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Accounting Terminology

We have compiled a list of accounting terms that are most commonly used. We hope that this information can be of great use to you as you start using QuickBooks^® or for your general daily accounting use.

CHART OF ACCOUNTS

Used to track:
Where your income comes from
Where it goes
What your expenses are for
What you use to pay them

QuickBooks^® sets up the chart of accounts in alphabetical order by type.   You can use a pre-defined template for your industry, import a preset chart of accounts from an older version of QuickBooks or from your CPA or create your own.

Hint: When coding information to a chart of accounts category, make sure to "book" it to an account that describes what it is, not who it is from (example: GTE phone bill should be booked to telephone expense, not GTE expense).  By keeping your chart of accounts simple, you will have shorter reports to review, compare and analyze.

ASSETS

Assets include:
What you have worth value (ex. inventory, bank accounts, prepaid expenses)
What other people (customers) owe you, called "Accounts Receivable" (A/R)

LIABILITIES

Liabilities include:
What debts you have incurred (ex. loans, credit lines, credit cards)
What your company owes other people (vendors) called "Accounts Payable" (A/P)
 

EQUITY

The difference between what you have (assets) and what you owe (liabilities) or the net worth of the company

The accounting equation is:
Owner's Equity = Assets - Liabilities
OR
Assets = Liabilities + Owner's Equity

Equity comes from four sources:

• Money invested in the company by its owners or stockholders
• Money paid to an owner or used for personal (sole proprietor only) as owner draws
• Net profit from operating the business during the current accounting period
• Retained earnings or net profits from earlier periods that have not been distributed to the owners or shareholders

Equity accounts track:
Owner equity
Owner withdrawals (called Owner's Draws)
Capital investments
Capital stock (if a corporation)
Retained earnings

CASH VS. ACCRUAL BOOKKEEPING

Cash basis
When you record income when you received the money and the expenses when you pay the bills. Similar to your personal checking account. No tracking is done on outstanding bills or outstanding receivables.  The income and expenses "hit" the books at the time the transaction is paid for or received.  Example: You receive your monthly telephone bill on 12/31 for December telephone calls.

Cash - You pay the bill on 1/10 and it gets recorded as a check in the check register.  On your financial reports, it would show up in January, the month you paid the check, not when the expense actually occurred.

Accrual - You enter the bill in the bill screen dated 12/31 and due on whatever date the bill says.  The importance of bill date is the date it will appear on your financial reports.  This bill, which is for December expenses, actually record in the same month, showing accurate expenses for that period.  This also allows for accuracy for budgeting and forecasting.  This is the preferred method for most clients.

Accrual basis
When you record the income at the time of sale or service, and when you receive the bill or bill generation date. This method is more accurate in the IRS rulebook.

Most accountants feel the accrual method gives you a truer picture of your company's finances, which also gives the owner more control over his money.

The IRS does not allow a "true" cash-based business anymore because a good tracking system does not exist when cash is only recorded as paid or received instead of anticipated income and expenses with an accrual system. However, some accountants use a hybrid method of the two systems. Speak to your accountant for what method suits your needs.

MEASURING BUSINESS PROFITABILITY

Keep in mind that both the Balance Sheet and the Income Statement or Profit and Loss reports work hand in hand.  You can not use one report to get a true picture of your business.

The balance sheet

Shows a financial snapshot or your company at any given time which includes:
What you have (assets)
What people owe you (accounts receivable)
What your business owes other people (liabilities and accounts payable)
The net worth of your business, known as the "bottom line" (equity)

If you were to sell your business at any given time, your total equity is the true factor for your worth of the business.
 

The Profit and Loss Statement (or income statement/cash flow statement) summarizes the income and expenses of your business by category (first income, then expenses).   The Net Income found at the bottom of this report is not a true picture of what you made for the year because there are adjustments that only happen once a year and after tax returns are completed, such as depreciation, reclassification, interest and principal allocations for loans, etc.

BALANCE SHEET ACCOUNTS

There are ten balance sheet accounts:
All show balances in the Chart of Accounts listing and all have their own register that shows all the transactions (like a check register):

Bank
Bank accounts, can include petty cash

Accounts Receivable
All transactions between you and your customer (invoices, statement charges, payments from customers, deposits of customer payments, refunds, credit memos, etc.)

Other Current Assets
Assets that are likely to get converted to cash and must be used up within a year. Can include petty cash, inventory valuation, notes receivable, prepaid expenses, security deposits, etc.)

Fixed Assets
Depreciable assets the business owns that are not liquid (will not be used up within a year) - Machinery and Equipment, Furniture and fixtures, Buildings, Tenant Improvements, Vehicles, Accumulated Depreciation, etc

Other Assets
Any asset that is not a current assets or fixed asset - long term notes receivable

Accounts Payable
The business' outstanding bills

Credit Card
Outstanding credit card receipts before reconciliation and payment

Other Current Liability
Liabilities that are scheduled to be paid within one year - sales tax, payroll tax, accrued or deferred salaries, short-term loans, etc. Can include the current portion of long-term liabilities.

Long-Term Liability
Loans that are schedules for over one year - mortgage loans

Equity
Capital investment, draws and retained earnings

COST OF GOODS SOLD (COGS)

This account is usually grouped with income and expense accounts even though it is a separate account type.

Many businesses have one cost of goods sold account. It is similar to an expense account, in that it contains all expenses that are direct costs of your sales (such as job materials or inventory)

If you use inventory to track purchases and sales of inventory, QuickBooks automatically calculates the cost of goods sold every time you sell the item.

In reports, COGS will appear after income and before any other expenses, so you can see what your net income is before subtracting our indirect expenses (utilities and office supplies).

INCOME AND EXPENSE ACCOUNTS

These accounts track the sources of your income and the purpose of each expense.

These balances accumulate over one year. At the beginning of the fiscal year, reports show income and expense account balances starting again at zero. QuickBooks closes the previous year into Retained Earnings automatically.

You can use a profit and loss report to compare how much you make and spend on specific items this year to how much you made and spent on those items last year, by using Last Year Comparison reports.

Income and expense accounts have no registers or balances on the Chart of Accounts.

 

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Last modified: January 15, 2008