Small-Business Accounting Glossary: A 2026 Reference

The two principal methods of recognising revenue and expense in accounting. The choice affects when income is reported (and therefore taxed) and how the books reflect business activity.

Cash basis

Revenue is recognised when cash is received; expenses are recognised when cash is paid. The simplest method and usually the default for sole proprietors and small service businesses. Acceptable to the IRS for most small businesses below the gross-receipts threshold (currently around $30 million, adjusted periodically). The disadvantage: cash basis can distort the picture of business performance because timing of receipts and payments may not reflect when work was actually done.

Accrual basis

Revenue is recognised when earned (typically when services are delivered or goods are shipped); expenses are recognised when incurred (when the obligation arises, regardless of payment timing). Required by GAAP for most external reporting. Required by the IRS for businesses with inventory and businesses above the small-business gross-receipts threshold. More accurate picture of business performance; more complex to maintain.

Which to use

Cash for simple service businesses with no inventory and rapid payment cycles. Accrual if you carry inventory, sell on credit (invoices that take 30+ days to collect), or expect to grow past the small-business threshold. Switching from cash to accrual later requires IRS Form 3115 in most cases, so the choice is sticky. Talk to a CPA before deciding.

The structured list of accounts in your general ledger: every revenue category, expense category, asset, liability, and equity account. The chart determines what reports your accounting software can produce; setting it up correctly is the most important decision in initial software setup.

A typical small-business chart of accounts has between 30 and 100 accounts, organised by type:

• • Assets: cash, A/R, inventory, fixed assets, accumulated depreciation.
• • Liabilities: A/P, credit cards, loans, sales tax payable, payroll liabilities.
• • Equity: owner's equity, owner's draw / distributions, retained earnings.
• • Revenue: by service line, product line, or revenue stream.
• • Cost of goods sold (if applicable): by product category.
• • Expenses: aligned with Schedule C lines for sole props, with Form 1120-S categories for S-Corps, etc.

Cloud accounting products ship with a default chart you can modify. Most small businesses benefit from starting with the default and customising minimally rather than designing from scratch. For S-Corps and multi-member LLCs, a CPA-reviewed chart at setup is worth the small fee.

The accounting method where every transaction is recorded as at least two entries, a debit and a credit, that balance to zero. Every dollar of debit must equal a dollar of credit somewhere else in the books. The system is over 500 years old (codified by Luca Pacioli in 1494) and is the foundation of every accounting product used by businesses today.

Example: paying a $100 utility bill from your bank account. The transaction debits utilities expense $100 (increasing the expense) and credits cash $100 (decreasing the asset). The two sides balance; the income statement shows the new expense; the balance sheet shows the lower cash.

The advantage of double-entry over single-entry (a checkbook register, for example) is that the books always balance, which acts as an automatic error check. If your trial balance does not balance, you know an entry was missed or recorded incorrectly. Single-entry has no equivalent integrity check.

All real accounting software is double-entry. Personal-finance apps and simple invoicing tools sometimes are not, which is one of the reasons they are not adequate substitutes for accounting software.

The process of matching your books against an external source (most commonly a bank statement) to verify that all transactions are recorded correctly and nothing is missing. The monthly close depends on reconciling each bank account, credit card, and major receivable balance.

In cloud accounting, reconciliation typically works like this: you import the bank statement (often automatic via bank feed); the software displays the bank's transactions alongside your book transactions; you match each pair, mark discrepancies, and confirm the ending balances agree. Discrepancies usually mean a missing transaction or a duplicate; both must be resolved before reconciliation is complete.

Reconciled balances are the foundation of trustworthy financial reports. Books that have not been reconciled cannot be trusted for tax filing or audit. Most CPAs require their clients to reconcile monthly.