What Those Accounting Terms Really Mean

Bookkeeping and accounting have a way of making simple concepts sound more complicated than they need to be. If you've ever read a financial report and thought, "Do I actually need to know what 'accruals' are?"—you’re not alone.

The good news? Most of these terms have simple explanations, and understanding them can actually help you run your business more effectively. Let’s break down some common bookkeeping jargon in plain English.

1. Accounts Payable (A/P) – "The Bills You Owe"

This is the money your business owes to vendors, suppliers, or anyone who sent you an invoice. Think of it as the business version of your personal bills—rent, utilities, subscriptions, and any unpaid invoices from suppliers all fall into A/P.

Why it matters: Keeping A/P under control ensures you don’t rack up late fees or damage relationships with suppliers.

📌 Pro Tip: If your A/P is climbing, check for unnecessary expenses or negotiate better payment terms.

2. Accounts Receivable (A/R) – "The Money You’re Waiting On"

If A/P is what you owe, Accounts Receivable (A/R) is the money your customers owe you. When you send an invoice and haven’t been paid yet, that’s A/R.

Why it matters: Too much A/R means you’re basically giving customers a free loan. If clients take too long to pay, your cash flow suffers.

📌 Pro Tip: If A/R is always high, consider tightening your payment terms, sending reminders, or even offering early payment discounts.

3. Accrual Accounting – "Counting Money Before It Hits the Bank"

Accrual accounting records income and expenses when they’re earned or incurred, not when money actually moves.

Example: If you finish a job today but don’t get paid for 30 days, accrual accounting still counts that income today.

Why it matters: It gives a more accurate picture of your business’s financial health but can make cash flow harder to track.

📌 Pro Tip: Many small businesses use cash accounting instead, which only records transactions when money actually moves.

4. Depreciation – "Your Stuff Losing Value Over Time"

When you buy big-ticket items like equipment, vehicles, or machinery, they lose value over time. Instead of deducting the full cost right away, depreciation spreads that expense over multiple years.

Example: You buy a $10,000 work truck. Instead of deducting all $10,000 this year, depreciation allows you to deduct a portion of it each year.

Why it matters: Depreciation helps smooth out expenses and can lower taxable income.

📌 Pro Tip: If you want a bigger tax break sooner, ask your accountant about Section 179 deductions, which let you write off the full amount in one year.

5. Profit Margin – "What’s Left After Expenses"

Profit margin is the percentage of revenue that turns into actual profit after covering costs.

Example: If you make $100,000 in sales but spend $80,000 on expenses, your profit margin is 20%.

Why it matters: A low margin means your pricing might be off, expenses might be too high, or both.

📌 Pro Tip: If your margins are shrinking, check for hidden costs like rising supply prices, inefficiencies, or underpriced services.

6. Cash Flow – "Your Business’s Oxygen Supply"

This is how money moves in and out of your business. Profit is important, but cash flow is what keeps the lights on.

Example: You could be profitable on paper but broke in reality if customers aren’t paying invoices on time.

Why it matters: Poor cash flow is one of the biggest reasons businesses struggle.

📌 Pro Tip: Use a cash flow forecast to predict slow months and prepare accordingly.

7. COGS (Cost of Goods Sold) – "What It Costs to Deliver Your Product or Service"

COGS includes all direct costs needed to produce what you sell. If you’re a contractor, it’s materials and labor. If you run a retail shop, it’s inventory costs.

Why it matters: The lower your COGS, the higher your profit.

📌 Pro Tip: If COGS is creeping up, look at bulk discounts, supplier negotiations, or reducing waste.

8. Retained Earnings – "The Business’s Savings Account"

After you’ve paid all expenses, salaries, and dividends, retained earnings is what’s left over in the business. Think of it as the company’s “rainy day fund.”

Why it matters: Strong retained earnings mean your business is financially healthy and can reinvest in growth.

📌 Pro Tip: If retained earnings are low, consider reducing unnecessary spending or increasing margins.

9. Owner’s Draw – "Paying Yourself Without a Paycheck"

Unlike a regular salary, owner’s draws are when a business owner takes money out of the company’s profits for personal use.

Why it matters: Taking too much can hurt business cash flow, and it’s not taxed like a paycheck—meaning you need to plan for taxes separately.

📌 Pro Tip: Keep personal and business finances separate, and track all draws so you know how much you're actually paying yourself.

10. Burn Rate – "How Fast You’re Spending Money"

Burn rate measures how quickly a business spends cash before turning a profit. Startups track this closely, but every business should know how long they can sustain operations if revenue slows down.

Why it matters: If your burn rate is high, you’ll run out of cash fast if income slows.

📌 Pro Tip: If expenses are outpacing revenue, look for ways to trim costs before a cash crunch hits.

Final Thoughts

Bookkeeping jargon doesn’t have to be intimidating. Once you break it down, these terms are just different ways of saying, “Where’s the money going?”

Understanding what these words mean—and how they apply to your business—helps you make smarter financial decisions, avoid surprises, and run things with more confidence.

Got a term you’ve heard but don’t understand? Drop it in the comments, and let’s demystify it together.

📌 Need help making sense of your financials? Let’s chat.