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Glossary: The accounting and finance terms every business owner must know

June 23, 2021    |     11-minute read (2041 words)

  1. Accounts payable: All unpaid company expenditures are included in accounts payable. It comprises the company's debt and is shown as a liability on its balance sheet.

  2. Accounts receivable: The term "account receivable" refers to money owed to a company by third parties. It is a source of short-term cash and is represented as an asset on the balance sheet.

  3. Accrual basis accounting: Accrual basis accounting incorporates accounts receivable and accounts payable to encompass projected costs and income. On the contrary, cash basis accounting records current expenses and revenues and does not record transactions until the firm pays or gets cash. As a result, cash-basis accounting is more convenient for most individuals, but it does not provide as accurate a representation of an organization's financial health as accrual-basis accounting does.

  4. Accrued expense: An expense that has occurred but that has not yet been paid or recorded in the accounts. In other words, accrued expenses comprise a business’ obligation to pay for goods and services that have been provided but for which invoices have not yet been received.

  5. Asset (fixed asset): Property or equipment that a firm owns and uses to generate revenue but that can’t easily be converted into cash. Fixed assets may include real estate, land or large machinery, which are long-term entities that will likely give advantages to a firm in the future or when in need. Fixed assets are not projected to be consumed or transformed into cash within a year and are also referred to as capital assets.  Property, factories and equipment are typical fixed assets on a company’s balance sheet.

  6. Balance sheet: Also called a financial statement, a balance sheet reports a company's owned assets, liabilities and the owner or shareholders’ equity at a specific time.

  7. Book value: The book value of an asset is its original cost minus its accumulated depreciation or impairment. It reflects how an asset loses value.

  8. Capital: Capital is an expansive term that refers to anything that confers value to a person or an organization. It might be money in a bank account, money borrowed from a lender, intellectual property such as a patent or machinery, for example. Working capital is a term used to describe a company's liquid cash that can be used to cover day-to-day or continuing costs. Working capital reflects a company's overall health and capacity to pay financial obligations that are due within a year.

  9. Cash basis accounting: Cash basis accounting is a form of accounting in which transactions are not recorded until the company gets or pays cash for products and services. This method focuses on current revenue and expenditures. On the other hand, accrual basis accounting covers future payments and costs and accounts payable and receivable.

  10. Cash flow: The entire amount of money entering and leaving a company is referred to as cash flow, while the amount of money a company makes is called net cash flow. Cash flow records are financial reports that show how much money a company makes through operations, investments and borrowing.

  11. Certified public accountant: A certified public accountant (CPA) is an accountant who has completed a standardized exam and is qualified to audit public corporations and sign tax returns.

  12. Cost of goods sold: COGS comprises the direct costs of producing the goods or services that a company sells. It includes only the direct costs for producing items, such as materials and labor, and excludes indirect costs like distribution expenses.

  13. Credit: These are account entries that either increase assets or decrease liability on a firm’s balance sheet. For an account to be in balance, debits must equal credits.

  14. Debenture: An unsecured loan issued by a company at a fixed interest rate supported only by the borrower's creditworthiness and recorded by an indenture agreement.

  15. Debit: The opposite of a credit, a debit is an amount owed that is recorded on an account's left side. Debits increase asset accounts but decrease equity and liability accounts in double-entry accounting systems.

  16. Depreciation: The depreciation accounting method determines a tangible asset's declining value over time. For accounting and tax reasons, a firm can profit from a depreciating asset by expensing or deducting a portion of the asset each year it is in use. The IRS mandates that businesses amortize depreciating assets over time.

  17. Diversification: This is a risk-reduction approach in which a company's money is spread over various assets. Individual asset performance will not impact the outcomes of other assets in this way.

  18. Dividends: Dividends are a portion of a company's earnings or profit that it distributes to its shareholders in exchange for their investment in the company's stock. Dividends can be paid in cash or in the form of extra equity. Dividends may be paid regularly or on a one-time basis. Mutual funds and exchange-traded funds both pay dividends.

  19. Double-entry bookkeeping: This is an accounting system in which each financial transaction involves the entry of credits and debits.

  20. Enrolled agent: Enrolled agents are tax experts who are federally licensed to represent U.S. taxpayers. They must pass the IRS' three-part special enrollment examination. Without completing the test, former IRS workers can serve as registered agents. To keep their licenses, enrolled agents must complete 72 hours of continuing education courses every three years. Enrolled agents can generally represent any type of taxpayer.

  21. Equity: Assets minus liabilities equals equity. The proportion of shares that indicate a person's ownership stake in a business is referred to as owners' equity. Business owners and shareholders are the owners of equity.

  22. Fixed cost: A cost that does not change from month to month. Examples of fixed costs are salary, insurance and rent.

  23. Generally accepted accounting principles: The term "generally accepted accounting principles" or GAAP refers to a common set of accounting rules and procedures. Public companies in the U.S. must adhere to GAAP when their accountants report financial data. The principles establish a consistent framework for evaluating a company's financial statements.

  24. General ledger: A general ledger is a book that accountants use to store and organize financial data for their clients. General ledgers contain debit and credit account entries and are used by firms that employ double-entry accounting. Companies use the information in their general ledgers to generate financial reports and track their financial health and performance over time.

  25. Gross profit margin: Calculated by dividing a company’s gross profit by its net sales during the same period.

  26. Gross profit: Gross profit, also known as gross income or sales profit, is computed by subtracting a company’s cost of goods sold from its net sales. Variable costs, not fixed expenses, are taken into account when calculating gross profit. Analysts use gross profit to determine a company's efficiency in providing services or manufacturing items.

  27. Inventory: The commodities and raw materials needed to make the goods a firm sells are referred to as inventory. Inventory shows up as an asset on a balance sheet. Finished items, raw materials and works-in-progress are all included in inventory. However, businesses should avoid keeping significant inventory volumes for lengthy periods because of the danger of obsolescence and storage expenses.

  28. Liability: When someone owes another person or a business money, this is referred to as a liability. Someone can complete a liability settlement obligation by transferring money, services or commodities. Loans, mortgages, accounts payable and accumulated costs are all examples of liabilities. Short-term obligations are resolved in less than a year, but long-term liabilities might take up to a year to settle.

    29. Liquidity: The ease with which an individual or a corporation may convert an asset to cash for its entire market worth is referred to as liquidity. Cash, the most liquid asset, may be converted into other assets quickly and easily. Accounting liquidity refers to a person's ability to pay for goods with liquid assets. The ease with which a market allows the transparent purchasing and selling of assets at stable prices is referred to as market liquidity.

  29. Net income, also known as net profit or net earnings: After taking deductions and taxes from gross income, net income is the amount earned by a person or corporation. Net income, often known as the bottom line in business, is the last item on an income statement. Investors and shareholders use it to analyze a company's financial health and determine loan eligibility.

  30. Income statement: Income statements, also known as revenue and expenditure statements or profit and loss statements, detail a company's expenses and revenue over a period of time. Like balance sheets and cash flow statements, income statements provide information about a company's financial health.

  31. On credit/on account: This refers to a purchase that will be paid for later but that the buyer will be able to enjoy right now. It is a type of contract that allows an individual or company to pay for a commodity or service on credit, also known as on the account.

  32. Overhead: Overhead refers to the costs of running a business that isn't directly connected to the creation of a product or service. Companies must understand their overhead costs to determine how much they should charge for their goods or services to break even. Overhead costs are disclosed in income statements.

  33. Payroll: Payroll is generally handled by human resources and accounting departments. Payroll is the total remuneration a firm pays its employees for a given time. It includes keeping track of hours worked, distributing payments, and dividing money for Social Security and Medicare taxes are all part of the payroll process.

  34. Present value: A future sum of money's present worth depends on a specified return rate. Present value explains why cash in hand now is worth more than money in hand a year from now since cash in hand now can be invested at a greater rate of return.

  35. Profit: After deducting interest, depreciation, and taxes, profit equals revenue minus costs.

  36. Profit and loss statement: A profit and loss statement, also known as an income statement, illustrates a company's spending, costs and revenues over a period of time. Along with cash flow statements and the balance sheet, this financial statement offers information on a company's financial health and potential to create profit.

  37. Receipt: Receipts are written confirmations that one party has received something of value from the other. They serve as documentation of financial transactions and admission of ownership. Small companies must save some receipts for documenting tax-deductible costs, according to the IRS.

  38. Retained earnings: This term is sometimes also called an earnings surplus. After paying dividends to shareholders, a company's retained earnings refer to the net income left over for the company to spend. The management of a business usually determines whether to keep the profits or distribute them to shareholders.

  39. Return on investment: Often referred to as ROI, return on investment is a performance measure expressed as a ratio or a percentage used to assess the efficiency or profitability of an investment. To determine ROI, the benefit of the investment is divided by the cost of the investment.

  40. Revenue: The gross money a firm generates through typical business activities is referred to as sales. Multiply the sales price by the sum of units sold to get revenue. Revenue is calculated differently using accrual accounting and cash accounting. Accountants credit sales to revenue when using accrual accounting. Cash accounting credits sales as revenue only when the company receives payment.

  41. Single-entry bookkeeping: This type of bookkeeping system tracks a company's financial activities by recording cash, taxable income and tax-deductible costs coming in and out of the firm as one entry per transaction. Single-entry bookkeeping can be performed through accounting software or simple tables. It is far less complicated than double-entry bookkeeping, which necessitates two entries for each transaction.

  42. Trial balance: A trial balance is an accounting worksheet in which the balance of all ledgers are compiled into debit and credit account column totals that are equal. Trial balances are used by businesses to check that their bookkeeping system entries are mathematically correct.

  43. Variable cost: Variable costs are defined as a company's costs pertaining to the number of goods or services it produces. Variable costs increase as output goes up and decrease as output declines. In contrast to variable cost, fixed cost refers to a company's costs that remain constant regardless of production, such as rent and insurance.

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