Accounting
Definitions for Business Owners
What your accountant wishes you’d heard on day one: the core terms you’ll see and use as a business owner for the rest of your career.
These are the words you will read in emails, reports, and hear in tax season conversations.
You do not need to be an accountant.
You just need to recognize what each word is pointing to and why it matters to your work.
​
We'll start simple and get more complex.
Core Money Terms
Business Money
Money that belongs to your business, not to you as a person. Even if you are the only owner, the business money is separate from your personal money.
And the two should never mix. But we'll get to that later.
Revenue
Money your business earns from doing work.
For example: sessions, memberships, classes, or product sales.
Expenses
Money your business spends to keep running.
For example: rent, software, supplies, payroll, or insurance.
Profit
What is left after your business pays its expenses.
Profit is business money earned after the bills are paid.
Owner pay
Money the business gives you as the owner.
This is how you get paid for your work in the business.
Profit is what the business is earning.
Owner pay is what you take home.
How Money is Tracked
Bookkeeping
Writing down or entering every time money comes in and goes out of your business.
Then, each item is put into a clear, tax-friendly category.
Good bookkeeping is how we get numbers that are safe to use on tax returns.
Books
A bit of a misnomer now, but it used to be a literal ledger journal or "books" containing your business figures.
The place where all this money tracking lives.
Most of the time this is a computer program, not a paper book. It holds the full story of your business money.
Account
A category in your books that holds one kind of money activity.
For example: you might have an account for your business bank, an account for rent, and an account for income.
Chart of Accounts
The full list of all the accounts in your books.
This list tells the bookkeeping program the options available to sort each transaction into.
A clear chart of accounts makes reports easier to read.
Depreciation
This is how we spread the cost of big business purchase over time in your books and on your tax return.
Instead of showing the whole cost in one year, a part of the cost is recorded as an expense each year for a set amount of time.
This is often used for things like equipment, furniture, or a company vehicle.
Bank Feed
A connection between your bank or credit card and bookkeeping program.
It pulls in your transactions so they can be categorized, instead of typing each one by hand.
Reconciliation
Checking that the content of your books match your bank, credit card, or loan statements. If something is missing, doubled, or wrong, we fix it.
​
Reconciliation is how we know the books are complete and can be trusted for tax filing.
What the Business Owns, Owes,
& Your Owner Share
Assets
Things your business owns that have value.
This includes: cash in the bank, equipment, furniture, and money clients or payers still owe you that you've billed them for.
Liabilities
The opposite of an asset, these are things your business owes to others.
​
This includes: loans, credit card balances, taxes that are due, and bills you've received but have not yet paid.
Equity
This is the owner's share of the business.
It is the running total of:
-
what the owner has put into the business
-
plus past profits the business has kept
-
minus what owner has taken out
​
It is the overall picture of how much of the business belongs to the owners after everything is totaled.
​
For example:
Imagine you are going to a barbeque with friends and family.
You bring hot dogs to share. That is what you have “put into” the barbeque.
On the way there, you are hungry and eat a few.
Now you are bringing fewer hot dogs than you started with.
What is left is what you have actually invested in the barbeque.
Equity works the same way: it starts with what you put in, then changes as you add more or take some back out.
Accounts Receivable (A/R)
Money that clients or payers still owe you for work you've already completed.
It is the list of invoices you've sent that are not yet paid.
​
Accounts Receivable is an asset, because it is money that your business expects to receive.
Accounts Payable (A/P)
Money your business still owes to other people or companies.
It is the list of bills and vendors you have not yet paid.
Accounts Payable is a liability, because it is money that your business expects to pay.
Aging
This shows how long invoices or bills have been waiting to be paid.
It groups them by how "old" they are.
Aging helps you see what needs attention first.
When Income & Expenses "Count"
Accounting Method
This is the rule your business follows for when to count income and expenses in your books.
Cash Basis
You count income when money goes into your bank account.
You count expenses when money leaves your bank account.
This method is simple and is what many small businesses use.
Accrual Basis
You count income when you do the work and send the bill, even if you get paid later.
You count expenses when you get the bill, even if you pay later.
This method can show a clearer picture when you have many unpaid invoices or bills at any time.
Why this matters
Your accounting method changes when income and expenses show up on reports and tax returns.
It can make one period look higher or lower than another, even if your day-to-day work feels the same.
I will tell you which method you are on and why, so you do not have to figure that out alone.
Reports You'll See
Profit and Loss (P&L) or Income Statement
This report shows your revenue, expenses, and profit for a set amount of time, like a month or a year.
​
It answers the question: "Did the business make money or lose money during this time?"
Balance Sheet
This report shows what the business owns, what it owes, and the owner's share on one specific day.
It is built from assets, liabilities, and equity.
​
It answers the question: "What does the business look like right now on paper?"
Statement of Cash Flows
Cash flow shows how cash moves into and out of your accounts over time.
It looks at when money really arrives and when it really leaves.
It helps explain why a business can look good on reports but still feel tight in the bank.
Taxes & Pay
Estimated Tax
These are tax payments you send in during the year.
They are used when tax is not already being paid in from another source, like a paycheck.
Making estimated tax payments helps reduce surprise tax bills and some penalties later.
Depending on how much tax you could owe, they are often required.
If you are self-employed, most likely you should be making estimated tax payments.
Payroll
This is the process of paying employees or paying yourself as an employee.
It includes calculating pay, taking out taxes, and sending those taxes to the appropriate federal, state, and local agencies.
Payroll also includes filing payroll tax returns and year-end reports.
Payroll Taxes
These are taxes tied to paychecks.
Some come out of each paycheck and are paid by the employee.
Some are paid by the business as the employer.
They must be sent in on a schedule set by federal, state, and local agencies, to stay in good standing.
Sales Tax
This is tax collected from clients on certain services or products.
You hold this money for the state or local government.
Later, you send it in on a set schedule set by the state or local government.
This money is not part of your income, even though it passes through your bank account.
Contractor (1099)
This is a person or business you pay for work who is not an employee on your payroll.
They fill out a W-9 providing their personal or company name, address, SSN or EIN, and tax entity type accompanied by their signature.
You do not take taxes out of a contractor's pay.
At the end of the year, you may need to send a tax form called a 1099 that shows how much you paid them in total for a specific tax year.
Employee (W-2)
This is someone on your payroll whose work and schedule you direct.
They fill out a W-4 providing their personal name, address, SSN, their tax filing status, and any exemptions or extra withholding they're claiming.
At the end of the year, you give them a tax form called a W-2 that shows their pay and the taxes taken out and paid into the government on their behalf.