Bookkeeping Terms: 25 Plain-English Definitions for Owners

The five account types everything gets sorted into

An account, in bookkeeping, is just a labelled bucket. Every dollar that moves through a business lands in one of five kinds. IRS Publication 583 lists them in a single line: accounts show income, expenses, assets, liabilities and net worth.

• 1. Asset. Something the business owns that has value. Cash in the bank, the van, the stock of inner tubes, and money customers owe you.
• 2. Liability. Something the business owes. The van loan, the credit card balance, a supplier bill you have not paid, sales tax you have collected and not yet sent in.
• 3. Equity. Assets minus liabilities. The IRS calls it net worth: the excess of assets over liabilities. It is the owner’s share of the business once everyone else has been paid.
• 4. Revenue. What the business earns from selling its goods or services, before any costs come off. Also called income or sales.
• 5. Expense. What it costs to run the business and earn that revenue. Fuel, parts, insurance, software, the phone bill.

The first three are tied together by one sum, called the accounting equation: assets equal liabilities plus equity. If Dariusz’s business owns $22,000 of things and owes $14,500, his equity is $7,500.

Equity is the word owners most often mistake for cash. It is not a bank balance. A fair amount of Dariusz’s $7,500 is currently shaped like a van and a truing stand, and neither of those will pay a dentist.

Money owed in both directions, and when it counts

This is the group that tripped Dariusz up on the phone. All five words are about the same awkward fact: the work, the invoice and the money rarely happen on the same day.

• 11. Accounts receivable. Money customers owe you for work you have already invoiced. Often shortened to AR. It is an asset.
• 12. Accounts payable. Money you owe suppliers for bills you have received and not yet paid. Often shortened to AP. It is a liability.
• 13. Cash basis. The accounting method where, as IRS Publication 538 puts it, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them.
• 14. Accrual basis. The method where you generally report income in the tax year you earn it, regardless of when payment is received, and deduct expenses in the year you incur them.
• 15. Accrued expense. A cost you have already run up but have not yet paid or been billed for. December’s electricity, used in December, invoiced in January. To accrue it is to record it in December anyway.

Here is the difference in one invoice. On March 28, Dariusz services a café chain’s delivery bikes and sends a bill for $480. They pay on April 19.

1. On the cash basis, nothing happens in March. The $480 is income in April, when it lands. March looks quieter than it was.
2. On the accrual basis, March gets the $480. It is recorded as revenue on March 28, with a matching $480 in accounts receivable. On April 19 the receivable turns into cash and no new revenue is recorded.

Same job, same money, different month. Move the dates to December and January and it is a different tax year, which is why the bookkeeper asked. Accounts receivable and accounts payable have always sounded to me like two departments in a building you would not want to visit, but they are just “owed to me” and “owed by me.”

Each method has its own full guide here, including who is allowed to use which: cash basis accounting and accrual basis accounting.

The month-end and year-end words

The last five turn up when someone is checking the books rather than adding to them. They are the least glamorous words in a field not known for glamour, and they are the ones that keep the other twenty honest.

• 21. Accounting period. The stretch of time a report covers: a month, a quarter, a year. For tax, the IRS says a tax year is usually 12 consecutive months. A calendar year ends December 31, and a fiscal year ends on the last day of any other month.
• 22. Bank reconciliation. Comparing your books with the bank statement, line by line, until they agree. Publication 583 says you should reconcile your checking account each month.
• 23. Trial balance. A list of every account and its balance, with debits in one column and credits in the other. If the two totals match, the books balance. It proves the arithmetic, not that everything is in the right bucket.
• 24. Depreciation. Spreading the cost of a long-lived purchase over the years you use it. The IRS defines it as the recovery of the cost of the property over a number of years, for property expected to last more than one year.
• 25. Write-off. In the books, removing an amount that is no longer worth what you recorded, such as an invoice that will never be paid. In everyday talk it means a deductible expense.

Depreciation in its simplest form: a $6,000 piece of equipment used for five years is $1,200 of expense a year, not $6,000 in the month you bought it. The tax rules have their own schedules and often let you deduct faster, so the figure on your return may not match this tidy version.

And “write-off” deserves a gentle warning, because it is the most optimistic word in the language. A $500 write-off does not put $500 back in your pocket. It reduces the income you are taxed on by $500, so you get back your tax rate’s share of it and are still out the rest.

If your month end is one account and forty transactions, you can do this group yourself in an hour and you should. Our plans start at $299 a month, and nobody should pay that to have a spreadsheet compared with a bank statement. When the hour becomes a weekend, the services page shows what we take over and the pricing page shows what it costs. The signs you have crossed that line are in do you actually need an accountant.

Frequently asked questions

What are the basic bookkeeping terms?

The basic bookkeeping terms are the five account types (assets, liabilities, equity, revenue and expenses), the records they are kept in (chart of accounts, journal and general ledger), and the reports they produce (income statement, balance sheet and cash flow statement). Add accounts receivable, accounts payable, debit, credit and bank reconciliation and you have the vocabulary most small-business owners will ever meet.

What are the five basic accounts in bookkeeping?

The five basic account types are assets, liabilities, equity, revenue and expenses. Assets are what the business owns, liabilities are what it owes, and equity is the difference between the two. Revenue is what the business earns and expenses are what it costs to earn it.

What is the difference between a debit and a credit?

A debit is an entry on the left side of an account and a credit is an entry on the right side. Debits increase asset and expense accounts, while credits increase liability, equity and revenue accounts. In double-entry bookkeeping every transaction is recorded as a debit in one account and a credit in another, so total debits always equal total credits.

What is the difference between accounts payable and accounts receivable?

Accounts receivable is money customers owe your business for work you have already invoiced. Accounts payable is money your business owes suppliers for bills you have received but not yet paid. Receivable is an asset and payable is a liability.

What is a chart of accounts?

A chart of accounts is the complete list of accounts a business uses to sort its transactions. It is normally arranged in five groups: assets, liabilities, equity, revenue and expenses. Every transaction in the books is assigned to at least two accounts from that list.

What is expensing in accounting?

Expensing means recording a cost as an expense in the current period, so it reduces profit straight away. The alternative is capitalising the cost, which records it as an asset and spreads it over several years through depreciation. Everyday costs such as rent and fuel are expensed, while larger long-lived purchases such as vehicles and equipment are generally capitalised.

What is the difference between single-entry and double-entry bookkeeping?

Single-entry bookkeeping records each transaction once, as money in or money out, much like a cheque register. Double-entry bookkeeping records each transaction twice, as a debit in one account and a credit in another. IRS Publication 583 describes single-entry as a simple and practical system for a small business that is starting out, and double-entry as self-balancing.

Do I need to know bookkeeping terms if I have an accountant?

You do not need to keep the books yourself, but you do need enough vocabulary to read your own reports and answer your accountant’s questions. An owner who knows the difference between revenue, profit and cash, and between cash basis and accrual basis, can check the numbers they are signing. Around ten terms cover most of that.

Dariusz is a composite and his figures are illustrative. The IRS wording quoted above was checked against the linked IRS pages on October 12, 2026. Definitions here are the plain-English versions; the rules behind accounting methods and depreciation have exceptions, so confirm at the source before relying on a blog post — including this one.