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Basic Bookkeeping Terms and PhrasesGet a firm understanding of key bookkeeping and accounting terms and phrases before you begin work as a bookkeeper. Bookkeepers use specific terms and phrases everyday as they track and record financial transactions — from balance sheets and income statements to accounts payable and receivable. The following sections list bookkeeping terms that you’ll use on a daily basis.Balance sheet terminologyHere are a few terms you’ll want to know when working with balance sheets:Balance sheet: The financial statement that presents a snapshot of the company’s financial position as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).Assets: All the things a company owns in order to successfully run its business, such as cash, buildings, land, tools, equipment, vehicles, and furniture.Liabilities: All the debts the company owes, such as bonds, loans, and unpaid bills.Equity: All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown in shares of stock.Another key Equity account is Retained Earnings, which tracks all company profits that have been reinvested in the company rather than paid out to the company’s owners. Small businesses track money paid out to owners in a Drawing account, whereas incorporated businesses dole out money to owners by paying dividends.Income statement terminologyHere are a few terms related to the income statement that you’ll want to know:Income statement: The financial statement that presents a summary of the company’s financial activity over a certain period of time, such as a month, quarter, or year. The statement starts with Revenue earned, subtracts the Costs of Goods Sold and the Expenses, and ends with the bottom line — Net Profit or Loss.Revenue: All money collected in the process of selling the company’s goods and services. Some companies also collect revenue through other means, such as selling assets the business no longer needs or earning interest by offering short-term loans to employees or other businesses.Costs of goods sold: All money spent to purchase or make the products or services a company plans to sell to its customers.Expenses: All money spent to operate the company that’s not directly related to the sale of individual goods or services.Other common bookkeeping termsSome other common terms used in bookkeeping include the following:Accounting period: The time period for which financial information is being tracked. Most businesses track their financial results on a monthly basis, so each accounting period equals one month. Some businesses choose to do financial reports on a quarterly or annual basis. Businesses that track their financial activities monthly usually also create quarterly and annual reports.Accounts payable: The account used to track all outstanding bills from vendors, contractors, consultants, and any other companies or individuals from whom the company buys goods or services.Accounts receivable: The account used to track all customer sales that are made by store credit. Store credit refers not to credit card sales but rather to sales in which the customer is given credit directly by the store and the store needs to collect payment from the customer at a later date.Depreciation: An accounting method used to track the aging and use of assets. For example, if you own a car, you know that each year you use the car its value is reduced (unless you own one of those classic cars that goes up in value). Every major asset a business owns ages and eventually needs replacement, including buildings, factories, equipment, and other key assets.General Ledger: Where all the company’s accounts are summarized. The General Ledger is the granddaddy of the bookkeeping system.Interest: The money a company needs to pay if it borrows money from a bank or other company. For example, when you buy a car using a car loan, you must pay not only the amount you borrowed but also interest, based on a percent of the amount you borrowed.Inventory: The account that tracks all products that will be sold to customers.Journals: Where bookkeepers keep records (in chronological order) of daily company transactions. Each of the most active accounts — including cash, Accounts Payable, and Accounts Receivable — has its own journal.Payroll: The way a company pays its employees. Managing payroll is a key function of the bookkeeper and involves reporting many aspects of payroll to the government, including taxes to be paid on behalf of the employee, unemployment taxes, and workman’s compensation.Trial balance: How you test to be sure the books are in balance before pulling together information for the financial reports and closing the books for the accounting period.link Accounting Terminology Guide - Over 1,000 Accounting and Finance TermsAccounting TermsAccounting Equation - The Accounting Equation is Assets = Liabilities + Equity. With accurate financial records, the equation balances.Accounting - Accounting keeps track of the financial records of a business. In addition to recording financial transactions, it involves reporting, analyzing and summarizing information.Accounts Payable - Accounts Payable are liabilities of a business and represent money owed to others.Accounts Receivable - Assets of a business and represent money owed to a business by others.Accrual Accounting - Records financial transactions when they occur rather than when cash changes hands. For example, when goods are received without payment, an Accounts Payable is recorded.Accruals - Accruals acknowledge revenue when it is earned and expenses when they are incurred even though a cash transaction may not be involved.Amortization - Reduces debts through equal payments that include interest.Asset - Items of value that are owned.Audit Trail - Allow financial transactions to be traced to their source.Auditors - Examine financial accounts and records to evaluate their accuracy and the financial condition of the entity.Balance Sheet - Provides a snapshot of a business' assets, liabilities, and equity on a given date.Bookkeeping - Recording of financial transactions in an accounting system.Budgeting - Budgeting involves maintaining a financial plan to control cash flow.Capital Stock - Total amount of common and preferred stock issued by a company.Capital Surplus - The amount in excess of par value for shares of common stock.Capitalized Expense - Accumulated expenses that are expensed over time.Cash Flow - The difference in money flowing in and out. A negative flow indicates more money going out than coming in. A positive flow shows more money coming in than going out.Cash-Basis Accounting - Records when cash is received through revenues and disbursed for expenses.Chart of Accounts - An organization's list of accounts used to record financial transactions.Closing the Books/Year End Closing - Closing the Books occurs at the end of the annual period and allows for a start with a clean book at the beginning of the next year.Cost Accounting - Used internally to determine the cost of operations and to establish a budget to increase profitability.Credit - Entered in the right column of accounts. Liability, equity and revenue increase on the credit side.Debit - Entered in the left column of accounts. Assets and expenses increase on the debit side.Departmental Accounting - Shows individual departments' income, expenses and net profit.Depreciation - The decrease in an asset's value over time.Dividends - Profits returned to the shareholders of a corporation.Double-Entry Bookkeeping - Requires entries of debits and credits for each financial transaction.Equity - Represents the value of company ownership.Financial Accounting - The accounting branch that prepares financial reporting primarily for external users.Financial Statement - Financial Statements detail the financial activities of a business.Fixed Asset - Used for a long period of time, e.g. - equipment or buildings.General Ledger - Where debit and credit transactions are recorded.Goodwill - Intangible asset a business enjoys like its reputation or brand popularity.Income Statement - A Financial Statement documents the difference in revenue and expenses resulting in income.Inventory Valuation - A valuation method modified for use in real estate and business appraisals.Inventory - Inventory consists of raw materials, work in progress, and finished goods.Invoice - An Invoice shows the amount of money owed for goods or services received.In The Black - Makes reference to a profit on the books; opposite of “in the red.” Black Friday sales are known for the profit retailers are adding to their books.In The Red - Makes reference to a loss on the books; opposite of “in the black.” In the days of handwritten accounting, ledger entries written in black meant there was a profit, but those in red meant there was a loss.Job Costing - Job Costing tracks costs of a particular job against its revenues.Journal - The first place financial transactions are entered. They are entered chronologically.Liability - Liabilities are the obligations of an entity, usually financial in nature.Liquid Asset - Consist of cash and other assets that can be easily converted to cash.Loan - A monetary advance from a lender to a borrower.Master Account - A Master Account has subsidiary accounts. Accounts Receivable could be a master account for various individual receivable accounts.Net Income - Net Income equals revenue minus expenses, taxes, depreciation and interest.Non-Cash Expense - Does not require cash outlay, e.g. - depreciation.Non-operating Income - Income not generated from the business. An example might be the sale of unused equipment.Note - A Note is a document promising to repay a debt.Operating Income - Determined by subtracting operating expenses from operating revenue. Interest and income tax expenses are not included.Other Income - Non-recurring income, e.g. - interest.Payroll - An account listing employees and any wages and salaries due them.Posting - Refers to the recording of ledger entries.Profit - Profit is revenue minus expenses. Reductions for taxes, interest, and depreciation are included.Profit/Loss Statement - A financial report issued by a company on a regular basis that discloses earnings, expenses and net profit for a given time period.Reconciliation - The act of proving an account balances; debits and credits equal. An example of reconciling an account is to verify that the bank statement matches the checkbook balance, making allowances for outstanding checks and deposits.Retained Earnings - Money left after all the bills have been paid and all the shareholder dividends have been distributed; often reinvested in the business.Revenue - The actual amount of money a company brings in during a particular time period; gross income.Shareholder Equity - A company’s total assets less its total liabilities; owner’s equity; net worth. Shareholder equity comes from the start-up capital of the business plus retained earnings amassed over time.Single-Entry Bookkeeping - An accounting process that uses on one entry, instead of debit and credit entries. Small businesses using cash accounting system benefit from the ease of this system, which is much like keeping a checkbook.Statement of Account - A written document that shows all charges and payments; accounts receivable statement; accounts payable statement. Generally, a monthly accounts receivable statement is sent to a charge customer; and reconciled by an accounts payable clerk for payment.Subsidiary Accounts - Accounts that are under a control account; they must equal the main account balance. Examples of subsidiary accounts may be “Office Supplies,” or “Cleaning Supplies,” under the control account called “Supplies.”Supplies - Consumable materials used in business and replenished as needed. Supplies are not inventory for sale; rather they are used to carry out business activities.Treasury Stock - Shares a company retains or buys back once offered to the public for purchase.Write-down/Write-off - An accounting transaction that reduces the value of an asset.courtesy :allaccounting .com

Imagine your bank account statement. You will see two different columns – credit and debit. Each line in the statement is when money has either been deposited or withdrawn. This is your cash flow. Now consider the company’s ledger. Every time the company actually receives or spends money in cash form, the ledger would be updated. These are called cash flows. The financial statement, which takes into account only the cash flows, and not the money promised or owed, is called the cash flow statement.We’ll start understanding the cash flow statement by looking at its significance, structure and components.This is why, it is important to maintain strict records of the inflows as well as the outflows. This process of keeping a detailed account of financial aspects of the company is called ‘accounting’.ACCOUNTING BASICS: ACCRUALS, ADJUSTMENTS AND ASSUMPTIONSWe start our study of accounting norms with an understanding of the accruals, adjustments and assumptions used in prepareation of the financial statements.SIGNIFICANCE OF THE CASH FLOW STATEMENT :What if you sold something to someone and they requested for three months to pay for it? You would consider the sale completed and count the money as yours, but where is the guarantee that they will pay you duly, or even pay at all? Something similar happens with the companies. They record non-cash incomes and expenses on the income statement but are not always sure whether the cash exchange will ever happen. Such transactions result in no immediate change in their cash position. They are recorded as receivables or payables on the balance sheet.Apart from these, there are some articles on the income statement, such as depreciation, which are only notional. They are reported as an expense (or income), but no flow of cash ever happens on their count. Such items are known as non-cash items. They only inflate the income and expense figures for the period. The cash flow statement eliminates the impact of all such figures and only talks about the transactions that took place in cash. Its scope extends beyond the income statement and also incorporates cash-based changes in balance sheet items, i.e. assets and liabilities.Understanding the cash flow statement helps you understand how effectively the company is using its cash. If the company gets cash after great delays, while its expenses have to be met immediately, it is natural that the company would be under severe financial stress. It will then have to borrow money to meet its short-term needs. This is additional liability on the company. This is why the cash flow analysis is important.During the times of economic stress, the cash flow statement can give you a better idea of how the company is performing in comparison with the income statement. If you see cash inflows are slowing down, you can predict the company’s near-term future too. This is called cash flow forecasting. This is very important, after all the stock markets react today in anticipation of the future.STRUCTURE OF THE CASH FLOW STATEMENT :Companies can choose one of the two formats to present the cash flow statement—direct and indirect. The direct method begins with cash sales, i.e. the proportion of sales revenue that was received in cash. It then adds to it all the cash inflows that occurred on account of operating, investing and financing inflows and subtracts from it all the corresponding outflows. In the end, the cash balance at the end of last year is added. This is because the current year’s cash balance is the sum of cash balance at the end of the previous year and the net cash inflows this year. The resulting amount is the cash balance for the year, the same as found in the balance sheet.The indirect method begins with the net income for the year, as mentioned in the income statement. Recall that for arriving at net income, we adjusted earnings before taxes and non-operating items (EBT) for some non-operating incomes and expenses (including tax). To show cash-based incomes and expenses, we must reverse this. So, we add back non-operating expenses and subtract non-operating incomes.The resulting figure is EBT. Next, we adjust for non-cash items. We start by adding back non-cash expenses, such as depreciation and subtracting non-cash incomes. After this, we move to the balance sheet. We will adjust for changes in the current assets (other than cash) and liabilities. Increases in current assets and decrease in current liabilities represent an outflow of cash. They will therefore be subtracted. Similarly, increase in current liabilities and decreases in current assets are added back. The net value of these is called changes in working capital. After this, the statement progresses like the direct method, as can be seen in the illustration below.In most annual reports, the cash flow statement is presented in the indirect format. However, it starts with EBT instead of net income. The adjustments to net income that we talked about are not shown. A pro forma cash flow statement using either approach is presented below.COMPONENTS OF THE CASH FLOW STATEMENT :As seen in the illustration, cash flows are divided into three categories—operating, investing and financing. This categorisation is common to both the formats. The only difference between the formats is the way of presenting operating cash flows. The presentation of the other two categories is the same for both approaches.Operating cash flows :This represents all categories of cash flows that are a part of the company’s core operations. The contents of operating cash flows differ according to the presentation format used. This can be seen in the illustration.Investing cash flows :This category represents all the cash flows that occur on account of investment in fixed physical assets (such as land, buildings and machinery) and financial assets (such as shares and bonds of other companies).These cash flows are in the form of:Cash flow from the sale/purchase of a fixed asset, such as landCash flows from the sale/ purchase of entire business unitsCash flows from the sale/purchase of strategic stakes in other companiesCash flows from sale and purchase of financial assets, such as shares, bonds and mutual fundsDividends/ interest received from the investment in financial assetsFINANCING CASH FLOWS :This category includes all the cash inflows and outflows that are related to raising/repaying capital used in the business.Financing cash flows include:Fresh debt capital raisedFresh equity (share) capital raisedRepayment of debtInterest paid to creditorsShare repurchasesDividends paid to shareholdersOut of these, fresh capital raised through debt and equity is treated as an inflow and added. All outflows on account of repayments of debt and equity capital as well as payment of interest and dividends are subtracted.WHY OPERATING CASH FLOW MATTERSMEASURES PROFITABILITY :When looking at a cash flow statement, investors tend to look at the component of operating cash flows with the greatest interest. As with the income statement, investors like companies that raise cash predominantly from operating sources.The other two activities should ideally be financed in totality by operating cash flows. Investors don’t mind negative investing and financing flows as long as the figure for operating cash flows is positive and greater than the combined outflows on account of the other two. (Although negative values must be investigated further.)If this is the case, it means that the company has raised enough money from its operations to finance its investments, as well as repay money to creditors and shareholders. Such a company must be doing rather well!CASH FLOW FORECASTING :In case operating cash flows are negative and investing cash flows are positive, it means the company has sold its assets to raise money for its ailing operations.In extreme cases, it may even be facing prospects of a shutdown, and is therefore selling parts of its business to support its operations and repay capital.In case financing cash flows are positive and operating cash flows are negative, it may again mean that the company doesn’t have sound operations and therefore has to raise fresh capital to finance them. Shareholders are very sensitive about negative operating cash flows.INVESTING V/S OPERATING CASH FLOWS :Negative investing cash flows generally signify that the company is expanding its operations or replacing old, worn-out assets. In such cases, you must be concerned as to the purpose of these investments. Negative investing cash flows are frequently found together with large, positive financing cash flows. This is because funding for these investments comes from financing inflows. You may be interested in the source of this funding—debt or equity. Sometimes, there is no increase in either. This means the company is using its retained earnings to finance these investments. In the section on the income statement, we defined retained earnings as the pool of net income not distributed as dividend over the years. This is the best and the cheapest source of financing.WHY OPERATING CASH FLOW MATTERSAn extension of the concept of cash flows is the concept of free cash flows. It is an important part of cash flow analysis. We just discussed how a company should ideally use its operating cash flows to finance investments in new opportunities (i.e. fixed assets). In very crude terms, the portion of cash flows that is left after making such investments and fulfilling all other cash obligations is called free cash flows. There are two types of free cash flows—free cash flows to firm (FCFF) and free cash flow to equity (FCFE).The cash flows available to the company after all its investing needs are met are free to be used for the third avenue of outflows – financing outflows. The financing (or capital) for running the company is provided by two categories of investors – creditors and equity shareholders. Together, the funding provided by them therefore, forms the company, i.e., the firm. The cash flows available for distributing to capital providers are therefore called free cash flows to the firm.The formula for the calculation of FCFF is presented below:Since shareholders are owners of the company, creditors always have the first right over FCFF. As such, FCFF should be first directed towards making interest and principal payments. Post-tax interest expense has been added here because interest anyway goes to creditors. Thus, it should be a part of the funds available for them. However, interest is subtracted in the income statement while calculating net income. Since net income is the starting point of operating cash flows, interest is not able to flow into operating income. For this reason it has to be added back.What remains of FCFF after providing for creditors can be directed to equity holders. This amount is therefore called free cash flow to equity or FCFE.The formula for this is presented below.We subtract post-tax interest and repaid debt from FCFF because this amount has been paid off to creditors out of FCFF. However, the company may also raise fresh debt during the year. This also provides cash for repayment to shareholders. It is therefore added in the calculation of FCFE.It must be noted, that FCFF and FCFE are only estimates of what CAN go to debt and equity holders. They don’t represent what ACTUALLY goes to them. Free cash flows are therefore only a tool for assessing whether the company has generated enough cash to meet its obligations towards creditors and shareholders. FCFF is of particular interest to those who lend money to the company in the form of bonds or loans. It provides them an estimate of the company’s ability to cover its obligations towards them. FCFE on the other hand, is used by equity holders. It gives them an estimate of the safety of their dividend. Expected future values of FCFE are also used by equity investors to calculate the fair value of an equity share of the company. We will talk about this later, in the section on the relationship between stock price and dividends.