Small Business Accounting Glossary (2026)
40 accounting terms explained specifically for small business owners, not accounting students. Practical definitions with real examples and links to the relevant deep-dive pages.
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Accrual AccountingCash AccountingChart of AccountsDouble-Entry BookkeepingGeneral LedgerReconciliationTrial BalanceProfit and Loss Statement (P&L / Income Statement)Balance SheetCash Flow StatementAccounts Payable (AP)Accounts Receivable (AR)COGS (Cost of Goods Sold)DepreciationAmortizationOwner's Draw vs Distribution1099-NECSchedule CEIN (Employer Identification Number)Reasonable Salary (S-Corp)Economic Nexus (Sales Tax)Bank FeedClass / Location TrackingMulti-CurrencyProAdvisor (QuickBooks)Accrual Accounting
An accounting method that records revenue when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. Example: if you send an invoice in December but receive payment in January, accrual accounting records the revenue in December.
See FAQ: cash vs accrual →Cash Accounting
An accounting method that records revenue when cash is received and expenses when cash is paid. Most small businesses and sole proprietors use cash basis because it matches bank account reality. The IRS requires accrual for businesses with over $27 million in average gross receipts.
See FAQ →Chart of Accounts
The complete list of financial accounts used to categorise every transaction in your business. Includes 5 categories: assets, liabilities, equity, revenue, and expenses. Accounting software provides a default chart of accounts; you customise it for your business. The structure of your chart of accounts determines how useful your financial reports are.
Double-Entry Bookkeeping
An accounting system where every transaction affects at least two accounts - a debit to one and a credit to another. The fundamental principle: Assets = Liabilities + Equity. Double-entry ensures the books always balance and makes errors easier to detect. All accounting software uses double-entry under the hood, even if you never see the journal entries.
General Ledger
The master record of all financial transactions in your business, organised by account. Every invoice, payment, expense, and journal entry appears in the general ledger. The GL is the source of truth for your trial balance, profit and loss statement, and balance sheet.
Reconciliation
The process of matching transactions in your accounting software against your bank or credit card statements to confirm they agree. Reconciliation catches errors, duplicate entries, and missed transactions. Most accounting software has a reconciliation tool that walks you through matching each transaction. You should reconcile monthly.
See FAQ: how often to reconcile →Trial Balance
A report listing all accounts in your chart of accounts and their balances, used to verify that total debits equal total credits. A trial balance is the starting point for preparing financial statements. In accounting software, it is a standard report you can run at any point.
Critical for migration: verify opening balances via trial balance →Profit and Loss Statement (P&L / Income Statement)
A financial report showing revenue, expenses, and net profit or loss over a period. This is the primary financial report your accountant uses for tax preparation. In accounting software it is typically called 'Profit and Loss' and is available by month, quarter, or year.
Balance Sheet
A financial report showing assets, liabilities, and equity at a specific point in time. Assets = Liabilities + Equity. The balance sheet proves the books balance and shows the net worth of the business. Required for loan applications, investor reporting, and S-Corp tax preparation.
S-Corps need clean balance sheets →Cash Flow Statement
A financial report showing actual cash inflows and outflows over a period. Different from the P&L: a business can be profitable on accrual basis but cash-flow-negative if clients are slow to pay. Xero and QBO Advanced generate cash flow statements; lower tiers may require manual creation.
Accounts Payable (AP)
Money your business owes to vendors and suppliers for goods or services received but not yet paid. AP is a liability on your balance sheet. Accounting software tracks open bills and AP aging (how long each bill has been outstanding).
Accounts Receivable (AR)
Money owed to your business by customers for goods or services delivered but not yet paid. AR is an asset on your balance sheet. Accounting software tracks open invoices and AR aging. High AR aging (many old unpaid invoices) is a common small business cash flow problem.
COGS (Cost of Goods Sold)
The direct costs associated with producing or acquiring the products you sell. For a manufacturer: materials plus labour. For a retailer: inventory purchase cost. For a service business: there may be no COGS (only operating expenses). COGS directly reduces your gross profit. Accurate COGS requires inventory tracking - QBO Plus, Zoho Books Professional, and Sage 50 all handle this.
COGS tracking for ecommerce sellers →Depreciation
The allocation of a capital asset's cost over its useful life. Example: a $3,000 laptop used for business is depreciated over 3-5 years rather than expensed immediately. Section 179 and bonus depreciation rules allow immediate expensing of many small business assets. Your accountant handles depreciation entries; accounting software records them.
Amortization
The gradual write-off of an intangible asset over time. Similar to depreciation but for intangibles like patents, trademarks, or goodwill from a business acquisition. Also used for loan repayment - a mortgage amortises when payments cover interest first, then principal.
Owner's Draw vs Distribution
For a sole proprietor or single-member LLC: an owner's draw is money the owner takes out of the business. It reduces equity but is not a salary - not subject to payroll taxes (but is subject to self-employment tax). For an S-Corp: distributions are pass-through income not subject to FICA, separate from the owner-employee salary. The IRS scrutinises S-Corp distributions that seem to substitute for reasonable salary.
See LLC and S-Corp accounting guide →1099-NEC
The IRS form used to report non-employee compensation paid to contractors, freelancers, and service providers. You must file a 1099-NEC for any contractor paid $600 or more in a calendar year for services. The filing deadline is January 31. Payment to corporations (S-Corps, C-Corps) are generally exempt. QuickBooks, Gusto, and Track1099 all facilitate 1099 e-filing.
1099 filing by accounting software →Schedule C
The IRS form (Schedule C, Form 1040) used by sole proprietors and single-member LLCs to report business income and deductions. Your accounting software's profit and loss report maps directly to Schedule C categories. Found, Lili, and QBO Solopreneur auto-categorise transactions into Schedule C buckets.
Best software for Schedule C filers →EIN (Employer Identification Number)
A 9-digit IRS tax ID for your business, analogous to a Social Security number. Required to open a business bank account, hire employees, and form an LLC or corporation. Applied for free at irs.gov and issued immediately online. Even sole proprietors without employees can get an EIN to avoid using their SSN on business forms.
Setup sequence for new LLCs →Reasonable Salary (S-Corp)
The IRS-required salary an S-Corp owner-employee must pay themselves, comparable to what a third party would earn for the same work. The salary is subject to payroll taxes (FICA); distributions are not. The IRS has audited S-Corps where owner salaries were deliberately set low to minimize payroll taxes. For most service businesses, 40-60% of net profit is the safe harbour range.
S-Corp reasonable salary worked example →Economic Nexus (Sales Tax)
A sales tax threshold rule that says once you exceed $100,000 in sales or 200 transactions in a state in a calendar year, you owe that state's sales tax even without a physical presence there. Post-South Dakota v. Wayfair (2018), all states with a sales tax have economic nexus rules. Ecommerce sellers must track nexus across all 45 sales-tax states.
Sales tax for ecommerce sellers →Bank Feed
A live data connection between your accounting software and your bank account that automatically imports transactions. Bank feeds use Plaid, Finicity, or Yodlee as data intermediaries. You review and categorise imported transactions rather than entering them manually. Bank feeds can break when banks update their security - re-authentication fixes most breaks.
Bank feed reliability comparison →Class / Location Tracking
A QuickBooks and Xero feature that lets you tag transactions with a custom category (class) beyond the account category. Used for departmental reporting, project profitability, and profit-by-location analysis. QBO Plus and above support class tracking. Xero Established supports project tracking. FreshBooks has native project profitability without requiring class tracking.
Multi-Currency
The ability to invoice in foreign currencies, reconcile foreign bank accounts, and record exchange rate gains/losses. Available in Xero Established ($90/month), QBO Essentials and above, Zoho Books Premium and above. Not available in Wave, FreshBooks Lite or Plus, or Patriot.
Multi-currency comparison →ProAdvisor (QuickBooks)
A certification program for accountants and bookkeepers who work with QuickBooks. ProAdvisors receive a free QuickBooks Online Accountant subscription, client-facing certifications, access to priority support, and ProAdvisor Preferred Pricing they can pass to clients. The bookkeeping profession runs largely on ProAdvisor-trained practitioners in the US.
ProAdvisor and Xero Partner programs →Find the right software for your business: