Basic Accounting Terms

Debits & Credits

A debit is a record of all money expected to come into an account. A credit is a record of all money expected to come out of an account. Essentially, debits and credits track where the money in your business is coming from, and where it’s going.

Accounts Receivable & Accounts Payable

Accounts receivable is money that people owe you for goods and services. It’s considered an asset on your balance sheet. For example, if a customer fulfills their invoice your company’s accounts receivable amount is reduced because less money is now owed.

Accounts payable is money that you owe other people and is considered a liability on your balance sheet. For example, let’s say your company pays $5,000 in rent each month. Here’s how that would be recorded in your financial records before that amount is paid out.

Accruals

Accruals are credits and debts that you’ve recorded but not yet fulfilled. These could be sales you’ve completed but not yet collected payment on or expenses you’ve made but not yet paid for.

Assets

Assets are everything that your company owns — tangible and intangible. Your assets could include cash, tools, property, copyrights, patents, and trademarks.

Cost of Goods Sold

The cost of goods sold (COGS) or cost of sales (COS) is the cost of producing your product or delivering your service. COGS or COS is the first expense you’ll see on your profit and loss (P&L) statement and is a critical component when calculating your business’s gross margin. Reducing your COGS can help you increase profit without increasing sales.

Expenses

Expenses include any purchases you make or money you spend in an effort to generate revenue. Expenses are also referred to as “the cost of doing business”.

Fiscal Year

A fiscal year is the time period a company uses for accounting. The start and end dates of your fiscal year are determined by your company; some coincide with the calendar year, while others vary based on when accountants can prepare financial statements.

Liabilities

Liabilities are everything that your company owes in the long or short term. Your liabilities could include a credit card balance, payroll, taxes, or a loan.