Bookkeeping Glossary — Plain-English Definitions

Clear, citable definitions of bookkeeping and accounting terms for small-business owners.

• What is Accounts Payable?

  Accounts Payable (AP) is the short-term liability a business records when it buys goods or services on credit from a supplier. It represents money owed — typically due within 30 to 90 days — and appears on the balance sheet under current liabilities. Managing AP well protects cash flow and supplier trust.

• What is Invoice Processing?

  Invoice processing is the complete workflow a business follows to handle a supplier invoice from receipt to payment: capture the data, verify it against the purchase order and goods received, route it for approval, post it to the ledger, and execute payment. It is the operational backbone of Accounts Payable.

• Bookkeeping vs Accounting: What’s the Difference?

  Bookkeeping is the systematic recording of every financial transaction — sales, purchases, receipts, payments — into the ledger so the books balance. Accounting takes that verified data and interprets it: preparing financial statements, filing taxes, advising on strategy, and auditing. Bookkeeping is the foundation; accounting is the analysis built on top of it.

• What is Petty Cash Management?

  Petty cash is a small reserve of physical currency — typically kept in a locked box — that a business maintains to pay for low-value expenses where a card or bank transfer is impractical: stamps, taxi fares, office snacks, minor supplies. Petty cash management is the system of controlling that float: setting a limit, recording every withdrawal, collecting receipts, and reconciling the box to the ledger.

• What is Input VAT?

  Input VAT (input tax) is the value-added tax a VAT-registered business pays on the goods and services it buys for its operations. It appears on supplier invoices as a separate tax line. The business can usually reclaim this input tax from the tax authority, offsetting it against the output VAT it charges on its own sales — paying the tax authority only the net difference.

• What is a Chart of Accounts?

  A Chart of Accounts (COA) is the structured, numbered list of every account a business uses to record its financial transactions. It is the index of the general ledger: each account has a unique code and a name, grouped by type — assets, liabilities, equity, income, and expenses. Every bookkeeping entry posts to one or more accounts in the COA, which is why getting the structure right from day one matters.

• What is Accounts Receivable?

  Accounts Receivable (AR) is the short-term asset a business records when it delivers goods or services to a customer on credit, before the customer has paid. It represents money owed — typically due within 30 to 90 days — and appears on the balance sheet under current assets. Effective AR management is the single biggest lever on a small business’s cash flow.

• What is Double-Entry Bookkeeping?

  Double-entry bookkeeping is the accounting method in which every financial transaction is recorded in at least two accounts — as a debit in one and an equal credit in another — so that total debits always equal total credits. This dual effect keeps the accounting equation (Assets = Liabilities + Equity) in balance and is the foundation of every modern bookkeeping system, in use since the 15th century.

• What is Cost of Goods Sold (COGS)?

  Cost of Goods Sold (COGS) is the total of all direct costs incurred to produce or acquire the goods and services a business sells during a period. It includes raw materials, direct labour, and manufacturing overhead, and it is deducted from revenue to calculate gross profit on the income statement.

• What is a General Ledger?

  A general ledger (GL) is the complete, chronological master record of every financial transaction a business posts through double-entry bookkeeping. Every transaction is sorted into accounts — assets, liabilities, equity, revenue, and expenses — and the GL is the source from which the trial balance and all financial statements are produced.

• What is Bank Reconciliation?

  Bank reconciliation is the process of comparing a company’s internal cash records against its bank statement to confirm that every transaction matches and the ending balances agree. Differences arise from timing (uncleared cheques, deposits in transit), bank fees, interest, and errors, and each one must be identified and resolved before the books are closed.

• What is Accrual Accounting?

  Accrual accounting is the method of recording revenue when it is earned and expenses when they are incurred, regardless of when the related cash is received or paid. It matches income with the costs that produced it in the same period, giving a more accurate picture of profitability than the cash method, which records only actual money movements.

• What is Amortization?

  Amortization is the accounting process of spreading the cost of an intangible asset — a patent, trademark, software licence, or goodwill — evenly across its useful life. Each period a portion of the cost is recorded as an expense on the income statement while the asset’s carrying value on the balance sheet is reduced by the same amount.

• What is a Cash Flow Statement?

  A cash flow statement is one of the three core financial statements. It reports every cash inflow and outflow during a period, grouped into three categories — operating activities, investing activities, and financing activities — and reconciles the opening and closing cash balances. It answers the single question the income statement cannot: where did the actual money go?

• What is a Balance Sheet?

  A balance sheet is a financial statement that lists everything a business owns (assets), everything it owes (liabilities), and the owners’ residual claim (equity) at a single moment in time. The three sections always satisfy the accounting equation — assets equal liabilities plus equity — which is why the statement balances.

• What is an Income Statement?

  An income statement, also called a profit and loss statement, reports a business’s revenue, expenses, and resulting profit or loss over a specific period. It starts with sales at the top, subtracts the cost of goods sold to reach gross profit, then deducts operating expenses, interest, and tax to arrive at net income — the bottom line.

• What is Depreciation?

  Depreciation is the accounting process of allocating the cost of a tangible fixed asset — a vehicle, machine, or building — across its useful life rather than expensing it all in the year of purchase. Each period a portion of the cost is charged to the income statement as depreciation expense while the asset’s carrying value on the balance sheet is reduced by the same amount.

• What is a Trial Balance?

  A trial balance is an internal accounting report that lists every account in the general ledger alongside its debit or credit balance. Its single purpose is to confirm that total debits equal total credits — the mathematical check that the double-entry books are in balance before financial statements are prepared.

• What is Accounts Receivable Aging?

  Accounts receivable aging is a report that sorts every unpaid customer invoice by how long it has been outstanding, grouping balances into time buckets — typically 0–30, 31–60, 61–90, and over 90 days. It shows at a glance which customers are paying on time, which are slipping, and how much cash is trapped in late or doubtful debts.

• What is a Purchase Order?

  A purchase order (PO) is a commercial document a buyer sends to a supplier to authorise the purchase of specified goods or services at agreed prices, quantities, and delivery terms. Once the supplier accepts it, the PO becomes a legally binding contract, and it is the document the supplier’s invoice is matched against before payment is approved.

• What is a Credit Note?

  A credit note is a commercial document a seller issues to a buyer to reduce the amount owed on a previously issued invoice. It is used when goods are returned, services are cancelled, an invoice was overcharged, or a post-sale discount is granted. The credit note effectively cancels part or all of the original invoice’s value.

• What is Working Capital?

  Working capital is the difference between a business’s current assets and its current liabilities. It measures the cash and near-cash available to fund day-to-day operations after short-term obligations are met. Positive working capital means the business can pay its near-term bills; negative working capital signals potential liquidity stress and is watched closely by lenders and suppliers.

• What is Gross Profit Margin?

  Gross profit margin is a profitability ratio that shows what percentage of revenue remains after the direct costs of producing or acquiring the goods sold have been deducted. It is calculated as gross profit (revenue minus cost of goods sold) divided by revenue, expressed as a percentage. It measures the core profitability of what a business sells before operating overhead is considered.

• What is a Fiscal Year?

  A fiscal year is the 12-month accounting period a business, government, or other organisation uses for financial reporting and tax purposes. It does not have to match the calendar year. A fiscal year may end on the last day of any month — December, March, June — and once chosen it is fixed unless the tax authority approves a change.

• What is a Journal Entry?

  A journal entry is the fundamental record of a business transaction in double-entry bookkeeping. Each entry has at least one debit and one credit, the total debits must equal the total credits, and it includes a date, description, and reference number.

• What is Net Profit?

  Net profit is the amount of money a business earns after deducting all expenses — cost of goods sold, operating costs, interest, taxes, and depreciation — from total revenue. Also called net income or the bottom line, it is the final profitability figure on the income statement.

• What are Debits and Credits?

  Debits and credits are the two entries that make up every double-entry bookkeeping transaction. For every debit to one account, there must be an equal credit to another. Whether a debit increases or decreases an account depends on the account type: assets and expenses increase with a debit; liabilities, equity, and revenue increase with a credit.

• What is a Prepayment?

  A prepayment is an expense a business pays before it receives the goods or services — such as annual insurance, rent paid in advance, or a software subscription billed yearly. It is recorded as an asset because the business has not yet consumed the benefit; as the benefit is used up, the prepayment is moved to the expense account.

• What is Bad Debt?

  Bad debt is an amount owed by a customer that a business determines will never be collected. It arises when a customer goes bankrupt, disappears, or refuses to pay. The debt is removed from Accounts Receivable and recorded as a Bad Debt Expense, reducing both revenue and the asset balance.

• What is a Write-Off?

  A write-off is an accounting action that removes the value of an asset from the books because it is no longer recoverable. The asset's value is transferred to an expense account, reducing profit. Common write-offs include bad debt, obsolete inventory, and equipment that is broken or obsolete.

• What is an Accounting Voucher?

  An accounting voucher is an internal document that authorises and records a financial transaction — a payment, a receipt, or a journal adjustment. It contains the date, amount, payee, account codes, approval signature, and supporting documents (the invoice or receipt). It is the evidence behind every entry in the books.

• What is a Profit and Loss Statement (P&L)?

  A Profit and Loss statement (P&L), also called an income statement, is a financial report that summarises a business's revenue, costs, and expenses over a specific period — usually a month, quarter, or year. It shows whether the business made a profit or a loss and is one of the three core financial statements.

• What are Retained Earnings?

  Retained earnings are the cumulative profits a business has earned and kept (rather than distributed to owners as dividends). They appear on the balance sheet under equity and represent the portion of net profit reinvested in the business since it was founded.

• What is Depreciation Expense?

  Depreciation expense is the portion of a fixed asset's cost that is allocated to a single accounting period. It spreads the cost of equipment, vehicles, or buildings over the years they are used, matching the expense to the revenue the asset helps generate. It is a non-cash expense — no money leaves the business when depreciation is recorded.

• What is a Bank Statement?

  A bank statement is a periodic summary issued by a bank showing every transaction — deposits, withdrawals, fees, and interest — in a business's account over a defined period, usually a month. It shows the opening balance, each transaction, and the closing balance. It is the primary document used for bank reconciliation.

• What is EBITDA?

  EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It is a profitability measure that starts with net income and adds back interest, tax, depreciation and amortization, so the result reflects core operating performance without the noise of financing structure, tax jurisdiction, or non-cash accounting charges.

• What is Cash Basis Accounting?

  Cash basis accounting is a method that records revenue when money is received and records expenses when money is paid, rather than when the sale or obligation occurs. It is the simpler of the two main bookkeeping methods and is common among very small businesses and sole traders with straightforward, low-volume transactions.

• What is Deferred Revenue?

  Deferred revenue, also called unearned revenue, is money a business has collected from a customer for goods or services it has not yet delivered. Because the obligation to deliver still exists, the amount is recorded on the balance sheet as a liability, and it is recognised as revenue only as the work is actually performed.

• What is the Break-Even Point?

  The break-even point is the level of sales at which total revenue exactly equals total costs, so the business makes neither a profit nor a loss. It is calculated by dividing fixed costs by the contribution margin per unit, and it is one of the most direct ways to see how much a business must sell before it starts earning.

• What are Accrued Expenses?

  Accrued expenses are costs a business has incurred but has not yet paid or recorded through an invoice by the end of an accounting period. Under accrual accounting they are recognised in the period the cost arises and recorded as a current liability, so the financial statements match expenses to the period they actually belong to.

• What are Operating Expenses (OpEx)?

  Operating expenses (OpEx) are the day-to-day costs a business incurs to keep running, such as rent, salaries, utilities, marketing and software subscriptions. They are recorded on the income statement in the period they are incurred and are subtracted from revenue to arrive at operating profit. They are distinct from the one-off cost of buying long-term assets.

• What is Capital Expenditure (CapEx)?

  Capital expenditure (CapEx) is money a business spends to acquire, upgrade or extend the life of a long-term asset such as equipment, vehicles, buildings or software that will be used for more than one year. Instead of being expensed immediately, CapEx is recorded on the balance sheet as an asset and expensed gradually through depreciation.

• What is Owner's Equity?

  Owner's equity is the owner's residual interest in a business: what remains after total liabilities are subtracted from total assets. It represents the value the owner has actually put into and built up in the business, through capital contributions and retained profit, and it appears on the balance sheet as the balancing figure.

• What are Fixed Assets?

  Fixed assets are long-term physical resources a business owns and uses to operate for more than one year, such as machinery, vehicles, furniture, buildings and land. They are not intended for resale and are recorded on the balance sheet, where their cost is expensed gradually over their useful life through depreciation.

• What is the Cash Conversion Cycle?

  The cash conversion cycle (CCC) measures how many days a business's cash is tied up in operations, from paying suppliers for inventory to collecting payment from customers. It combines inventory days, receivable days and payable days, and a shorter cycle means the business turns its cash over faster.

• What is Revenue Recognition?

  Revenue recognition is the accounting principle that determines when a business records income in its books. Under accrual accounting, revenue is recognised when it is earned and the customer has control of the good or service, not necessarily when cash arrives. The timing rule keeps reported profit tied to the period the work was actually delivered.

• What is Goodwill in Accounting?

  Goodwill is an intangible asset that appears when a business is bought for more than the fair value of its identifiable net assets. The excess represents the value of the target's reputation, customer relationships and brand that cannot be bought separately. It is recorded only on acquisition, never generated internally.

• What are Intangible Assets?

  Intangible assets are non-physical resources a business owns and uses for more than one year, such as software, licences, patents, trademarks, copyrights and customer lists. They have no material form but hold real economic value, and their cost is spread over their useful life through amortisation rather than depreciation.

• What are Current Assets?

  Current assets are resources a business expects to turn into cash, sell or use up within one operating cycle, typically twelve months. The main examples are cash and bank balances, accounts receivable, inventory and short-term investments. They sit at the top of the balance sheet and fund day-to-day operations.

• What are Current Liabilities?

  Current liabilities are obligations a business must settle within one operating cycle, typically twelve months. They include accounts payable, accrued expenses, short-term loans, the current portion of long-term debt and taxes owed. They sit opposite current assets on the balance sheet and represent the business's near-term cash commitments.

• What is a Liquidity Ratio?

  A liquidity ratio measures whether a business can pay its short-term obligations with its short-term resources. The two most common are the current ratio, which compares current assets to current liabilities, and the quick ratio, which excludes inventory. A higher ratio means a larger safety buffer for paying bills on time.

• What is Net Present Value (NPV)?

  Net present value (NPV) is the sum of an investment's future cash flows discounted back to today's value, minus the initial cost. Because money today is worth more than money later, each future amount is reduced by a discount rate. A positive NPV means the investment is expected to create value.

• What is Internal Rate of Return (IRR)?

  Internal rate of return (IRR) is the discount rate at which an investment's future cash flows have a net present value of zero. In other words, it is the annual return the project is expected to generate. If the IRR exceeds the cost of capital, the investment is considered worthwhile.

• What is a Sunk Cost?

  A sunk cost is money that has already been spent and cannot be recovered, such as a non-refundable deposit or past research spending. Because it cannot be changed by any future decision, it should be ignored when choosing between future options. Only future costs and benefits matter for a rational decision.

• What is Opportunity Cost?

  Opportunity cost is the value of the next best alternative forgone when a choice is made. Every decision to spend money, time or effort on one option means giving up what that same resource could have earned elsewhere. It is not always a cash figure, but it is a real economic cost.

• What is a Fixed Cost?

  A fixed cost is an expense that stays the same regardless of how much a business produces or sells, at least within a normal range. Rent, insurance, and salaried staff are typical examples. Fixed costs are paid even when output is zero, which makes them central to the break-even calculation.

• What is a Variable Cost?

  A variable cost is an expense that changes in proportion to how much a business produces or sells. Raw materials, packaging, shipping and sales commissions are typical examples. When output is zero, variable costs are zero; when output doubles, they roughly double too.

• What is Contribution Margin?

  Contribution margin is the amount left over from a sale after variable costs are subtracted, available to cover fixed costs and then generate profit. It can be expressed per unit, as a total, or as a ratio of sales. It is the figure that drives break-even and pricing decisions.

• What is EBIT?

  EBIT, earnings before interest and tax, is a measure of a company's operating profit that excludes interest costs and income tax. It shows how much the core business earned before the effects of how it is financed and how it is taxed. It is also called operating profit.