A big part of understanding the financial side of your business consists of nothing more than learning the language of accounting. Once you're familiar with basic terms, you'll be well prepared to make sense of basic written reports and better able to communicate with others about important financial information. You'll also be well positioned to cope with a common business problem: the imprecise or even plainly wrong use of financial terminology.
Accounting is a general term that refers to the overall process of tracking your business's income and expenses, and then using these numbers in various calculations and formulas to answer specific questions about the financial and tax status of the business.
Bookkeeping refers to the task of recording the amount, date, and source of all business revenues and expenses. Bookkeeping is essentially the starting point of the accounting process. Only with accurate bookkeeping numbers can meaningful accounting be done.
An invoice is a written record of a transaction, often submitted to a customer or client when requesting payment. Invoices are sometimes called bills or statements, though the latter term has its own technical meaning, as explained below.
A statement is a formal written summary of outstanding (unpaid) invoices. Unlike an invoice, a statement is not generally used as a formal request for payment but is more of a reminder to a customer or client that payment is due.
A ledger is a physical collection of related financial information, such as revenues, expenditures, accounts receivable, and accounts payable. Ledgers used to be kept in books preprinted with lined ledger paper -- which explains why a business's financial info is often referred to as the "books" -- but are now commonly computer files that can be printed out.
An account is a collection of financial information grouped according to customer or purpose. For example, if you have a regular customer, the collection of information regarding that customer's purchases, payments, and debts would be called his or her "account." A written record of an account is called a statement.
A receipt is a written record of a transaction. A buyer receives a receipt to show that he paid for an item. The seller keeps a copy of the receipt to show she received payment for the item. Receipts are sometimes called sales slips.
Accounts payable are amounts that your business owes. For example, unpaid utility bills and purchases your business made on credit would be included in your accounts payable.
Accounts receivable are amounts owed to your business that you expect to receive. Accounts receivable include sales your business made on credit.
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