleaner books, easier reporting, and optimal cash flow:

Perform Regular Reconciliations

Frequently reconcile account balances—like receivables or payables—in your ledgers to corresponding bank or credit card statements.

Follow the Matching Principle

Match related revenues and expenses in the same reporting period according to when transactions occurred following accrual methods.

Maintain an Audit Trail

Keep clear documentation on source data and calculations behind every entry made, so activity is easily traceable.

Bookkeeping Software

Leveraging bookkeeping software can save considerable time while avoiding errors:

Cloud Accounting Systems

Web-based platforms accessible anytime, anywhere. QuickBooks Online is one of the most widely used for small businesses.

Automated Functions

Tools like reporting dashboards, invoicing, transaction categorization, and receipt capture help streamline processes.

Integrations

Many programs integrate directly with other systems for payroll, banking, inventory, POS, and more.

When to Work with an Accountant

While bookkeepers handle day-to-day data entry, accountants take a bigger picture view to inform strategy and growth.

Prepare Official Filings

Certified Public Accountants (CPAs) can step in to prepare and file formal financial statements, income tax returns, government documentation, or other regulatory submissions required.

Perform Audits

Accountants can conduct official audits measuring financial statement integrity and compliance with tax codes or GAAP principles.

Advisory Services

Leverage an accountant’s expertise around business advisory services, budget forecasting, taxes, growth planning, or financial modeling.

Gaining fluency around these and other bookkeeping concepts is invaluable for monitoring the fiscal pulse and long-term viability of your business. Mastering the basics helps owners make smarter moves and future-proof for scalability down the line.