Accounting Terms, Explained (in Plain English)
A practical glossary of the most common U.S. accounting terms you’ll see in bookkeeping, financial statements, and tax-ready reports. Use this page to build clarity—then let us run your monthly accounting so you can focus on growth.
What we do in Monthly Accounting
- Transaction categorization + reconciliations
- Monthly Profit & Loss and Balance Sheet
- Cleanup of messy books (as needed)
- Advisor notes (what changed, what to watch)
Cash Basis Accounting
Income is recorded when money is received; expenses are recorded when paid. Simple, but can distort “true” monthly performance.
Accrual Basis Accounting
Income and expenses are recorded when earned/incurred, regardless of cash movement. Often better for management reporting.
Chart of Accounts (COA)
The structured list of your categories (income, expenses, assets, liabilities, equity). A clean COA makes reporting reliable.
Bank Reconciliation
Matching your accounting records to the bank statement to confirm accuracy and catch duplicates, missing items, or fraud.
Profit & Loss (P&L)
Also called the Income Statement. Shows revenue, expenses, and net profit for a period—your core performance report.
Balance Sheet
Snapshot of your assets, liabilities, and equity. Helps verify the “health” of the business beyond profit alone.
Cash Flow Statement
Explains how cash moved (operations, investing, financing). Useful when profit looks good but cash feels tight.
Accounts Receivable (A/R)
Money customers owe you for delivered goods/services. Aging A/R is key to staying liquid.
Accounts Payable (A/P)
Bills you owe to vendors. Tracking due dates prevents late fees and protects vendor relationships.
Cost of Goods Sold (COGS)
Direct costs tied to producing or delivering what you sell (materials, direct labor, fulfillment). Impacts gross margin.
Gross Margin
Revenue minus COGS, shown as a percentage. A key metric for pricing and operational efficiency.
Operating Expenses (OpEx)
Day-to-day costs to run the business (software, rent, marketing, admin). Not directly tied to production.
Fixed vs. Variable Costs
Fixed costs stay stable (rent); variable costs move with sales volume (transaction fees, shipping). Helps budgeting and forecasting.
Owner’s Draw / Distribution
Money taken out by the owner(s). Not the same as payroll; how it’s treated depends on entity type and accounting setup.
Equity & Retained Earnings
Equity is what the business “owes” to owners. Retained earnings reflect cumulative profit (minus distributions) over time.
Depreciation & Amortization
Spreading asset costs over time. Depreciation: tangible assets; amortization: intangible assets. Impacts profit but not immediate cash.
Capital Expenditure (CapEx)
Purchases that create long-term value (equipment, improvements). Typically recorded as an asset, not an expense.
Journal Entry (JE)
A manual accounting entry used to adjust records (accruals, reclasses, corrections). Must be well-documented.
Month-End Close
The monthly workflow of reconciling accounts, reviewing transactions, and producing consistent, reliable financial statements.
Cleanup / Catch-Up
Fixing prior periods: recoding transactions, reconciling months, correcting balances. Often needed before tax filing or financing.
Expense Categorization
Assigning each transaction to the right account (e.g., COGS vs marketing). This is where “messy books” usually start.
Sales Tax Nexus
The connection that creates sales tax collection/filing obligations in a state (physical presence or economic thresholds).
W-2 vs 1099
W-2 employees are on payroll with withholdings; 1099 contractors are paid gross and handle their own taxes. Classification matters.
1099 Reporting
Year-end forms for qualifying vendor/contractor payments. Good bookkeeping throughout the year makes 1099 season painless.
Bookkeeping vs Accounting
Bookkeeping records transactions; accounting interprets and reports them for decision-making. You usually need both.
KPIs (Key Performance Indicators)
Numbers that matter for your business (gross margin, CAC, runway). Accurate books make KPIs trustworthy.
Want us to handle this monthly?
If your books are behind, inconsistent, or you just want clean monthly reporting—our Monthly Accounting service covers categorization, reconciliations, and tax-ready financial statements.
Burn Rate & Runway
Burn rate is monthly net cash outflow; runway is how many months you can operate before cash runs out. Needs clean cash tracking.
Budget vs Actual (Variance)
Comparing planned spending/revenue to reality. The value comes from consistent categorization and month-end close.
Merchant / Processing Fees
Card and platform fees (Stripe, PayPal, Shopify). Often miscategorized—getting these right improves margin reporting.
Contra Account
An account that offsets another (e.g., accumulated depreciation reduces fixed assets). Improves clarity without deleting history.
Materiality
If an item is too small to change decisions, you may simplify treatment. Helps keep bookkeeping efficient without losing accuracy.
Audit Trail
A record of changes made in the accounting system (who changed what and when). Essential for controls and clean handoffs.
Supporting Documentation
Receipts, invoices, contracts—anything that supports a transaction. Clean documentation reduces tax and compliance risk.
FAQ
How often should bookkeeping be updated?
For most businesses: monthly. High-volume or cash-sensitive operations often benefit from weekly updates.
Do you work with QuickBooks and Xero?
Yes. We typically support QuickBooks Online and can also work with Xero depending on your workflow and integrations.
What do you need from me to start monthly accounting?
Access to your bookkeeping platform, bank/credit feeds, and basic business context (how you earn, how you spend, who you pay).
Can you clean up prior months before starting monthly service?
Yes. Cleanup/catch-up is common. We align categories, reconcile past months, and correct balances so your reports become reliable.
Ready for clean monthly books?
Stop guessing with your numbers. Get accurate P&L and Balance Sheet every month, with reconciled accounts and clear categorization.
Tip: If you’re not sure what you need, start with a short call. We’ll recommend the right monthly setup.