Essential Bookkeeping Terms Every Small Business Owner Should Know
Essential Bookkeeping Terms Every Small Business Owner Should Know
As a small business owner in Newcastle or Maitland, understanding your finances is crucial to the success and sustainability of your business. Bookkeeping might seem complicated, especially when you’re dealing with technical terms and jargon. But to manage your finances effectively, it’s essential to become familiar with key bookkeeping terms. Understanding these terms will not only help you communicate better with your bookkeeper but also give you a clearer picture of your business’s financial health.
At Bottrell Accounting & Bookkeeping, we believe that empowering small business owners with knowledge is the first step to financial success. In this comprehensive guide, we will break down some of the most important bookkeeping terms that every small business owner should know. By the end of this glossary, you’ll have a solid grasp of the language of finance, helping you manage your business’s accounts with confidence.
Our Newcastle & Maitland Offices:-
- Newcastle Accountants & Advisors – 45 Hunter Street, Newcastle.
- Maitland Accountants & Advisors – 93 Lawes St, East Maitland.
1. Accrual Accounting
Definition:
Accrual accounting is a method of recording income and expenses when they are incurred, rather than when cash is received or paid. In other words, transactions are recorded when they happen, regardless of whether cash has been exchanged.
Example:
If your business provides services in October but the customer doesn’t pay until November, under accrual accounting, you would record the income in October, when the service was provided, rather than in November, when you receive payment.
If your business provides services in October but the customer doesn’t pay until November, under accrual accounting, you would record the income in October, when the service was provided, rather than in November, when you receive payment.
Why It Matters:
Accrual accounting gives you a more accurate picture of your business’s financial health by showing what you owe and what is owed to you, helping you manage cash flow more effectively.
Accrual accounting gives you a more accurate picture of your business’s financial health by showing what you owe and what is owed to you, helping you manage cash flow more effectively.
How to contact us
- In Person: Visit our conveniently located office at 45 Hunter St, Newcastle, NSW, 2300.
- Online: Schedule a virtual appointment via Zoom or Teams for added convenience.
- Mobile Tax Services: Benefit from the flexibility of having our expert CPA Newcastle accountants come to you for tax assistance.
- Onsite Services: Enjoy personalized services delivered directly at your place of business.
At Bottrell Accounting, we’re more than just consultants and accountants; we’re your strategic financial partners. Contact us today to discover how we can help you achieve your financial goals and secure a prosperous future .
Google Business Pages – Bottrell Accountants & Tax Agents
Bottrell Accountants Main Website – www.bottrellaccounting.com.au
Accountant Newcastle – 45 Hunter St, Newcastle, NSW, 2300
Accountant Maitland – 93 Lawes St, East Maitland, NSW, 2320
Our Accounting Services
Taxation
Our experienced tax professionals at Bottrell Accounting ensure that your tax obligations are met efficiently. We also focus on maximizing your tax savings through strategic planning. Our services include:
-Personal Tax Returns: Accurate preparation and lodgement of personal income tax returns.
- Rental Property Tax Returns: Expert handling of tax matters related to rental properties.
- Business Tax Returns: Comprehensive support for business tax planning and compliance.
Bookkeeping
Maintaining organized financial records is crucial for informed decision-making. Our bookkeeping services cover:
- Bookkeeping Processing: Timely and accurate record-keeping for your business transactions.
- Bookkeeping Data Entry: Efficient data entry to keep your financial records up-to-date.
Cash Flow Management
Optimizing cash flow is essential for financial stability. Our tailored solutions include:
- Cashflow Forecast: Predictive analysis to help you manage cash flow effectively.
- 3Way Cashflow: Comprehensive insights into your inflows and outflows.
Payroll Processing
Let us handle payroll processing for you. Our services ensure accurate and timely payments to your employees while staying compliant with relevant regulations.
Financial Reporting
Financial Reporting
Gain valuable insights into your financial performance with our comprehensive reporting services:
- Company Tax Accounting: Accurate preparation of tax-related financial statements.
- Business Tax Accounting: Detailed reporting for business tax purposes.
- SMSF Tax Accounting: Specialized reporting for Self-Managed Superannuation Funds.
Financial Control Services
Our financial control services help businesses establish robust systems and controls, ensuring accuracy, transparency, and compliance.
2. Cash Accounting
Definition:
Cash accounting is an alternative to accrual accounting where income and expenses are recorded only when cash is actually received or paid.
Cash accounting is an alternative to accrual accounting where income and expenses are recorded only when cash is actually received or paid.
Example:
Using the previous example, if you provided a service in October but were paid in November, under cash accounting, you would record the income in November, when you receive the payment.
Using the previous example, if you provided a service in October but were paid in November, under cash accounting, you would record the income in November, when you receive the payment.
Why It Matters:
Cash accounting is simpler and more straightforward, making it popular among smaller businesses. However, it may not provide a complete picture of your financial health because it doesn’t account for money that is owed to you or money you owe to others.
Cash accounting is simpler and more straightforward, making it popular among smaller businesses. However, it may not provide a complete picture of your financial health because it doesn’t account for money that is owed to you or money you owe to others.
3. Debits and Credits
Definition:
Debits and credits are the fundamental building blocks of double-entry bookkeeping. In double-entry bookkeeping, every financial transaction is recorded in two places: once as a debit and once as a credit. Debits increase asset and expense accounts and decrease liability, equity, and income accounts. Credits do the opposite: they decrease asset and expense accounts and increase liability, equity, and income accounts.
Example:
If your business purchases equipment, you would record a debit to your equipment account (an asset) and a credit to your cash account (reducing your cash balance).
If your business purchases equipment, you would record a debit to your equipment account (an asset) and a credit to your cash account (reducing your cash balance).
Why It Matters:
Understanding debits and credits is crucial for maintaining accurate financial records. These entries ensure that your books are always balanced, which is key to tracking your financial performance.
Understanding debits and credits is crucial for maintaining accurate financial records. These entries ensure that your books are always balanced, which is key to tracking your financial performance.
4. Assets
Definition:
Assets are anything of value that your business owns. They can be physical items like machinery, office equipment, and inventory, or intangible items like patents or trademarks. Assets can also include cash and receivables (money owed to you by customers).
Assets are anything of value that your business owns. They can be physical items like machinery, office equipment, and inventory, or intangible items like patents or trademarks. Assets can also include cash and receivables (money owed to you by customers).
Example:
Your business’s computers, inventory, and accounts receivable are all considered assets.
Your business’s computers, inventory, and accounts receivable are all considered assets.
Why It Matters:
Assets are a critical part of your business’s balance sheet. Monitoring your assets helps you understand the value of your business and whether you have the resources to meet your financial obligations.
Assets are a critical part of your business’s balance sheet. Monitoring your assets helps you understand the value of your business and whether you have the resources to meet your financial obligations.
Accountants Newcastle – 45 Hunter St, Newcastle, NSW, 2300
Accountants Maitland – 93 Lawes St, East Maitland, NSW, 2320
5. Liabilities
Definition:
Liabilities are the debts or obligations your business owes to others. They can include loans, credit card debt, accounts payable (bills your business owes), and taxes.
Liabilities are the debts or obligations your business owes to others. They can include loans, credit card debt, accounts payable (bills your business owes), and taxes.
Example:
If you take out a loan to buy equipment for your business, that loan is considered a liability until it is paid off.
If you take out a loan to buy equipment for your business, that loan is considered a liability until it is paid off.
Why It Matters:
Liabilities give you insight into what your business owes. Keeping track of your liabilities ensures that you can manage debt effectively and avoid overextending your business financially.
Liabilities give you insight into what your business owes. Keeping track of your liabilities ensures that you can manage debt effectively and avoid overextending your business financially.
6. Equity
Definition:
Equity represents the owner’s stake in the business. It’s the difference between your business’s assets and liabilities, showing what remains if all your debts were paid off.
Equity represents the owner’s stake in the business. It’s the difference between your business’s assets and liabilities, showing what remains if all your debts were paid off.
Example:
If your business has $100,000 in assets and $40,000 in liabilities, your equity would be $60,000.
If your business has $100,000 in assets and $40,000 in liabilities, your equity would be $60,000.
Why It Matters:
Equity is an important measure of your business’s financial health. A positive equity balance indicates that your business owns more than it owes, which is a good sign of financial stability.
Equity is an important measure of your business’s financial health. A positive equity balance indicates that your business owns more than it owes, which is a good sign of financial stability.
7. Profit and Loss Statement (P&L)
Definition:
A profit and loss statement, also known as an income statement, summarises your business’s income and expenses over a specific period (monthly, quarterly, or annually). It shows whether your business made a profit or incurred a loss during that time.
A profit and loss statement, also known as an income statement, summarises your business’s income and expenses over a specific period (monthly, quarterly, or annually). It shows whether your business made a profit or incurred a loss during that time.
Example:
Your P&L might show that your business had $50,000 in revenue and $40,000 in expenses over the past month, resulting in a $10,000 profit.
Your P&L might show that your business had $50,000 in revenue and $40,000 in expenses over the past month, resulting in a $10,000 profit.
Why It Matters:
The P&L statement helps you understand your business’s profitability. It’s essential for making informed decisions about pricing, cost-cutting, and investments, and it’s often used by lenders to assess the financial health of your business.
The P&L statement helps you understand your business’s profitability. It’s essential for making informed decisions about pricing, cost-cutting, and investments, and it’s often used by lenders to assess the financial health of your business.
12+ Years Experience
With over a decade of experience, trust Bottrell Accountants & Financial Advisors for seasoned financial expertise.
Award Winning
Benefit from the knowledge and expertise of our certified accountants, who excel in their respective fields.
Qualified Accountants
Our team of chartered accountants & CPA, with over a decade of experience, brings a deep understanding of East Maitland's business landscape.
Specialist Services
Explore our specialized tax services, covering everything from individual income tax to corporate tax planning.
8. Balance Sheet
Definition:
A balance sheet is a financial statement that provides a snapshot of your business’s financial position at a specific point in time. It lists your assets, liabilities, and equity, giving you a clear view of what your business owns and owes.
A balance sheet is a financial statement that provides a snapshot of your business’s financial position at a specific point in time. It lists your assets, liabilities, and equity, giving you a clear view of what your business owns and owes.
Example:
Your balance sheet might show that your business has $200,000 in assets, $80,000 in liabilities, and $120,000 in equity.
Your balance sheet might show that your business has $200,000 in assets, $80,000 in liabilities, and $120,000 in equity.
Why It Matters:
The balance sheet helps you assess your business’s financial health and liquidity. It’s a crucial tool for understanding your ability to pay off debts and invest in growth opportunities.
The balance sheet helps you assess your business’s financial health and liquidity. It’s a crucial tool for understanding your ability to pay off debts and invest in growth opportunities.
9. Cash Flow Statement
Definition:
A cash flow statement tracks the flow of cash in and out of your business over a specific period. It breaks down your cash flow into three categories: operating activities (day-to-day business operations), investing activities (buying or selling assets), and financing activities (borrowing or repaying loans).
A cash flow statement tracks the flow of cash in and out of your business over a specific period. It breaks down your cash flow into three categories: operating activities (day-to-day business operations), investing activities (buying or selling assets), and financing activities (borrowing or repaying loans).
Example:
Your cash flow statement might show that you received $10,000 in payments from customers, spent $5,000 on operating expenses, and made a $2,000 loan repayment.
Your cash flow statement might show that you received $10,000 in payments from customers, spent $5,000 on operating expenses, and made a $2,000 loan repayment.
Why It Matters:
A cash flow statement helps you understand how money is moving through your business. It’s essential for managing cash flow, ensuring you have enough cash to cover expenses, and making investment decisions.
A cash flow statement helps you understand how money is moving through your business. It’s essential for managing cash flow, ensuring you have enough cash to cover expenses, and making investment decisions.
10. Accounts Receivable
Definition:
Accounts receivable refers to the money owed to your business by customers who have purchased goods or services on credit. It represents sales for which you have not yet been paid.
Accounts receivable refers to the money owed to your business by customers who have purchased goods or services on credit. It represents sales for which you have not yet been paid.
Example:
If you provide services to a client in September and they agree to pay in 30 days, the amount they owe you is recorded as accounts receivable.
If you provide services to a client in September and they agree to pay in 30 days, the amount they owe you is recorded as accounts receivable.
Why It Matters:
Tracking accounts receivable helps you stay on top of outstanding invoices and ensures that you follow up on late payments. It’s a critical aspect of cash flow management.
Tracking accounts receivable helps you stay on top of outstanding invoices and ensures that you follow up on late payments. It’s a critical aspect of cash flow management.
11. Accounts Payable
Definition:
Accounts payable represents the money your business owes to suppliers, vendors, or service providers. It includes unpaid bills, invoices, and other short-term debts.
Accounts payable represents the money your business owes to suppliers, vendors, or service providers. It includes unpaid bills, invoices, and other short-term debts.
Example:
If you receive an invoice for office supplies that you haven’t paid yet, that amount would be recorded as accounts payable.
If you receive an invoice for office supplies that you haven’t paid yet, that amount would be recorded as accounts payable.
Why It Matters:
Monitoring accounts payable ensures that you pay your bills on time, avoiding late fees and maintaining good relationships with suppliers.
Monitoring accounts payable ensures that you pay your bills on time, avoiding late fees and maintaining good relationships with suppliers.
12. Reconciliation
Definition:
Reconciliation is the process of comparing your business’s financial records with external documents (like bank statements) to ensure accuracy. It involves checking that the transactions in your books match the amounts on your bank statement and identifying any discrepancies.
Reconciliation is the process of comparing your business’s financial records with external documents (like bank statements) to ensure accuracy. It involves checking that the transactions in your books match the amounts on your bank statement and identifying any discrepancies.
Example:
You might reconcile your bank account at the end of the month by comparing the transactions in your bookkeeping software to those listed on your bank statement.
You might reconcile your bank account at the end of the month by comparing the transactions in your bookkeeping software to those listed on your bank statement.
Why It Matters:
Regular reconciliation is essential for maintaining accurate financial records. It helps you spot errors, detect fraud, and ensure that your business’s finances are in order.
Regular reconciliation is essential for maintaining accurate financial records. It helps you spot errors, detect fraud, and ensure that your business’s finances are in order.
13. Depreciation
Definition:
Depreciation is the process of allocating the cost of a long-term asset (like machinery or vehicles) over its useful life. It reflects the wear and tear or obsolescence of an asset over time.
Depreciation is the process of allocating the cost of a long-term asset (like machinery or vehicles) over its useful life. It reflects the wear and tear or obsolescence of an asset over time.
Example:
If you purchase a computer for $5,000 and expect it to last five years, you might depreciate it by $1,000 per year over those five years.
If you purchase a computer for $5,000 and expect it to last five years, you might depreciate it by $1,000 per year over those five years.
Why It Matters:
Depreciation is important for tax purposes, as it allows you to spread the cost of an asset over its useful life, reducing your taxable income each year.
Depreciation is important for tax purposes, as it allows you to spread the cost of an asset over its useful life, reducing your taxable income each year.
14. General Ledger
Definition:
A general ledger is the main accounting record for your business, containing all the financial transactions from every account, including assets, liabilities, equity, income, and expenses.
A general ledger is the main accounting record for your business, containing all the financial transactions from every account, including assets, liabilities, equity, income, and expenses.
Example:
Your general ledger will include detailed records of all transactions, such as sales, expenses, payroll, and loan payments.
Your general ledger will include detailed records of all transactions, such as sales, expenses, payroll, and loan payments.
Why It Matters:
The general ledger is the foundation of your business’s financial records. It’s used to prepare financial statements, track performance, and ensure that your books are accurate and balanced.
The general ledger is the foundation of your business’s financial records. It’s used to prepare financial statements, track performance, and ensure that your books are accurate and balanced.
15. Trial Balance
Definition:
A trial balance is a summary of all the balances in your general ledger accounts at a specific point in time. Itis used to check that the total debits equal the total credits in your bookkeeping system. If the debits and credits are not equal, it indicates that there may be an error in your bookkeeping entries that needs to be corrected.
A trial balance is a summary of all the balances in your general ledger accounts at a specific point in time. Itis used to check that the total debits equal the total credits in your bookkeeping system. If the debits and credits are not equal, it indicates that there may be an error in your bookkeeping entries that needs to be corrected.
Example:
Your trial balance might show that your total debits (for assets, expenses, etc.) amount to $100,000, and your total credits (for liabilities, equity, and income) also amount to $100,000, meaning your books are balanced.
Your trial balance might show that your total debits (for assets, expenses, etc.) amount to $100,000, and your total credits (for liabilities, equity, and income) also amount to $100,000, meaning your books are balanced.
Why It Matters:
A trial balance is a vital internal control tool for ensuring your books are accurate. It helps you identify and correct discrepancies before preparing your final financial statements.
A trial balance is a vital internal control tool for ensuring your books are accurate. It helps you identify and correct discrepancies before preparing your final financial statements.
16. Chart of Accounts
Definition:
The chart of accounts is a structured list of every account used in your business’s general ledger. It is the framework that categorises all your business’s transactions into different types, such as assets, liabilities, income, and expenses.
The chart of accounts is a structured list of every account used in your business’s general ledger. It is the framework that categorises all your business’s transactions into different types, such as assets, liabilities, income, and expenses.
Example:
Your chart of accounts might include categories like “Bank Accounts” under assets, “Accounts Payable” under liabilities, “Sales Revenue” under income, and “Rent” under expenses.
Your chart of accounts might include categories like “Bank Accounts” under assets, “Accounts Payable” under liabilities, “Sales Revenue” under income, and “Rent” under expenses.
Why It Matters:
A well-organised chart of accounts helps you categorise transactions correctly, making it easier to generate accurate financial reports. It also ensures that your bookkeeping is organised and systematic.
A well-organised chart of accounts helps you categorise transactions correctly, making it easier to generate accurate financial reports. It also ensures that your bookkeeping is organised and systematic.
17. BAS (Business Activity Statement)
Definition:
A BAS is a report that businesses submit to the Australian Taxation Office (ATO) to report their tax obligations, including GST, PAYG withholding, and PAYG instalments. It is usually submitted quarterly or monthly, depending on your business’s turnover.
A BAS is a report that businesses submit to the Australian Taxation Office (ATO) to report their tax obligations, including GST, PAYG withholding, and PAYG instalments. It is usually submitted quarterly or monthly, depending on your business’s turnover.
Example:
If your business collects GST on sales, you will report the GST collected and the GST you have paid on business purchases in your BAS.
If your business collects GST on sales, you will report the GST collected and the GST you have paid on business purchases in your BAS.
Why It Matters:
Submitting your BAS on time is essential for tax compliance in Australia. Failure to lodge a BAS accurately and on time can result in penalties and fines from the ATO. At Bottrell Accounting & Bookkeeping, we assist small businesses in preparing and lodging their BAS accurately and on time.
Submitting your BAS on time is essential for tax compliance in Australia. Failure to lodge a BAS accurately and on time can result in penalties and fines from the ATO. At Bottrell Accounting & Bookkeeping, we assist small businesses in preparing and lodging their BAS accurately and on time.
18. Superannuation
Definition:
Superannuation (or “super”) is the compulsory retirement savings system in Australia. Employers are required to make superannuation contributions on behalf of their employees, based on a percentage of their earnings.
Superannuation (or “super”) is the compulsory retirement savings system in Australia. Employers are required to make superannuation contributions on behalf of their employees, based on a percentage of their earnings.
Example:
If your employee earns $1,000 in a week, and the superannuation rate is 10.5%, you would need to contribute $105 to their superannuation fund.
If your employee earns $1,000 in a week, and the superannuation rate is 10.5%, you would need to contribute $105 to their superannuation fund.
Why It Matters:
Ensuring that your business complies with superannuation obligations is critical to avoiding penalties from the ATO. A bookkeeper can help you manage and process super contributions accurately and on time.
Ensuring that your business complies with superannuation obligations is critical to avoiding penalties from the ATO. A bookkeeper can help you manage and process super contributions accurately and on time.
19. Working Capital
Definition:
Working capital is the amount of cash and liquid assets your business has available to meet short-term obligations. It is calculated by subtracting current liabilities from current assets.
Working capital is the amount of cash and liquid assets your business has available to meet short-term obligations. It is calculated by subtracting current liabilities from current assets.
Example:
If your business has $50,000 in current assets and $20,000 in current liabilities, your working capital is $30,000.
If your business has $50,000 in current assets and $20,000 in current liabilities, your working capital is $30,000.
Why It Matters:
Working capital is a measure of your business’s short-term financial health and its ability to cover day-to-day expenses. Monitoring your working capital helps you manage cash flow and maintain liquidity.
Working capital is a measure of your business’s short-term financial health and its ability to cover day-to-day expenses. Monitoring your working capital helps you manage cash flow and maintain liquidity.
20. Fiscal Year
Definition:
A fiscal year (or financial year) is a 12-month period used for accounting and tax purposes. In Australia, the fiscal year runs from 1 July to 30 June.
A fiscal year (or financial year) is a 12-month period used for accounting and tax purposes. In Australia, the fiscal year runs from 1 July to 30 June.
Example:
Your business would prepare and file its tax return for the fiscal year 2023-2024 after 30 June 2024.
Your business would prepare and file its tax return for the fiscal year 2023-2024 after 30 June 2024.
Why It Matters:
Understanding the fiscal year is important for financial planning, tax reporting, and meeting compliance deadlines. It ensures that your bookkeeping records align with the tax year for reporting to the ATO.
Understanding the fiscal year is important for financial planning, tax reporting, and meeting compliance deadlines. It ensures that your bookkeeping records align with the tax year for reporting to the ATO.
The Importance of Knowing Bookkeeping Terms
Understanding bookkeeping terms is crucial for small business owners who want to manage their finances more effectively. Whether you’re communicating with your bookkeeper, reviewing financial reports, or ensuring tax compliance, having a solid grasp of these essential terms will give you greater confidence and control over your business’s financial health.
At Bottrell Accounting & Bookkeeping, we’re committed to helping small businesses in Newcastle and Maitland navigate their bookkeeping with ease. Our team of professional bookkeepers not only manages your books but also ensures you understand the financial data that drives your business. We offer tailored bookkeeping solutions to meet your specific needs, from day-to-day transaction recording to BAS preparation and financial reporting.
If you’re ready to take control of your business’s finances or need help with bookkeeping, contact Bottrell Accounting & Bookkeeping today. Let us help you ensure that your business’s financial records are accurate, compliant, and ready to support your growth.
