200+ accounting and bookkeeping terms explained in plain English. Everything an SMB owner needs to understand their finances.
67 terms
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An ABN is a unique 11-digit identifier issued by the Australian Business Register to businesses and organisations operating in Australia.
Account numbering is the system used to assign numeric codes to accounts in the chart of accounts, enabling organised categorisation and reporting.
An accounting period is the span of time covered by a set of financial statements, typically a month, quarter or year.
Accounting software is a computer program that records, processes and reports financial transactions. Modern cloud solutions like Xero provide real-time access and automation.
Accounts payable (AP) represents the money your business owes to suppliers and vendors for goods or services received but not yet paid for. It is a current liability on your balance sheet.
Accounts receivable (AR) is the money owed to your business by customers who have purchased goods or services on credit. It is a current asset on your balance sheet.
A ratio measuring how efficiently a business collects its receivables. Calculated by dividing net credit sales by average accounts receivable.
Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash changes hands. It provides a more accurate picture of your financial position than cash accounting.
Accrued expenses are costs your business has incurred but not yet been billed or paid for. They are recorded as current liabilities to accurately reflect your obligations.
Aged payables is a report showing all outstanding amounts owed to suppliers, grouped by how long each bill has been outstanding (current, 30, 60, 90+ days).
An ageing report categorises accounts receivable or accounts payable by the length of time invoices have been outstanding, typically in 30-day buckets (current, 30, 60, 90+ days).
Amortisation is the process of spreading the cost of an intangible asset over its useful life. It is similar to depreciation but applies to non-physical assets like patents, trademarks and software.
An amortisation schedule is a table showing each periodic payment on a loan, broken down into principal and interest components, with the remaining balance after each payment.
An annual report is a comprehensive document presenting a company's financial performance and position for the year, including financial statements, director reports and auditor opinions.
Assessable income is the total income on which you are required to pay tax. It includes all ordinary income plus any statutory income items specified by tax law.
An asset is anything of value that your business owns or controls. Assets are listed on the balance sheet and include cash, receivables, inventory, equipment, property and intangible items.
An asset register is a detailed record of all fixed assets owned by a business, including purchase date, cost, depreciation method, accumulated depreciation and current book value.
The ATO is Australia's principal tax collection agency, responsible for administering income tax, GST, superannuation, excise and other federal tax obligations.
An audit trail is a chronological record of all financial transactions and changes made in your accounting system. It provides a verifiable history that supports the integrity of your financial data.
Bookkeeping automation uses technology to perform repetitive bookkeeping tasks without manual intervention, including transaction categorisation, reconciliation and report generation.
The average collection period (or days sales outstanding) measures the average number of days it takes to collect payment from customers after a sale is made.
Bad debt is money owed to your business that you determine is uncollectable. Writing off bad debt removes the amount from accounts receivable and records it as an expense.
Bad debt expense is the amount recorded on the profit and loss statement for accounts receivable that are estimated to be uncollectable during the period.
A bad debt provision (or allowance for doubtful debts) is an estimated amount set aside to cover accounts receivable that may not be collected.
The balance sheet is a financial statement that shows your business's assets, liabilities and equity at a specific point in time. It follows the equation: Assets = Liabilities + Equity.
A bank feed is an automatic, real-time connection between your bank account and your accounting software that imports transactions directly, eliminating manual data entry.
Bank reconciliation is the process of matching your accounting records to your bank statement to ensure they agree. It identifies discrepancies, errors and missing transactions.
A bank statement is a periodic record from your bank showing all transactions, deposits, withdrawals and the running balance for your account over a specific period.
The BAS is an Australian tax form used to report GST, PAYG withholding, PAYG instalments and other tax obligations to the ATO, typically lodged quarterly.
The basis of accounting determines when transactions are recorded. The two main bases are accrual (when earned/incurred) and cash (when cash changes hands).
Benchmarking compares your business's financial performance against industry standards, competitors or best practices to identify areas for improvement.
A bill (also called a supplier invoice or purchase invoice) is a document received from a supplier requesting payment for goods or services they have provided to your business.
A billing cycle is the regular interval between invoicing periods. Common cycles include weekly, fortnightly, monthly and milestone-based billing.
Bookkeeping is the systematic recording, organising and tracking of all financial transactions in a business. It forms the foundation for accounting, tax compliance and financial decision-making.
Break-even analysis calculates the point at which total revenue equals total costs, showing the minimum sales needed to cover all expenses without making a profit or loss.
The break-even point is the level of sales at which your total revenue equals your total costs, resulting in zero profit or loss. It tells you the minimum you need to sell to cover all expenses.
A budget is a financial plan that estimates revenue and expenses for a specific period. It serves as a benchmark for measuring actual performance and guiding spending decisions.
A business loan is borrowed capital used to fund business operations, growth or asset purchases. It creates a liability that must be repaid with interest over an agreed term.
Business structure refers to the legal form of your business entity. Common structures include sole trader, partnership, company, trust and cooperative.
Business valuation is the process of determining the economic value of a business. Common methods include EBITDA multiples, discounted cash flow and asset-based approaches.
A capital contribution is money or assets invested into a business by its owners. It increases equity without creating debt and is not a taxable event for the business.
Capital expenditure is money spent on acquiring or improving long-term assets like equipment, property or vehicles. Unlike operating expenses, CapEx is not fully deducted in the year of purchase but depreciated over time.
Capital gains tax is a tax on the profit made from selling or disposing of an asset for more than its cost base. It applies to business assets, investments, property and shares.
Cash accounting records revenue when cash is received and expenses when cash is paid, regardless of when the goods or services were delivered or received.
A cash book is a financial record that tracks all cash receipts and payments in and out of a business. In modern bookkeeping, it is typically maintained through your accounting software's bank register.
The cash conversion cycle measures the time between paying for inventory or inputs and receiving cash from customers. Shorter cycles indicate more efficient cash management.
Cash flow is the movement of money in and out of your business. Positive cash flow means more money coming in than going out. It is often considered more important than profit for business survival.
A cash flow forecast predicts future cash inflows and outflows over a specific period, helping you anticipate cash surpluses and shortages before they occur.
The cash flow statement is a financial report showing how cash moved in and out of your business during a period. It is divided into operating, investing and financing activities.
The chart of accounts is a structured list of all accounts used in your accounting system to categorise transactions. It defines the categories for your income, expenses, assets, liabilities and equity.
Chart of accounts setup is the process of configuring the account structure in your accounting software to match your business needs and reporting requirements.
Closing the books is the process of finalising all accounting entries for a period and preparing the accounts for the next period. It includes reconciliation, adjustments and report generation.
Cloud accounting uses internet-based software to manage your business finances. Data is stored securely online and accessible from any device with internet access.
Company tax (or corporation tax) is the tax levied on a company's taxable income. Rates vary by country and sometimes by company size.
In bookkeeping, compliance refers to meeting all legal and regulatory requirements for financial record keeping, tax reporting and lodgement obligations set by your tax authority.
A contingent liability is a potential financial obligation that may arise depending on the outcome of a future event, such as a pending lawsuit or warranty claim.
A contractor (or independent contractor) is a person or business that provides services to your business but is not an employee. Contractors invoice for their work rather than being paid wages.
Contribution margin is the amount remaining from sales revenue after deducting variable costs. It shows how much each sale contributes toward covering fixed costs and generating profit.
Corporation tax is the UK term for the tax levied on company profits. The main rate is 25%, with a reduced rate of 19% for companies with profits under GBP 50,000.
Cost allocation is the process of assigning shared or indirect costs to specific products, departments, projects or clients to determine their true profitability.
The cost base of an asset is its original purchase price plus any acquisition costs, improvements and other allowable amounts. It is used to calculate capital gains or losses on disposal.
A cost centre is a department, location, project or function within a business to which costs are allocated for tracking and management purposes.
COGS represents the direct costs of producing or purchasing the goods your business sells. It includes raw materials, direct labour and manufacturing overhead but not selling or administrative expenses.
In double-entry bookkeeping, a credit is an entry on the right side of an account. Credits increase liabilities, equity and revenue but decrease assets and expenses.
A credit note is a document issued by a seller to a buyer reducing the amount owed. It is used for returns, overcharges, damaged goods or agreed discounts after an invoice has been issued.
Credit terms are the conditions under which a seller extends credit to a buyer, specifying when payment is due and any discounts for early payment.
Current assets are resources your business expects to convert to cash, sell or consume within 12 months. They include cash, accounts receivable, inventory and prepaid expenses.
Current liabilities are debts and obligations your business must pay within 12 months. They include accounts payable, short-term loans, accrued expenses and tax payable.
The current ratio measures your ability to pay short-term obligations by dividing current assets by current liabilities. A ratio above 1.0 indicates you can cover your short-term debts.
DPO measures the average number of days your business takes to pay its suppliers. It is calculated as (Accounts Payable / COGS) x 365.
DSO measures the average number of days it takes to collect payment after making a sale. It is calculated as (Accounts Receivable / Revenue) x 365.
In double-entry bookkeeping, a debit is an entry on the left side of an account. Debits increase assets and expenses but decrease liabilities, equity and revenue.
The debt-to-equity ratio compares total liabilities to total equity, showing how much of your business is funded by debt versus owner investment.
Deferred revenue (also called unearned revenue) is money received from customers for goods or services not yet delivered. It is a liability until the obligation is fulfilled.
Depreciation is the accounting method of allocating the cost of a tangible asset over its useful life. It reduces taxable income each year and reflects the asset's declining value.
A depreciation schedule lists all depreciable assets with their cost, useful life, depreciation method, annual depreciation amount and remaining book value.
A direct debit is an arrangement that allows a third party to withdraw funds from your bank account on agreed dates, commonly used for recurring payments like subscriptions and loan repayments.
A dividend is a distribution of profits from a company to its shareholders. It reduces the company's retained earnings and represents a return on the shareholders' investment.
Double-entry bookkeeping is a system where every transaction is recorded in at least two accounts - a debit and a credit - ensuring the accounting equation always balances.
Drawings are withdrawals of business funds by a sole trader or partner for personal use. They reduce the owner's equity but are not business expenses.
Dual entry is another term for double-entry bookkeeping, the accounting system where every transaction is recorded in at least two accounts to maintain the accounting equation.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It measures operating profitability by excluding non-operating expenses and non-cash charges.
EFT is the electronic transfer of money between bank accounts. It includes online banking transfers, BPAY, direct debits and payroll payments.
Equity represents the owner's residual interest in the business after all liabilities are deducted from assets. It includes contributed capital, retained earnings and reserves.
An equity injection is an investment of capital into a business by its owners, increasing the business's equity and cash reserves without creating a debt obligation.
An expense is a cost incurred in the process of earning revenue. Expenses reduce your profit and are recorded on the profit and loss statement in the period they are incurred.
An expense report is a document submitted by an employee or business owner detailing business expenses incurred, typically with supporting receipts, for reimbursement or recording.
Financial planning is the process of setting financial goals, creating strategies to achieve them and monitoring progress through budgets, forecasts and financial analysis.
Financial statements are formal reports that summarise your business's financial position and performance. The three core statements are the profit and loss, balance sheet and cash flow statement.
The financial year (or fiscal year) is the 12-month period your business uses for accounting and tax reporting purposes. It may or may not align with the calendar year.
A fiscal quarter is a three-month period within a fiscal year. Many tax obligations, financial reports and business metrics are measured and reported quarterly.
A fiscal year is any 12-month period a business uses for financial and tax reporting purposes. It may or may not align with the calendar year.
Fixed assets (also called property, plant and equipment) are long-term tangible assets used in your business operations that are not expected to be sold within 12 months.
Fixed costs are business expenses that remain constant regardless of your sales volume. Examples include rent, insurance premiums, salaries of permanent staff and loan repayments.
Franking credits (or imputation credits) are tax credits attached to dividends paid by Australian companies, representing company tax already paid on the profits being distributed.
Fraud prevention encompasses the controls, processes and systems designed to detect, deter and prevent fraudulent financial activities within a business.
The general ledger is the master record of all financial transactions in a business, organised by account. It forms the basis for preparing financial statements.
Goodwill is an intangible asset representing the excess amount paid for a business over the fair value of its identifiable net assets. It reflects the value of brand, reputation and customer relationships.
Goodwill impairment occurs when the carrying value of goodwill on the balance sheet exceeds its recoverable amount, requiring a write-down that reduces reported profit.
Gross margin is your gross profit expressed as a percentage of revenue. It shows what percentage of each sales dollar remains after covering direct costs.
Gross pay is the total amount of wages earned by an employee before any deductions for tax, superannuation, insurance or other withholdings.
Gross profit is your revenue minus the cost of goods sold (COGS). It shows how much money remains from sales after covering direct production or purchasing costs.
GST is a broad-based consumption tax applied to most goods and services. Businesses collect GST on sales and claim credits for GST paid on purchases, remitting the net amount to the tax authority.
GST registration is the process of registering your business with the tax authority to collect and remit Goods and Services Tax. It is mandatory above certain turnover thresholds.
The income statement is another name for the profit and loss statement. It summarises revenue, expenses and profit or loss over a specific period.
An input tax credit is the GST/VAT you paid on business purchases that you can claim back from the tax authority. It offsets the GST/VAT you collected on sales.
The instant asset write-off allows small businesses to immediately deduct the full cost of eligible assets below a threshold, rather than depreciating them over their useful life.
An intangible asset is a non-physical asset with economic value, such as patents, trademarks, copyrights, software, brand value and goodwill.
Interest expense is the cost of borrowing money. It includes interest on business loans, overdrafts, credit cards and any other form of debt used to finance business operations.
Internal controls are processes and procedures designed to safeguard business assets, ensure accurate financial reporting and prevent fraud or errors.
Inventory refers to the goods your business holds for sale or uses in production. It is a current asset on the balance sheet and its cost flows to COGS when sold.
An invoice is a document sent to a customer requesting payment for goods or services provided. It includes details of the transaction, payment terms and the amount due.
Invoice matching is the process of comparing supplier invoices to purchase orders and goods receipts to verify accuracy before payment. Also called three-way matching.
A journal is the book of original entry where financial transactions are first recorded before being posted to the general ledger. In modern software, this is largely automated.
A journal entry is a record of a financial transaction in the accounting system. It includes the date, accounts affected, amounts and a description of the transaction.
A ledger is a book or digital record containing accounts where transactions are classified. The general ledger contains all accounts; subsidiary ledgers provide detail for specific accounts.
Financial leverage refers to the use of borrowed money to finance business operations and growth. Higher leverage means more debt relative to equity, amplifying both gains and losses.
A liability is a financial obligation your business owes to another party. Liabilities are listed on the balance sheet and include loans, accounts payable, tax payable and accrued expenses.
Liquidity measures how quickly and easily your business can convert assets to cash to meet short-term obligations. High liquidity means you can pay bills without difficulty.
Margin analysis examines the different levels of profitability in your business - gross margin, operating margin and net margin - to identify where value is created and lost.
The matching principle requires expenses to be recorded in the same period as the revenue they helped generate, ensuring accurate profit measurement for each period.
Materiality is the threshold above which financial information is significant enough to influence decisions. Immaterial items can be simplified or rounded without affecting accuracy.
The month-end close is the process of finalising all accounting activities for a month, including reconciliation, adjustments and report preparation.
Making Tax Digital is a UK government initiative requiring businesses to keep digital records and submit tax returns through HMRC-compatible software.
Net assets is the total value of a business's assets minus its total liabilities. It equals equity and represents the residual value belonging to the business owners.
Net margin is your net profit expressed as a percentage of revenue. It shows what percentage of each sales dollar becomes actual profit after all expenses are paid.
Net pay (take-home pay) is the amount an employee receives after all deductions for tax, superannuation, insurance and other withholdings are subtracted from gross pay.
Net profit (also called net income or the bottom line) is your total revenue minus all expenses, including COGS, operating expenses, interest and tax. It is the final profit figure.
Opening balances are the account balances at the beginning of a new accounting period or when setting up a new accounting system. They carry forward from the previous period's closing balances.
Operating cash flow is the cash generated from your core business activities, excluding investing and financing activities. It indicates whether your business is self-sustaining.
Operating expenses are the day-to-day costs of running your business, excluding COGS. They include rent, wages, utilities, marketing, insurance and administrative costs.
Operating profit (also called EBIT - Earnings Before Interest and Tax) is your profit from core business operations, excluding interest expenses and income tax.
An overdraft is a credit facility that allows you to withdraw more money from your bank account than you have available, up to an approved limit.
Overhead refers to the ongoing costs of operating your business that are not directly tied to producing a specific product or service. It includes rent, utilities and administrative salaries.
A partial payment is when a customer pays less than the full amount of an invoice. The remaining balance stays as accounts receivable until fully paid.
PAYE is the system used in the UK, Ireland, New Zealand and other countries where employers deduct income tax from employee wages and remit it to the tax authority.
PAYG (Pay As You Go) withholding is an Australian system where employers withhold tax from employee wages and remit it to the ATO on their behalf.
Payment terms specify when payment is expected from a customer. Common terms include payment on receipt, net 7, net 14 and net 30 (meaning payment due within that many days).
Payroll is the process of calculating and distributing wages, withholding taxes, managing super/pension contributions and complying with employment tax obligations.
Personal expenses are non-business costs incurred by a business owner. They must be kept separate from business expenses and are not tax-deductible.
Petty cash is a small amount of physical cash kept on hand for minor business expenses that are impractical to pay by cheque or electronic transfer.
Prepaid expenses are payments made in advance for goods or services you will receive in future periods. They are current assets that are expensed as the benefit is consumed.
The P&L (also called the income statement) shows your business revenue, expenses and resulting profit or loss over a specific period.
Profit distribution is the allocation of business profits to owners, whether as dividends (companies), drawings (sole traders) or partner distributions (partnerships).
Profit margin is the percentage of revenue that becomes profit. It can be measured at gross, operating or net levels, each showing profitability at different stages.
Profitability measures your business's ability to generate profit from its operations. Key metrics include gross margin, operating margin, net margin and return on equity.
A provision is an amount set aside in your accounts for an expected future liability or expense that is probable but not yet certain in amount or timing.
A purchase invoice is a bill received from a supplier for goods or services provided to your business. It creates an accounts payable obligation until paid.
A purchase order (PO) is a formal document sent to a supplier authorising a purchase. It specifies the items, quantities, agreed prices and delivery terms.
A receipt is a document confirming that a payment has been made. Businesses need receipts to support expense claims, tax deductions and audit requirements.
Reconciliation is the process of comparing two sets of records to ensure they agree. Common types include bank reconciliation, accounts receivable reconciliation and intercompany reconciliation.
A refund is the return of money to a customer for returned goods, cancelled services or overcharges. It reverses the original sale and associated GST/VAT.
Reimbursement is the repayment to an employee or business owner for business expenses they paid from personal funds.
Retained earnings are the accumulated net profits that have been kept in the business rather than distributed to owners as dividends or drawings.
Return on Equity measures how effectively a business uses owner's equity to generate profit. It is calculated as Net Profit divided by Average Equity, expressed as a percentage.
Revenue (also called sales, income or turnover) is the total amount earned from selling goods or services before any expenses are deducted. It is the top line of the P&L.
Revenue per employee is a productivity metric calculated by dividing total revenue by the number of employees. It indicates how efficiently your workforce generates income.
Revenue recognition determines when and how revenue is recorded in your financial statements. Under accrual accounting, revenue is recognised when earned, not necessarily when cash is received.
Sales tax is a consumption tax charged at the point of sale to the end consumer. Unlike VAT/GST, it is typically a single-stage tax collected only at the final retail sale.
Segregation of duties is an internal control principle where no single person controls all aspects of a financial transaction, reducing the risk of errors and fraud.
STP is an Australian payroll reporting requirement where employers report salary, wages, PAYG withholding and superannuation information to the ATO each pay cycle.
A sole trader is a business structure where one person owns and operates the business. The owner and the business are the same legal entity, and the owner is personally liable for all debts.
The statement of changes in equity shows how equity changed during an accounting period, including profit, dividends, capital contributions and other comprehensive income.
A stocktake (or physical inventory count) is the process of physically counting and valuing all inventory on hand to verify that accounting records match actual stock levels.
Straight-line depreciation spreads the cost of an asset evenly over its useful life. The annual charge equals (Cost minus Residual Value) divided by Useful Life.
A subsidiary ledger provides detailed breakdowns of a general ledger account. The accounts receivable subsidiary ledger shows individual customer balances; the AP subsidiary ledger shows supplier balances.
Superannuation (super) is Australia's mandatory retirement savings system. Employers must contribute a percentage of each eligible employee's earnings to a compliant super fund.
A supplier (or vendor) is a business or individual that provides goods or services to your business. Supplier transactions create accounts payable obligations.
A suspense account is a temporary holding account used when you cannot immediately determine the correct account for a transaction. Items should be cleared promptly.
Tax compliance means meeting all your obligations to file tax returns, make payments and maintain records as required by your country's tax laws and tax authority.
A tax deduction is an expense that reduces your taxable income, therefore reducing the amount of tax you owe. It must be incurred in earning your assessable income.
A tax invoice is a document that includes GST/VAT information and your registration number. It is required for customers to claim input tax credits on their purchases from you.
A tax offset (or tax credit) directly reduces the amount of tax you owe, dollar for dollar. This is more valuable than a deduction, which only reduces taxable income.
A tax return is the formal document lodged with your tax authority reporting your income, deductions and tax payable for a specific period, usually annually.
Taxable income is your total assessable income minus all allowable deductions. It is the amount on which your income tax is calculated.
Transaction categorisation is the process of assigning each financial transaction to the correct account in your chart of accounts. It is the core activity of bookkeeping.
Transfer pricing refers to the prices charged for goods, services or intellectual property between related entities within a business group, particularly across international borders.
A trial balance is a report listing all general ledger accounts and their balances at a specific date. Total debits must equal total credits, confirming the books are mathematically balanced.
Turnover is the total revenue or sales of a business over a specific period. In some contexts, it also refers to how quickly inventory or assets are converted to sales.
Unearned revenue is money received from customers for goods or services not yet delivered. It is the same concept as deferred revenue and appears as a liability.
An unrealised gain or loss is a profit or loss on an asset you still hold, based on the change in its value since purchase. It becomes realised when the asset is sold.
Useful life is the estimated period over which a depreciable asset is expected to be usable by the business. It determines the depreciation rate and annual charge.
Variable costs change in proportion to your business activity or sales volume. Examples include raw materials, direct labour, shipping costs and sales commissions.
Variance analysis compares actual financial results to budgeted or expected amounts, identifying and explaining the differences to improve future performance.
VAT is a consumption tax charged on goods and services at each stage of production and distribution. Businesses collect VAT on sales and reclaim VAT on purchases, remitting the net amount.
Wages are payments made to employees for work performed, typically calculated on an hourly or weekly basis. They are a major operating expense for most businesses.
A Work in Progress (WIP) report shows the value of unbilled time and costs accumulated on client projects, helping service businesses manage billing and cash flow.
Withholding tax is tax deducted at the source of payment rather than paid by the recipient. It applies to employee wages, contractor payments and certain investment income.
WIP represents partially completed goods in manufacturing or unbilled time and costs in service businesses. It is a current asset reflecting the value of work not yet available for sale or billing.
Working capital is the difference between current assets and current liabilities. It measures the short-term financial health and operational efficiency of your business.
A write-off is the removal of an asset's remaining value from the books, recording it as an expense. Common write-offs include bad debts, obsolete inventory and damaged assets.
Xero is a cloud-based accounting platform designed for small businesses. It provides invoicing, bank reconciliation, payroll, reporting and integrations with over 1,000 third-party apps.
A Xero bank feed automatically imports transactions from your bank account into Xero, providing a real-time view of cash movements and enabling efficient reconciliation.
The Xero chart of accounts is the master list of all accounts used to categorise transactions in your Xero organisation. It defines how financial data is structured and reported.
Xero reconciliation is the process of matching bank feed transactions to accounting entries in Xero, confirming that your books accurately reflect your bank activity.
Year to date refers to the period from the beginning of the current financial year to the present date. YTD figures show cumulative performance for the year so far.
Year-end adjustments are journal entries made at the end of the financial year to ensure accounts accurately reflect the year's financial activity. They include accruals, prepayments and provisions.
All these terms and concepts are managed automatically when you connect SortBooks to Xero.