The following terms are often used by accountants, in accounting software, and in fact throughout our discussion. We've placed their definitions here so that you can print them out, if you want. Definitions are also scattered throughout the text — when you see blue or gray underlined text, click on the word to get more information. Accounting equation: Assets = liabilities + owner's equity. The accounting equation is the basis for the financial statement called the balance sheet . Accounts payable: Also called A/P, accounts payable are the bills your business owes to suppliers. Accounts receivable: Also called A/R, accounts receivable are the amounts owed to you by your customers. Accrual method of accounting: With the accrual method , you record income when the sale occurs, not necessarily when you receive payment. You record an expense when you receive goods or services, even though you may not pay for them until later. Adjusting entries: Special accounting entries that must be made when you close the books at the end of an accounting period. Adjusting entries are necessary to update your accounts for items that are not recorded in your daily transactions. Aging report: An aging report is a list of customers' accounts receivable amounts and their due dates. It alerts you to any slow-paying customers. You can also prepare an aging report for your accounts payable , which will help you manage your outstanding bills. Allowance for bad debts: Also called reserve for bad debts, it is an estimate of uncollectable customer accounts. It is known as a "contra" account because it is listed with the assets, but it will have a credit balance instead of a debit balance. For balance sheet purposes, it is a reduction of accounts receivable . Assets: Things of value held by the business. Assets are balance sheet accounts. Examples of assets are cash, accounts receivable, and furniture and fixtures. Balance sheet: Also called a statement of financial position , it is a financial "snapshot" of your business at a given date in time. It lists your assets, your liabilities, and the difference between the two, which is your equity, or net worth. Capital: Money invested in the business by the owners. Also called equity. Cash method of accounting: If you use the cash method , you record income only when you receive cash from your customers. You record an expense only when you write the check to the vendor. Chart of accounts: The list of account titles you use to keep your accounting records. Closing: Closing the books refers to procedures that take place at the end of an accounting period. Adjusting entries are made, and then the income and expense accounts are "closed." The net profit that results from the closing of the income and expense accounts is transferred to an equity account such as retained earnings. Corporation: A legal entity, formed by the issuance of a charter from the state. A corporation i... | 
