Bookkeeping Terms, Explained
Fifty words your accountant uses without thinking, defined the way we'd say them out loud.
Accounting has a vocabulary problem. Most of these words describe something simple, and most of them get used by professionals who forgot there was ever a time they didn't know what they meant.
These are the fifty terms our clients actually ask about — written the way we'd explain them on a call, not the way a textbook would. If a term you're looking for isn't here, ask us and we'll add it.
Core Bookkeeping Concepts
Accrual basis accounting
Recording revenue when it's earned and expenses when they're incurred, regardless of when cash moves. It shows what a period actually produced, which is why lenders and investors expect it. The trade-off is that a profitable month on paper can still be a tight month in the bank.
Cash basis accounting
Recording revenue when money arrives and expenses when money leaves. It's simpler and it matches your bank balance, which is why most very small businesses start here. It also hides timing problems, because a December invoice paid in February belongs to neither month in a way that's useful.
Chart of accounts
The master list of every category your transactions can be recorded into — each bank account, revenue line, expense type, asset and liability. It's the structure every report is built from. A chart of accounts that's too thin tells you nothing; one that's too detailed is never used consistently.
Double-entry bookkeeping
The convention that every transaction affects at least two accounts, with debits equal to credits. It's a 500-year-old error check: if the two sides don't agree, something is wrong and you know it immediately. Every real accounting system works this way, including QuickBooks.
General ledger
The complete record of every transaction posted to every account. It's the underlying source that financial statements summarize. When a number on a report looks wrong, the general ledger is where you go to find out why.
Journal entry
A manual posting that records something the bank feed can't see on its own — depreciation, an accrual, a correction, an owner contribution. Legitimate and routine, but a file full of unexplained journal entries is usually a sign that something isn't being recorded properly upstream.
Month-end close
The routine of finishing a period: reconciling every account, posting accruals and adjustments, reviewing the result, and then not changing it. Closing matters because an open period is a moving target — last month's profit shouldn't change in June.
Trial balance
A listing of every account's balance at a point in time, used to check that total debits equal total credits before statements are produced. It won't catch a transaction coded to the wrong account, but it will catch an unbalanced one.
Adjusting entry
A correction or accrual posted at period end to put activity in the right period — recognizing earned revenue, accruing an unpaid expense, recording depreciation. Your CPA often sends a set of these after the year is reviewed, and they need to be posted or next year starts wrong.
Reconciliation
Matching your books against an outside statement — bank, credit card, loan — until every transaction agrees and the ending balances match. It's the single step that proves the books are real. Books that have never been reconciled are an estimate, not a record.
The Three Financial Statements
Balance sheet
A snapshot of what you own, what you owe, and what's left over, as of one specific date. Assets equal liabilities plus equity, always. It's the statement most small business owners ignore and the one a lender reads first.
Profit and loss statement
Revenue minus expenses over a period of time, ending in net profit or loss. Also called an income statement or P&L. It answers what happened last month, not what you're worth or what's in the bank.
Statement of cash flows
A reconciliation of profit to actual cash movement, split into operating, investing and financing activity. It's the statement that explains the question owners ask most: how can we be profitable and still be short on cash.
Assets
What the business owns or is owed — cash, receivables, inventory, equipment, prepaid expenses. Assets are split between current (expected to convert to cash within a year) and long-term, because a building and a checking account are not interchangeable.
Liabilities
What the business owes — payables, loans, credit cards, payroll taxes collected and not yet remitted, customer deposits not yet earned. Like assets, they're split into current and long-term. Unearned customer money is a liability, not revenue, and that distinction causes more trouble than any other.
Equity
What's left when liabilities are subtracted from assets: the owner's stake. It moves with profit, losses, contributions and draws. Negative equity isn't automatically alarming, but it's always worth understanding the cause of.
Retained earnings
Cumulative profit the business has kept rather than distributed, carried forward year after year. It's not a pile of cash sitting anywhere — that money has usually been spent on assets or operations. The confusion between retained earnings and available cash is extremely common.
Gross margin
Revenue minus the direct cost of delivering it, expressed as a percentage. It tells you whether the thing you sell makes money before overhead. A business can grow revenue every quarter and go broke if gross margin is wrong, because every additional sale makes it worse.
Money In and Money Out
Accounts receivable
Money customers owe you for work already invoiced. It's an asset, but only a collectible one — receivables that age past 90 days are worth considerably less than their face value, and books that don't track aging make that invisible.
Accounts payable
Money you owe vendors for goods or services already received. Tracked properly, it tells you what's genuinely available to spend. Businesses that pay from the bank balance rather than from a payables list are the ones that get surprised.
Aging report
A breakdown of receivables or payables by how long they've been outstanding — current, 30, 60, 90-plus days. It's the most actionable report in a small business and the one most owners have never been shown.
Work in progress
Work performed and not yet billed. For professional services firms it's often the largest asset on the books and the one least likely to be recorded. Most firms discover their WIP balance at the moment they write it off. More on professional services →
Realization rate
What you actually collect measured against what you originally recorded or billed. A firm billing at $300 an hour and realizing $210 is running a materially different business than the one it believes it's running, and nothing on a standard P&L reveals the gap.
Bad debt write-off
Removing a receivable you've concluded won't be collected. Doing it keeps the balance sheet honest; avoiding it inflates your assets with money that isn't coming. The timing and method matter for taxes, which is a conversation for your CPA.
Cost of goods sold
The direct cost of producing what you sold — materials, direct labor, subcontractors on a job. Abbreviated COGS. Getting the line between COGS and overhead right is what makes gross margin mean anything; miscoding here quietly distorts every margin report you'll ever run.
Operating expenses
The costs of running the business that aren't tied to a specific sale — rent, software, insurance, administrative salaries, marketing. Often shortened to OpEx. They sit below gross profit on the P&L because they don't scale with each unit sold.
Deferred revenue
Money received for work not yet performed. It's a liability until you earn it, not revenue. Recording a retainer or an annual prepayment as revenue on arrival inflates the period, reverses later, and misrepresents what you can safely draw.
Payroll and People
Gross pay vs. net pay
Gross pay is what an employee earns before anything is withheld. Net pay is what actually lands in their account. The difference is withholding and deductions, and the employer's total cost is higher than gross because of employer-side taxes on top.
W-2 employee
A worker whose employer controls how and when the work is done, withholds taxes from their pay, and pays employer-side payroll taxes. The classification isn't a preference — it's determined by the nature of the relationship, and getting it wrong is expensive.
Payroll tax
Taxes tied to wages: Social Security and Medicare (split between employee and employer), federal unemployment, and state unemployment. Some are withheld from the employee, some are the employer's own cost, and all of them have filing deadlines independent of your income tax return.
FUTA and SUTA
Federal and state unemployment taxes, both paid by the employer rather than withheld from the employee. In Texas, SUTA is administered by the Texas Workforce Commission and the rate assigned to a new employer changes periodically. Texas payroll setup →
Withholding
Money taken out of an employee's gross pay and remitted on their behalf — federal income tax, Social Security, Medicare, and in most states, state income tax. Texas has no state income tax, so Texas employers withhold nothing at the state level.
Owner's draw
Money an owner takes out of the business that isn't payroll. It reduces equity rather than appearing as an expense on the P&L. Draws recorded as wages or as expenses distort profit and are among the most common cleanup items we find.
Reasonable compensation
The requirement that an owner-employee of an S corporation pay themselves a defensible salary through payroll before taking distributions. What counts as reasonable depends on role, industry and market, and determining it is a question for your CPA rather than your bookkeeper.
1099 contractor
An independent worker who controls how the work is performed, invoices for it, and handles their own taxes. You report payments on Form 1099-NEC. Treating someone as a contractor who functions as an employee is one of the most commonly penalized errors in small business payroll.
Entities, Taxes and Compliance
EIN
Employer Identification Number — the federal tax ID the IRS issues to a business. You need one to hire employees, open most business bank accounts, and file business returns. It's free and issued directly by the IRS; services charging for it are charging for the form.
Sole proprietorship
A business that isn't legally separate from its owner. Simplest to operate and the default if you never form anything else, but it offers no liability separation, and in practice business and personal transactions tend to mix — which is where bookkeeping gets difficult.
LLC
A limited liability company: a state-level legal structure that separates business liability from personal assets. An LLC is not a tax classification — it can be taxed as a sole proprietorship, a partnership or an S corporation, and that choice is separate from forming it.
Sales tax nexus
The connection that obligates a business to collect and remit sales tax in a state — created by physical presence, and in most states now by economic activity above a threshold. Selling online across state lines creates obligations many businesses don't know they have.
Depreciation
Spreading the cost of a long-lived asset across the years it's used rather than expensing it all at purchase. It's a real expense on the P&L that involves no cash movement, which is why profit and cash flow diverge. Depreciation method and timing are tax questions for your CPA.
Fiscal year
A twelve-month accounting period that doesn't have to start in January. Most small businesses use the calendar year because it's simpler and aligns with how tax forms arrive, but seasonal businesses sometimes choose a year end that falls after their busy season.
Audit trail
The record of who changed what and when inside your accounting file. It's what makes a set of books defensible, and it's the reason deleting and re-entering a transaction is worse than correcting it. QuickBooks keeps one automatically and it cannot be turned off.
S corporation
A tax election, not an entity type, that lets profits pass through to owners while requiring owner-employees to take reasonable compensation through payroll. It can reduce self-employment tax, and it adds payroll obligations and filing complexity that have to be run properly to be worth it.
Software and Process
QuickBooks Online vs. Desktop
Two different products, not two versions of one. Online is cloud-based, subscription-priced, and multi-user by design. Desktop is locally installed with deeper industry-specific features. Migration between them is possible but not lossless, and the decision is worth making deliberately.
Bank feed
The automatic connection that pulls transactions from your bank into your accounting software. It saves enormous time and it is not bookkeeping — a transaction imported is not a transaction categorized, and a file where the feed has been accepted without review is one of the most common cleanup jobs we take.
Class tracking
A QuickBooks feature that tags transactions so you can report profit by location, department, engagement or product line. Set up at the start it's effortless; applied retroactively to a year of history it's a project. Most firms wish they'd turned it on sooner.
Opening balance equity
A temporary QuickBooks account created when balances are entered during setup. It's supposed to be cleared out once setup is complete. A file with a balance still sitting there years later is telling you the initial setup was never finished.
Catch-up bookkeeping
Bringing books current when months or years of transactions haven't been recorded. The work is rebuilding history: coding, reconciling and closing each period in order. Catch-up and cleanup →
Cleanup bookkeeping
Fixing books that exist but can't be trusted — miscoded transactions, unreconciled accounts, duplicated entries, balances that don't tie. Different from catch-up, and often harder, because you have to determine what was intended before you can correct it.
Undeposited funds
A holding account for payments received but not yet deposited as part of a bank deposit. Used correctly it lets your books match a deposit slip with four checks on it. Left unmanaged it accumulates phantom income — a swollen undeposited funds balance is one of the first things we check.
To be clear about scope: Bulverde Business Solutions provides bookkeeping, payroll, and financial operations services from Bulverde, Texas, serving the Hill Country, San Antonio, and clients across Texas. We are not a CPA firm. These definitions are general explanations, not tax, legal, or investment advice. Entity structure, compensation, depreciation and nexus questions should go to a CPA or attorney.
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