If you have ever needed to balance your checkbook, then you have used the principles of bookkeeping and accounting. An understanding of basic accounting and bookkeeping terms will help you to keep your finances under control. It will also help you communicate with your accountant at tax time, so that you understand what you are paying and why you are paying it.
The cash method of accounting means that money is only actively entered into the books when it is received in cash or check form. Expenses are not registered until they are paid in full.
The accrual method of accounting means that as soon as a client commits to an order, it is entered as revenue on the books, whether the money has been physically received or not.
An asset is anything of value that you own outright. Something cannot be an asset until it is paid in full.
A liability is a debt. It can be an installment debt such as a car loan, or it can be the debt on a credit card.
The amortization of a loan means the amount by which a loan is reduced due to regular installment payments. Those payments usually include interest, principle, taxes and insurance. An amortization schedule helps determine how much you must pay per month in order to eliminate your complete debt over a pre-determined period of time.
The term bank reconciliation is another way of indicating that you balanced your checkbook. A company will do a bank reconciliation by comparing their balance sheet with the bank's balance sheet to make sure the two match and that all funds are accounted for.
A debit receipt shows the amount of money that was paid in a complete transaction. A debit receipt is only concerned with money that was paid out, and it shows all products or services acquired for that single transaction.
The decreased value of an asset over the useful lifetime of the asset. For example, you may purchase a computer for your business and then write it off on your taxes over the course of the next three years at a decreasing value. The amount by which the computer loses value is depreciation.
Equity is the value of an asset after subtracting the costs of owning the asset. For example, the equity on your house is the value of your house minus what is left on your mortgage. That remaining balance is your home equity.
Line of Credit
A credit account that can be utilized at any time and for any reason. Companies will normally establish a line of credit with a bank, and private individuals will establish credit in the form of credit card accounts.
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