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How Business Accounting Works


Glossary

Accounting

This is the system that tracks the transactions that make up your business income and expenses and then uses this data to create reports that show the financial and task status of your business.

Accounts Payable

This is the money that your company owes to its vendors.

Accounts Receivable

This is the money that your customers owe to your company.

Accrual Basis Accounting

This is the accounting system in which reports are drawn from accounts payable, accounts receivable, cash sales, and cash payments. Most accountants recommend accrual basis accounting if you bill your customers or incur debt. (See Cash Basis Accounting)

Assets

The are the things that add value to your company: cash in the bank, accounts receivable, property, equipment, stocks or bonds, etc.

Balance Sheet

Think of a Polaroid picture. This is a snapshot of where your company is on a particular date. It lists assets, liabilities, and produces your equity -- the net worth of your company. (Download a Sample Balance Sheet, and visit our Tools Library for more samples.)

Bookkeeping

This is the process of entering data into an accounting system, including the amount, date, and source of each revenue or expense. No accounting system will work without reliable bookkeeping.

Budget

This is a process for managing cash flow in your company.

Cash Basis Accounting

This is the accounting system in which cash transactions are recorded and reports drawn from actual payments made into and out of your company. (See Accrual Basis Accounting)

Cash Flow

This is a summary of your company's sources and uses of cash. A cash flow report will show you changes in your cash position over a period of time. (Download a Sample Cash Flow Statement, and visit our Tools Library for more samples.)

Cash Sale (Receipt)

This is a sale of a product or service that is paid for when it is delivered. The paperwork that accompanies a cash sale is called a receipt and documents the delivery and payment.

Equity

This is the net worth of your company when all assets and liabilities have been accounted for.

Invoice

This is the written record of a transaction, often given to a customer or client when a service or product is delivered, but not paid for. Sometimes invoices are called bills, or even statements, although statements are technically something else (see below).

Liabilities

These are the things that your company owes to others: accounts payable, credit card debt, mortgages, etc.

Profit and Loss Statement

This is one of the reports that your accounting system will generate to give you a picture of how your company is faring. A P&L statement will look at a period of time such as a month, a quarter, or a year. You can compare with other periods of time to make decisions. (Download a Sample Profit and Loss Statement, and visit our Tools Library for more samples.)

Statement

This is a written summary of unpaid invoices. Statements may contain several invoices and are usually sent as a reminder of payment due.