Bookkeeping glossary

60 bookkeeping terms in plain words. Each one has a small example, and links to the practice rooms that teach it.

A

Accounting equation: The accounting equation says that assets equal liabilities plus capital. It is always true.
Accrual: An accrual is a cost a business has used by the year end but has not yet paid or been billed for.
Asset: An asset is something a business owns, or is owed: a van, money in the bank, or money that customers owe.

Balance brought down: The balance brought down is the figure an account starts a period with: the balance carried down from the period before.
Balance carried down: The balance carried down is written on the smaller side of an account, so that both sides add up to the same total.
Bank reconciliation: A bank reconciliation explains the gap between the balance in the cash book and the balance on the bank statement.
Books of prime entry: Books of prime entry are where a transaction is first written down, before it reaches the ledger.

Capital: Capital is what a business owes its owner: the money the owner put in, plus any profit left in the business.
Cash book: The cash book records every receipt into the bank and every payment out of it. It is also the Bank account in the ledger.
Control account: A control account holds one total in the general ledger, such as the amount owed by all the credit customers together.
Cost of sales: Cost of sales is what the goods sold in a year cost the business: opening inventory, plus purchases, less closing inventory.
Credit: Credit is the right side of an account. Liabilities, capital and income go up on the credit side.
Credit note: A credit note reduces what a customer owes. It is the opposite of an invoice.
Current asset: A current asset is cash, or something that should turn into cash within a year: inventory, trade receivables, money in the bank.

Day book: A day book is a book of prime entry that lists credit sales or credit purchases, one line for each invoice.
Debit: Debit is the left side of an account. Assets and expenses go up on the debit side.
Depreciation: Depreciation shares the cost of a non-current asset over the years it is used. Each year's share is an expense.
Direct debit: A direct debit lets the payee collect money from the payer's bank account. The payee decides the amount and the date.
Double entry: Double entry means every transaction is posted twice: a debit in one account and a credit of the same amount in another.
Drawings: Drawings are money or goods the owner takes out of the business for their own use. They reduce capital.

Error of commission: An error of commission is an entry for the right amount, on the right side, in the wrong account of the same kind.
Error of omission: An error of omission is a transaction left out of the books completely. The trial balance still agrees.
Error of principle: An error of principle is an entry in the wrong kind of account, such as an asset recorded as an expense.
Expense: An expense is a cost of running a business in a period, such as rent, wages or electricity.

General ledger: The general ledger holds the accounts for assets, liabilities, capital, income and expenses. The double entry is made here.
Gross pay: Gross pay is everything an employee earned in a pay period, before anything is taken off.
Gross profit: Gross profit is revenue less cost of sales: the profit on trading, before the running expenses of the business.

Imprest system: The imprest system keeps petty cash at a fixed amount. The top-up at the end of each period equals what was spent.
Income: Income is what a business earns, mostly from sales. An income account goes up on the credit side.
Input tax: Input tax is the VAT a business pays on its purchases and expenses. It can usually be claimed back from HMRC.
Inventory: Inventory is the goods a business holds at a point in time: bought or made, and not yet sold.
Invoice: An invoice is the seller's request for payment. It lists what was sold and what is owed.

Journal: The journal is the book of prime entry for anything that fits in neither a day book nor the cash book.

Ledger: A ledger is a set of accounts. A business may keep a general ledger, a sales ledger and a purchases ledger.
Liability: A liability is money a business owes to someone else, such as a bank loan or an unpaid supplier bill.

Net pay: Net pay is gross pay less deductions: the amount that is paid into the employee's bank.
Net profit: Net profit is the profit for the year: gross profit less all the other expenses of running the business.
Non-current asset: A non-current asset is an asset a business keeps and uses for more than a year, such as a van, an oven or shop fittings.

Output tax: Output tax is the VAT a business charges on its sales. It is owed to HMRC.
Outstanding lodgement: An outstanding lodgement is money paid in, and entered in the cash book, that the bank statement has not shown yet.

Petty cash: Petty cash is a small amount of notes and coins kept for small costs, such as stamps or milk.
Prepayment: A prepayment is a cost paid before the year end that will be used after it. It is carried forward as an asset.
Prompt payment discount: A prompt payment discount is offered to a customer for paying early. It is only earned if the customer does pay early.
Purchases ledger: The purchases ledger holds one account for each credit supplier. It shows who the business owes money to, and how much.

Reducing balance depreciation: Reducing balance depreciation charges a fixed percentage of an asset's carrying amount each year, so the charge falls.
Remittance advice: A remittance advice is sent by a customer with a payment. It lists the invoices and credit notes the payment covers.

Sales ledger: The sales ledger holds one account for each credit customer. It shows who owes the business money, and how much.
Standing order: A standing order is an instruction from the payer to its own bank to pay a fixed amount on fixed dates.
Statement of account: A statement of account lists the invoices, credit notes and payments between a seller and one customer, and the balance owed.
Statement of financial position: The statement of financial position lists what a business owns and owes at one date: its assets, liabilities and capital.
Statement of profit or loss: The statement of profit or loss sets the income of a period against its expenses, to show the profit or loss.
Straight line depreciation: Straight line depreciation charges the same amount in every year of an asset's useful life.
Suspense account: A suspense account is a temporary account that holds the difference when a trial balance does not agree.

T-account: A T-account is an account drawn as a letter T: debits on the left side, credits on the right side.
Trade discount: A trade discount is a percentage taken off the list price. It comes off on the invoice, before VAT is worked out.
Trade payables: Trade payables is the money a business owes its suppliers for goods bought on credit. It is a liability.
Trade receivables: Trade receivables is the money that customers owe a business for sales made on credit. It is an asset.
Trial balance: A trial balance lists every account balance in two columns, debit and credit. If the bookkeeping is right, the totals agree.

Unpresented cheque: An unpresented cheque is a payment in the cash book that has not reached the bank statement yet.

VAT return: A VAT return is a summary of one VAT period: the VAT due on sales, the VAT reclaimed on purchases and the difference.