Business Terms Glossary

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A

Above-the-Line Deduction

A deduction that you can subtract from your adjusted gross income, which reduces the amount you are taxed on and therefore the amount of taxes you owe. An above-the-line dedication is subtracted before you determine your adjusted gross income.

Accounting Method

The set of rules and guidelines businesses use to keep their financial records, and prepare their financial statements and tax returns. The two main types of accounting methods are accrual basis and cash basis.

Accounting Software

Accounting software is software that does various accounting and bookkeeping tasks. It stores a business’s financial data, and is often used to perform business transactions.
Most modern accounting software is always connected to the internet. This means you can connect from any internet-capable device, like your laptop or smartphone.

Accounts Receivable

Accounts receivable ( AR) tracks the money owed to a person or business by its debtors. It is the functional opposite of accounts payable.

Accounts receivable are sometimes called “trade receivables.” In most cases, accounts receivable derive from products or services supplied on credit or without an upfront payment. Accountants track accounts receivable money as assets.

Accrual Accounting

Accrual basis accounting (or simply “accrual accounting”) records revenue- and expense-related items when they first occur. For example, a customer purchases a $2,000 product on credit. Accrual accounting recognizes that $2,000 in revenue on the date of the purchase. The method contrasts with cash basis accounting, which would record the $2,000 in revenue only after the money is actually received. In general, large businesses and publicly traded companies favor accrual accounting. Small businesses and individuals tend to use cash basis accounting.

Adjusted Gross Income

Your total gross income before taxes, minus certain deductions and adjustments. Usually, this includes wages, dividends, alimony, benefits, and other income minus health insurance premiums, alimony paid, retirement plan contributions and student loan interest.

Allowable Cost

A cost that is included in your contract that can be billed to the customer.

Amended Return

A tax return that has been filed but then revised to correct errors.

Amortizing Loan

A type of debt that requires regular, monthly payments, with a portion of every payment going toward the loan’s principal and part going toward interest.

Appreciation

The increase in the price or the value of an asset. Occurs when the market value of an investable asset is higher than the price the purchaser paid for it.

Assets

Anything with monetary value that a person, company, or government owns. These are typically purchased through a transaction or financial event.

Average Tax Rate

The percent of taxes divided by taxable income.

Accelerated Depreciation

An accounting method for income tax purposes that allows greater depreciation of an asset’s value during the early years of ownership. Higher expenses are deducted in the first years you own an asset and lower expenses deducted later, as opposed to the same amount over the course of the asset’s life.

Accounting Period

An accounting period defines the length of time covered by a financial statement or operation. Examples of commonly used accounting periods include fiscal years, calendar years, and three-month calendar quarters. Some organizations also use monthly periods.

Accounts Payable

Unpaid amounts due to vendors or suppliers for their goods or services that you have received and been invoiced for.

Accounts Receivable Turnover

The number of times per year that your business collects its average accounts receivable.

Adjusted Basis

How much you lose or gain when you sell a property, factoring in depreciation or money invested in the property before you sold it.

Adjustments To Income

Deductions you can take for income you earned that can’t be taxed. These reduce the amount of income you can be taxed on and are subtracted from income before your gross income is calculated and before below-the-line deductions are also subtracted.

Alternative Minimum Tax (AMT)

A method to calculate a taxpayer’s bill, which is applied to people whose income is over a certain level. The AMT is applied to close loopholes that allow the taxpayer to reduce or eliminate their tax obligations.

Amortization

The process of paying off a debt with regular payments over time. The payments cover the principal and the interest, and the interest charges get smaller over the payment schedule.

Annual Percentage Yield (APY)

The rate earned on an investment in a year, factoring in the effects of compounding interest.

Asset Case

A type of bankruptcy in which the person has some assets and cash to pay creditors, rather than wiping all debts clean and paying nothing.

Audit

The process of examining an aspect of an individual or company. It is often thought of in relation to a tax audit, in which a government representative ensures a taxpayer has met their tax obligations.

B

Balance Sheet

How a business records its financial information, including assets, liabilities and owner’s equity.

Bankruptcy

A legal process that can absolve people or corporations of some of their debts.

Bookkeeping vs Accounting

Bookkeeping and accounting are two closely related terms that are often used interchangeably. However, there is a difference between the two.

Bookkeeping is the process of recording financial transactions. It involves tracking the inflow and outflow of money, as well as the assets and liabilities of a business. Bookkeeping is the foundation of accounting, and it provides the data that accountants use to prepare financial statements.

Accounting is the process of summarizing, analyzing, and interpreting financial data. It involves preparing financial statements, such as the balance sheet, income statement, and statement of cash flows. Accounting also includes tasks such as budgeting, tax preparation, and financial analysis.

In short, bookkeeping is the process of recording financial transactions, while accounting is the process of summarizing, analyzing, and interpreting financial data.

Here is a table that summarizes the difference between bookkeeping and accounting:

Term	Definition
Bookkeeping	The process of recording financial transactions.
Accounting	The process of summarizing, analyzing, and interpreting financial data.
Tasks	Recording financial transactions, tracking assets and liabilities, preparing financial statements.
Skills	Data entry, organization, attention to detail.
Tools	Ledgers, journals, accounting software.

Both bookkeeping and accounting are important for businesses of all sizes. Bookkeeping is essential for tracking financial transactions and ensuring that the business’s financial records are accurate. Accounting provides insights into the business’s financial performance and helps to make informed decisions about the future.

If you are a business owner, it is important to have a good understanding of both bookkeeping and accounting. You can hire a bookkeeper or accountant to handle these tasks for you, or you can learn to do them yourself.

Here are some of the benefits of having accurate bookkeeping and accounting practices:

Compliance with tax laws. Accurate bookkeeping and accounting practices can help you to comply with tax laws.
Financial insights. Accurate bookkeeping and accounting practices can provide you with insights into your business’s financial performance.
Decision-making. Accurate bookkeeping and accounting practices can help you to make informed decisions about the future of your business.
Attracting investors. Accurate bookkeeping and accounting practices can make your business more attractive to investors.

If you are considering starting a business, or if you already have a business, it is important to understand the difference between bookkeeping and accounting. Both are important for the success of your business, and having accurate bookkeeping and accounting practices can help you to achieve your business goals.

Business Accounting

Business accounting is the process of tracking, recording, and analyzing financial transactions for a business. It is a critical function for businesses of all sizes, as it provides insights into the company’s financial performance and helps to make informed decisions about the future.

Business accounting typically involves the following tasks:

Recording financial transactions: This involves tracking the inflow and outflow of money, as well as the assets and liabilities of the business.
Preparing financial statements: Financial statements are a summary of a company’s financial performance. They typically include the balance sheet, income statement, and statement of cash flows.
Budgeting: Budgeting is the process of forecasting future financial needs. It helps businesses to track their spending and make sure that they are on track to meet their financial goals.
Tax preparation: Businesses are required to file taxes with the government. Business accounting can help to ensure that taxes are filed accurately and on time.
Financial analysis: Financial analysis is the process of using financial data to make informed decisions about the business. It can help businesses to identify areas where they can improve their financial performance.

Business accounting can be done manually or with the help of accounting software. Manual accounting is more time-consuming, but it can be more accurate. Accounting software can automate many of the tasks involved in business accounting, making it easier and faster to track financial transactions and prepare financial statements.

The benefits of business accounting include:

Compliance with tax laws: Accurate business accounting can help businesses to comply with tax laws.
Financial insights: Business accounting can provide businesses with insights into their financial performance. This information can be used to make informed decisions about the future of the business.
Decision-making: Business accounting can help businesses to make informed decisions about the future of the business. For example, businesses can use financial data to identify areas where they can improve their financial performance.
Attracting investors: Accurate business accounting can make businesses more attractive to investors. Investors want to see that businesses are financially sound before they invest their money.

If you are a business owner, it is important to have a good understanding of business accounting. You can hire an accountant to handle these tasks for you, or you can learn to do them yourself.

Bank Reconciliation

There can be times when your financial records might not be the same as your bank’s. Bank reconciliation involves comparing these records and identifying any differences between the two. This is important for keeping track of your business’s money.

There are a few reasons the balance on your records may not be the same as the bank’s:

When someone hasn’t yet cashed a cheque you’ve sent: The money owed from that cheque is still in your bank account – but it’s no longer yours to spend.
Changes to bank accounts at the end of a month: This can happen when you withdraw or deposit money just before the bank sends a statement. Those changes to the account might not show until the following month’s statement
The bank deducts loan payments: The bank can deduct money for loans before you enter that information into your systems.
Deposits in transit: Deposits you’ve made and recorded in your books that haven’t yet processed through the bank.

Bank reconciliation helps you identify these cases so you know exactly how much money is available to your business. It’s also needed to identify any cases of human error, bank charges and possible fraud.

Basis of Accounting

Your basis of accounting decides when you formally count a sale as income – or a purchase as an expense.

Some businesses count income or expenses as soon as a purchase is made (accrual accounting), while others wait until cash has actually changed hands (cash accounting).

A lot of time can pass between these two events, which makes your basis of accounting really important. This means your basis of accounting can also affect your tax filing.

Break Even Point

The break-even point refers to the amount of revenue necessary to cover the total fixed and variable expenses incurred by a company within a specified time period. This revenue could be stated in monetary terms, as the number of units sold or as hours of services provided.

The break-even point also can be considered as the point in time when revenue forecasts are exactly equal to the estimated total costs. This is where a company’s losses end and its profits start to accumulate. At this point, a project, product or business is financially viable.

C

Capital

The financial resources owned by a company, including its stocks, bonds, and physical assets.

Capital Loss

Losses incurred when certain assets are sold for less than their purchase price.

Cash Flow Statement

A cash flow statement is a financial report that shows where your money is coming from and where it’s going. It’s also known as a ‘statement of cash flows’ or a ‘CFS’.

At first glance, a cash flow statement looks similar to an income statement. But cash is different to income – cash only includes spendable money. Income includes fixed term assets, long term assets and sales made on credit.

Cash flow statements show whether you’re able to cover short term expenses like bills and employee wages. It is also useful for investors, as it shows how well your business can bring in money.

Chart Of Accounts

Accountants record financial transactions in a bookkeeping system known as a general ledger. A chart of accounts (COA) is a master list of all accounts in an organization’s general ledger. Five main types of accounts appear in a COA: assets, equity, expenses, liabilities, and revenues.

Current Year Tax

The amount of tax payable in the current tax year.

Capital Gains

Profits made when certain assets, such as real estate and investments, are sold.

Cash Accounting

Cash basis accounting records revenues and expenses when the money involved in each transaction officially changes hands. It contrasts with accrual basis accounting. Accrual accounting recognizes revenues and expenses when they occur without regard to whether the associated funds have been exchanged.

Cash Method

A method of accounting in which income is not counted until the payment is received and expenses are not counted until they are paid.

Cost Of Goods Sold (COGS)

The amount a company spends on making or acquiring goods to be sold. This includes the cost of materials, work, and purchasing goods.

D

Debt Consolidation

The process of combining two or more debts into one debt from a single lender.

Deduction

A deduction is an expense that you can subtract from your income to lower your taxable income. There are two main types of deductions:

Itemized deductions: These are expenses that you can itemize on your tax return. They include things like medical expenses, mortgage interest, and charitable contributions.
Standard deduction: This is a set amount that you can subtract from your income, regardless of your actual expenses. The standard deduction is different for single filers, married couples filing jointly, and heads of households.

In general, you can only deduct expenses that are “ordinary and necessary” for your business or profession. This means that the expenses must be related to your work and they must be reasonable in amount.

There are a number of different deductions that you may be able to claim, depending on your individual circumstances. Some common deductions include:

Business expenses: These include things like rent, utilities, office supplies, and travel expenses.
Medical expenses: These include things like doctor’s visits, prescription drugs, and medical insurance premiums.
Mortgage interest: This includes the interest you pay on your mortgage.
Charitable contributions: These include donations that you make to qualified charities.

If you itemize your deductions, you will need to keep track of all of your expenses throughout the year. You can use a tax preparation software program to help you track your expenses and prepare your tax return.

The standard deduction is a good option for people who do not have a lot of deductions. However, if you have a lot of deductions, you may be able to save money by itemizing your deductions.

Depreciation

The decrease in the value or price of an asset, when the market value of the asset is lower than what the investor paid for it. This can be due to the market changing or wear and tear on the asset.

Dividend

A distribution of a company’s earnings to its shareholders as determined by the board of directors.

Due Diligence

A systematic way to review and reduce risk from a business or investment decision. Usually, it includes an examination of financial records before entering into a transaction with another party, such as purchasing a business.

Debt to Income Ratio

How much of a person’s monthly income is taken up by their debt, including their monthly bills, minimum credit card payments, car payments, rent or mortgage, and other debts.

Dependent

An individual who is financially supported by another person and for the purposes of taxes, someone who can be claimed on a tax return for an exemption or credit.

Direct Tax

A tax paid by the person who owns the property or income being taxed, rather than on goods or services (which are an indirect tax).

Dividend Imputation

The process of eliminating double taxation on payments from companies to their shareholders.

E

EBITDA

Earnings before interest, taxes, depreciation, and amortization. A measure of a company’s profitability, taking the net earnings before a variety of expenses are deducted.

E-File

A system that enables income tax returns to be filed over the internet.

Employee Savings Plan

A pooled investment account into which workers deposit some of their pre-tax earnings and employers can also contribute an amount, typically an amount that matches the employee’s contributions up to a certain figure.

Estate

A person’s net worth based on the assets they own minus the amount they owe, particularly at the time of their death.

Estimated Tax Payments

These are made quarterly to tax authorities by people whose income is estimated from the previous year. Self-employed people may use these quarterly payments because they do not have employers withholding and submitting tax payments on their behalf.

Exclusion Tax

In tax law, an exclusion is a type of deduction that allows you to exclude certain types of income from your taxable income. This means that you do not have to pay taxes on that income.

There are many different types of exclusions, including:

Gifts and inheritances: You do not have to pay taxes on gifts or inheritances that you receive.
Scholarships: You do not have to pay taxes on scholarships that you receive for educational expenses.
Qualified retirement plans: You do not have to pay taxes on money that you contribute to qualified retirement plans, such as 401(k)s and IRAs.
Medical expenses: You may be able to exclude medical expenses that you pay that exceed a certain amount.
Foreign earned income: You may be able to exclude foreign earned income if you meet certain requirements.

The amount of income that you can exclude from your taxable income depends on the type of exclusion. You can find more information about exclusions in the Internal Revenue Code (IRC).

E-Commerce

Any transaction that is conducted over the internet.

Emergency Fund

Money that’s set aside for unplanned and typically urgent or important expenses.

Equity

The value of an asset after any of the asset’s liabilities have been deducted.

Estate Tax

A tax assessed when a deceased person’s estate is distributed to the beneficiaries.

Excise Tax

Tax that applies only to specific goods, services, or activities. For example, alcohol may have an excise tax.

F

Fair Market Value

Fair market value (FMV) is the price that an asset would sell for in an open market, assuming that both buyer and seller are reasonably knowledgeable about the asset, are behaving in their own best interests, are free of undue pressure, and are given a reasonable time period for completing the transaction.

Fiscal Year

A fiscal year (FY) is a 12-month period used for accounting purposes. It is different from a calendar year, which is the 12-month period from January 1 to December 31.

There are two main types of fiscal years:

Natural fiscal year: A natural fiscal year is a 12-month period that coincides with the calendar year.
Fiscal year-end: A fiscal year-end is the last day of the fiscal year.

Flat Tax

A system in which all people pay the same tax rate regardless of their income.

Financial Statement

A financial statement is a formal record of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand. They typically include four basic financial statements accompanied by a management discussion and analysis:

Balance sheet or statement of financial position, reports on a company’s assets, liabilities, and owners equity at a given point in time.

Income statement—or profit and loss report (P&L report), or statement of comprehensive income, or statement of revenue & expense—reports on a company’s income, expenses, and profits over a stated period.
Cash flow statement—or statement of cash flows—reports on the changes to the cash coming in and out of a business over a period of time.
Statement of changes in equity or statement of equity, or statement of retained earnings, reports on the changes in equity of the company over a stated period.

Fixed Assets

A fixed asset is a long-term tangible asset that a company owns and uses in its operations. It is expected to be used for more than one year and provides long-term financial benefits. Fixed assets are typically recorded on the balance sheet as property, plant, and equipment (PP&E).

Some examples of fixed assets include:

Land
Buildings
Machinery
Equipment
Vehicles
Furniture
Computer equipment
Intellectual property

Fixed assets are subject to depreciation, which is an accounting method that allocates the cost of an asset over its useful life. Depreciation is a non-cash expense, which means that it does not reduce the company’s cash balance. However, it does reduce the company’s net income.

The useful life of a fixed asset is the estimated period of time that the asset will be used by the company. The useful life of an asset is determined by a number of factors, including the asset’s expected wear and tear, technological obsolescence, and the company’s intended use of the asset.

Fractional Ownership

Where a group of people all own a portion of an asset, giving each owner the right to access and use the asset based on the size of their share. Each owner also has the right to share their fractional ownership to someone else.

G

Government Bond

A form of security sold by the government that earns a fixed amount of interest every year for the life of the bond. They are considered secure and can mature anywhere from one month to 30 years from the date of purchase.

Gross Profit

Gross profit (or gross income) defines the value of the products and services sold by a business before factoring in the cost of goods sold. If the gross profit is a negative number, it is instead called a gross loss. It contrasts with “net profit,” which describes the actual profit earned after accounting for those costs.Gross margin is a related term: It specifies the value of the organization’s net sales, minus the cost of goods sold. Net sales are calculated by correcting gross sales for adjustments such as discounts and allowances.

Gross Profit Vs Net Profit

Gross profit and net profit are two important financial metrics that companies use to measure their profitability. They are both calculated on the income statement, but they measure different things.

Gross profit is the amount of money that a company makes after subtracting the cost of goods sold (COGS) from revenue. It is a measure of how much profit a company makes from its core business operations.

Net profit is the amount of money that a company makes after subtracting all expenses from revenue. It is a measure of the company’s overall profitability, including all of its operating and non-operating expenses.

Here is the formula for calculating gross profit:

Gross profit = revenue - COGS

Here is the formula for calculating net profit:

Net profit = revenue - COGS - expenses

Examples

Let’s say a company has revenue of $100,000 and COGS of $50,000. Its gross profit would be $50,000. If the company’s expenses were $25,000, its net profit would be $25,000.

Interpreting the results

A high gross profit margin indicates that a company is efficient in its production and sales operations. A high net profit margin indicates that a company is efficient in its overall operations and is able to control its expenses.

Importance

Gross profit and net profit are both important financial metrics that companies use to measure their profitability. Gross profit is a key measure of how well a company is able to control its costs, while net profit is a key measure of the company’s overall profitability.

Gross Income

The total earnings a person receives before they account for taxes and other deductions. This is compared with net income, which accounts for taxes and deductions. A person’s gross income will be larger than your net because the taxes and deductions have not yet been taken out.

Gross Profit Margin

Gross profit margin is a measure of profitability that shows how much profit a company makes on its sales after paying for the cost of goods sold (COGS). It is calculated by dividing the gross profit by the total sales and expressed as a percentage.

Gross profit margin formula

Gross profit margin = (gross profit / total sales) * 100%

Where:

Gross profit = The difference between the total sales and the COGS.
Total sales = The total amount of revenue generated by the company.

H

Health Savings Account (HSA)

A medical savings account in which people can set aside money to pay for their healthcare expenses on a pre-tax basis. They are designed to help people reach their deductible, especially in cases where the deductible on an insurance plan is high.

Housing Expense Ratio

A person’s income before taxes when compared with their housing expenses to see if the person can afford the home. Most lenders won’t approve a loan if the number is higher than 28 percent, unless the individual has an outstanding credit rating or a co-borrower.

Household Income

Household income is the total income received by all members of a household in a given year. It is a measure of the financial resources available to a household to meet its needs and expenses. Household income can be used to compare the financial well-being of different households, and to track changes in the financial well-being of households over time.

There are a few different ways to define household income. The most common definition is to include all income received by all members of the household, regardless of source. This would include income from wages, salaries, self-employment, investments, government transfers, and other sources.

Another way to define household income is to only include income from wages and salaries. This definition is often used for research purposes, as it is a more consistent measure of income across different households.

The definition of household income can also vary depending on the source of data. For example, the Census Bureau defines household income as the total income received by all members of a household, regardless of source. However, the Internal Revenue Service (IRS) defines household income as the adjusted gross income (AGI) of the taxpayer, plus the AGI of any dependents who are required to file a tax return.

No matter how it is defined, household income is an important measure of the financial well-being of a household. It can be used to compare the financial well-being of different households, and to track changes in the financial well-being of households over time.

Here are some of the factors that can affect household income:

The number of people in the household
The ages of the people in the household
The employment status of the people in the household
The educational attainment of the people in the household
The location of the household
The household’s assets and liabilities

Household income is an important factor in determining a household’s ability to meet its financial needs. It can also be used to determine a household’s eligibility for government programs and benefits.

I

Income Tax

Taxes that are charged against a person or company’s earnings, including their wages, salaries, dividends, and royalties.

Inventory

As used in accounting, inventory describes assets that a company intends to liquidate through sales operations. It includes assets being held for sale, those in the process of being made, and the materials used to make them.

Invoice

An invoice is a document that lists the goods or services that have been provided to a customer, along with the price and payment terms. It is a formal record of a transaction between a buyer and seller. Invoices are typically used in business transactions, but they can also be used in other contexts, such as when a contractor provides services to a homeowner.

Here are some of the key elements of an invoice:

Invoice number: A unique identifier for the invoice.
Date: The date the invoice was issued.
Customer information: The name, address, and contact information of the customer.
Vendor information: The name, address, and contact information of the vendor.
Description of goods or services: A detailed description of the goods or services that have been provided.
Quantity: The quantity of goods or services that have been provided.
Unit price: The price per unit of goods or services.
Total amount: The total amount due for the goods or services.
Payment terms: The terms of payment, such as the due date and method of payment.
Invoices can be printed on paper or created electronically. Electronic invoices are often sent via email or through a secure online portal.

Invoices are an important part of the accounting process. They help to track sales and expenses, and they can be used to generate reports and financial statements. Invoices are also a legal document, and they can be used as evidence in case of a dispute.

Here are some of the benefits of using invoices:

They provide a formal record of a transaction.
They help to track sales and expenses.
They can be used to generate reports and financial statements.
They can be used as evidence in case of a dispute.
Here are some of the best practices for creating invoices:

Make sure the invoice is accurate and complete.
Use clear and concise language.
Use a consistent format.
Include all the necessary information, such as the invoice number, date, customer information, vendor information, description of goods or services, quantity, unit price, total amount, and payment terms.
Proofread the invoice carefully before sending it.
By following these best practices, you can ensure that your invoices are accurate, complete, and easy to understand. This will help to ensure that your customers pay their invoices on time, and it will also help to protect your business in case of a dispute.

Indirect Tax

A tax that is imposed on a transaction, such as a sales tax or excise tax, as opposed to a direct tax.

Investment Income

Money that someone earns when the value of their investments–such as stocks or property– increases.

J

Journal Entry

The method used to record individual financial transactions made by a company into its journal.

K

Key Performance Indicator (KPI)

A core metric used by a business to monitor its progress towards achieving key objectives and financial goals. Common financial KPIs include gross margin, net profit and debt to equity.

L

Ledger

An accounting ledger is a record of all financial transactions that a business makes. It is a central repository of information that is used to prepare financial statements, such as the balance sheet and income statement.

The ledger is organized by account, with each account representing a different type of asset, liability, equity, revenue, or expense. For example, there might be accounts for cash, accounts receivable, inventory, accounts payable, accrued expenses, debt, stockholders’ equity, revenue, cost of goods sold, salaries and wages, office expenses, depreciation, and income tax expense.

Each account in the ledger has a unique identifier, such as an account number or a name. The ledger also shows the balance of each account, which is the net amount of all the transactions that have been posted to the account.

The ledger is updated on a regular basis, usually daily or weekly. When a transaction occurs, it is recorded in the journal, which is a chronological record of all financial transactions. The journal entries are then posted to the ledger, which is where the transactions are summarized and organized by account.

The ledger is an important part of the accounting process. It provides a detailed record of all financial transactions, which is essential for preparing financial statements and tracking the financial health of a business.

Here are some of the benefits of using an accounting ledger:

It provides a detailed record of all financial transactions.
It helps to track the financial health of a business.
It is essential for preparing financial statements.
It can be used to generate reports and analysis.
It can be used to audit financial records.

Here are some of the best practices for maintaining an accounting ledger:

Make sure that all transactions are recorded accurately and in a timely manner.
Use a consistent format for recording transactions.
Use a reliable system for storing and backing up the ledger.
Review the ledger regularly to ensure that it is accurate and up-to-date.

By following these best practices, you can ensure that your accounting ledger is accurate, complete, and easy to understand. This will help to ensure that your financial records are accurate and that your business is compliant with accounting regulations.

Leverage

When a company takes on debt in order to invest in more assets with the hope of gaining a better reward. For example, borrowing money means your company can now acquire an asset that was previously out of reach, and interest only has to be paid on the borrowed amount. Your new asset should make your company more money than you otherwise would. Also known as financial leverage.

Line of Credit

An open-ended loan that a borrower can access on demand. The lender decides on the total amount of credit available based on the borrower’s creditworthiness. The borrower can access funds at any time, up to the maximum set under the terms.

Liquidity

Liquidity is a measure of how easily an asset can be converted into cash. Liquid assets are those that can be easily converted into cash without losing value. For example, cash, money market funds, and short-term government bonds are all considered to be liquid assets.

There are two main types of liquidity:

Market liquidity: This refers to the ability to sell an asset quickly at a fair price.
Funding liquidity: This refers to the ability to obtain cash quickly to meet financial obligations.

Liquidity is important for businesses because it allows them to meet their financial obligations as they come due. It is also important for investors because it allows them to sell their investments quickly if they need to raise cash.

Load

A commission (fee) paid to a sales broker by an investor.

Ledger Balance

An account balance at the beginning of each day. It includes all deposits and transactions posted from the previous night. Also known as the current balance.

Liability

Anything that a person or business owes money on. May include debts, payroll expenses, deferred revenues, accrued expenses, programs promised to employees, insurance to protect assets, invoices for goods and services, and the obligation to pay taxes, loans, and mortgage payments, etc.

Liquid Assets

Anything that you or your company owns that can be instantly converted into cash without losing its value. Liquid assets or liquid cash is important to remain financially solvent.

Living Trust

A living trust, also known as a revocable trust, is a legal arrangement that allows you to manage and distribute your assets during your lifetime and after your death. It is a popular estate planning tool because it can help you avoid the probate process, which can be time-consuming and expensive.

A living trust is created by a trustor, who is the person who establishes the trust. The trustor names a trustee, who is the person who will manage the trust assets. The trustor also names beneficiaries, who are the people who will receive the trust assets after the trustor’s death.

The trustor can change the trust at any time during their lifetime. They can add or remove assets, change the beneficiaries, or revoke the trust altogether.

When the trustor dies, the trustee takes over and manages the trust assets according to the trust’s terms. The trust assets are then distributed to the beneficiaries.

There are several benefits to using a living trust, including:

Avoiding probate: The probate process is a court-supervised process that is used to distribute the assets of a person who has died. It can be time-consuming and expensive. A living trust can help you avoid the probate process by transferring your assets to the trust while you are still alive.
More control: With a living trust, you have more control over how your assets are managed and distributed after your death. You can choose the trustee, the beneficiaries, and the terms of the trust.
Privacy: The terms of a living trust are not public record. This means that your assets will be distributed to your beneficiaries according to your wishes, without the public having access to the details of your estate.

M

Margin

A broad term with multiple meanings depending on the context.

Business: the profit received after costs, expressed as a percentage.
Investing: the deposit an investor places with a broker when borrowing money to buy a security.
Lending: the difference between the amount borrowed and the value of the collateral that secured the loan.

Mortgage

A loan to borrow a home. A mortgage is secured on the home itself, so if it isn’t paid, the bank or financial institution that issued the mortgage can sell the home to recoup its losses.

Margin vs Markup

Margin and markup are two terms that are often used interchangeably, but they actually have different meanings. Margin refers to the amount of profit that a company makes on a sale, while markup refers to the amount by which the price of a product is increased.

Margin is calculated by subtracting the cost of goods sold (COGS) from the selling price. It is expressed as a percentage of the selling price. For example, if a product costs $5 to produce and sells for $10, the margin is $5/$10 = 50%.

Markup is calculated by subtracting the cost of goods sold from the selling price and then dividing by the cost of goods sold. It is expressed as a percentage of the cost of goods sold. For example, if a product costs $5 to produce and sells for $10, the markup is ($10 – $5)/$5 = 100%.

In other words, margin is a measure of how much profit a company makes on a sale, while markup is a measure of how much the price of a product is increased.

Here is a table that summarizes the difference between margin and markup:

Term	Definition	Formula	Example
Margin	The amount of profit that a company makes on a sale	Selling price – COGS	$5/$10 = 50%
Markup	The amount by which the price of a product is increased	Selling price – COGS / COGS	($10 – $5)/$5 = 100%

Mutual Fund

An investment that allows individuals to contribute money along with other investors. The funds are put towards a collection of securities such as stocks, bonds, and money market funds. This approach allows investors to diversify their portfolios at a low cost.

N

Negative Equity

A term used when the mortgage amount is higher than the current market value of the home.

Net Profit

Net profit describes the amount of money left over after subtracting the cost of taxes and goods sold from the total value of all products or services sold during a given accounting period. It is also known as net income. If the net profit is a negative number, it is called net loss. The related term “net margin” refers to describing net profit as a ratio of a company’s total revenues. Net profit contrasts with gross profit. Gross profit simply describes the total value of sales in a given accounting period without adjusting for their costs.

Non-Liquid Asset

An asset that can not quickly or easily be converted into cash, such as a home, which might take several months to find a buyer for it and several more weeks before you receive the money from the transaction.

Net Income

The amount an individual or business makes after deducting costs, allowances and taxes.

Net Worth

A measure of wealth calculated by the sum of all assets owned by a person or a company, minus any obligations or liabilities.

Note

A legal debt instrument where one party makes a promise in writing to pay a certain amount of money to another party under certain terms. The most common example of a note would be a loan. Included terms are typically the amount owed, maturity date, interest rate, date and place of issuance, as well as the signature of the issuer.

O

Operating Margin

How much revenue a company retains after covering costs like payroll, taxes and materials.

Options

A contract in which an investor has the right, but not the obligation, to buy or sell a tradable asset at a specified price at a given time in the future. Similar to futures contracts, except that they are “optional,” hence the name.

Operating Profit

Operating profit is a measure of a company’s profitability that excludes interest and taxes. It is calculated by subtracting the cost of goods sold (COGS), operating expenses, and depreciation and amortization from revenue.

Operating profit is a key measure of a company’s operational efficiency. It shows how well a company is able to control its costs and generate profits from its core business activities.

Operating profit is also a useful measure for comparing the profitability of different companies. This is because it excludes the impact of interest and taxes, which can vary depending on a company’s financial structure and tax jurisdiction.

Here is the formula for calculating operating profit:

Operating profit = Revenue - COGS - operating expenses - depreciation and amortization

Revenue: The total amount of money that a company generates from its sales.
COGS: The cost of the goods or services that a company sells.
Operating expenses: The expenses that a company incurs in the course of its normal operations, such as salaries, rent, and utilities.
Depreciation and amortization: The expenses that a company incurs to account for the wear and tear of its assets.

Operating profit is a valuable metric for investors and creditors. It can be used to assess a company’s financial health and its ability to generate profits. Operating profit can also be used to compare the profitability of different companies.

Here are some of the factors that can affect operating profit:

The cost of goods sold: The cost of goods sold is a major component of operating expenses. A company with a high cost of goods sold will have a lower operating profit margin.
Operating expenses: Operating expenses can vary depending on the type of business and the size of the company. A company with high operating expenses will have a lower operating profit margin.
Depreciation and amortization: Depreciation and amortization are non-cash expenses, which means that they do not have a direct impact on a company’s cash flow. However, they can affect operating profit margin.

Overall, operating profit is a valuable metric for investors and creditors. It can be used to assess a company’s financial health and its ability to generate profits. Operating profit can also be used to compare the profitability of different companies.

P

Payroll Records

Payroll records are documents that contain information about an employee’s compensation, including how that pay was calculated. They are typically kept by employers and can be used to track an employee’s earnings, deductions, and tax information.

Payroll records typically include the following information:

Employee name and contact information
Employee’s job title and department
Employee’s pay rate and hours worked
Employee’s deductions, such as taxes, insurance, and retirement contributions
Employee’s net pay
Tax information, such as the employee’s Social Security number and W-4 form

Payroll records are important for a number of reasons. They can be used to track an employee’s earnings and deductions, which can be helpful for tax purposes. They can also be used to verify an employee’s employment history and salary information.

In addition, payroll records can be used to comply with labor laws. For example, the Fair Labor Standards Act (FLSA) requires employers to keep accurate records of employee hours worked.

Private Equity

A situation where investors pool money to acquire stakes in a company. Most often used to buy part or all of older companies that may be making money but need help to achieve their full potential.

Property Tax

Taxes paid by homeowners to help cover costs for services in a community, such as public schools, emergency services, the police department and road maintenance.

Periodic Rate

The interest rate charged over a certain number of time periods, equaling the annual interest rate divided by the number of periods.

Profit And Loss Statement

A record of revenue and expenses incurred by a business in a given period of time. Its purpose is to show management and investors how a company performed in a given period. Also known as a P&L, an income statement, a statement of profit and loss, an income and expense statement, or a statement of financial results.

Purchase Agreement

A document outlining the purchase price and other conditions associated with the transfer of title, typically in real estate transactions.

Q

Quantitative Easing

The introduction of new money into the money supply by a central bank. The central bank purchases longer-term securities from the open market to do this.

Quick Ratio

The ability of a company to pay all of its outstanding liabilities with only assets that can be quickly converted to cash.

R

Rebate

A partial refund or discount, often used to entice purchasers to buy. However, the government may also pay you a tax rebate when you have paid too much tax.

Refinance

Changing the terms of mortgage, often by replacing your current loan with a new one. The new arrangement will likely have different terms, such as a lower interest rate or a shorter term. Mortgage refinancing is typically done to lower your monthly payment and save money.

Return on Equity (ROE)

Return on equity (ROE) is a measure of how well a company is using its shareholders’ equity to generate profits. It is calculated by dividing the net income by the shareholders’ equity.

ROE formula

ROE = (net income / shareholders’ equity) * 100%

Where:

Net income = The total profit earned by the company after taxes.
Shareholders’ equity = The amount of money that shareholders have invested in the company.

Revenue

The income that a business receives regularly, typically due to the sale of goods or services.

Roth IRA

A Roth IRA allows you to invest cash after-tax, so you’ll pay taxes on any contributions before they go into the account. You’ll be able to grow your investments tax free, and when you withdraw your money in retirement you won’t have to pay taxes on the withdrawals.

Recession

A period of economic decline lasting more than a few months and affects every sector. Typically, industrial production and business activity are low and many people are unemployed.

Return On Assets (ROA)

A measure of how much profit a business is generating from its capital. This calculation is used to measure the growth in profits generated by the assets owned by the company.

Return On Investment (ROI)

The profit from a particular activity or period compared with the amount invested in it.

Risk

The possibility that a return on investment will be lower than what the investor is expecting.

S

S Corporation

An S corporation lets shareholders file their taxes using the company’s income and losses as their own. This is done so the business pays less tax than other types of corporations. The S corporation has to file with the IRS, but not every business qualifies for this structure and those that do must adhere to certain rules.

Schedules

Documents required by the IRS to record financial information. Schedules report your income, deductions and business-related details.

Self Employment Tax

In addition to income tax, people who work for themselves are required to pay Social Security and Medicare taxes which makes up the self-employment tax.

Sole Proprietorship

A sole proprietorship is a business owned and operated by one person. The owner is personally liable for all debts and obligations of the business. This means that the owner’s personal assets can be taken to satisfy the debts of the business.

Sole proprietorships are the simplest and most common form of business ownership. They are easy to set up and there are no ongoing filing requirements. However, sole proprietorships have some disadvantages, including:

The owner is personally liable for all debts and obligations of the business.
The owner cannot raise capital from investors.
The owner’s personal assets can be taken to satisfy the debts of the business.

If you are considering starting a sole proprietorship, you should carefully consider the risks and benefits involved. You should also talk to an accountant or lawyer to make sure that you understand the tax implications of this form of business ownership.

Here are some of the advantages of a sole proprietorship:

Easy to set up and maintain. There are no formal requirements to set up a sole proprietorship, and you do not need to file any paperwork with the government.
Low taxes. Sole proprietors report their business income on their personal tax return, which can simplify the tax process.
Complete control. As the sole proprietor, you have complete control over the business, including making all decisions and taking all profits.

Here are some of the disadvantages of a sole proprietorship:

Personal liability. The owner of a sole proprietorship is personally liable for all debts and obligations of the business. This means that if the business fails, the owner’s personal assets can be taken to satisfy the debts.
Limited access to capital. Sole proprietors may have difficulty raising capital from investors, as they do not have the same legal protections as corporations or limited liability companies.
Limited growth potential. Sole proprietorships are limited in their growth potential, as they are typically limited to the resources of the owner.

Overall, sole proprietorships are a simple and low-cost way to start a business. However, they also have some disadvantages, such as personal liability and limited growth potential. If you are considering starting a sole proprietorship, you should carefully consider the risks and benefits involved.

Safe Harbor

Safe harbor provisions protect an entity from liability as long as it acted in good faith.

Self-Directed IRA

Similar to a typical IRA in almost every way, the main difference is what you can invest in. SDIRA allows you to invest in a wide variety of alternative assets that most financial institutions may not typically handle.

Signature Loan

Also known as a “good faith loan” or “character loan” is a personal loan offered by banks and other financial companies that only requires the borrower’s signature and a promise to pay as collateral. Interest rates on signature loans are generally higher than other types of credit.

Stockbroker

A licensed professional with the authority to buy and sell stocks for investors. They usually receive a percentage of the trade’s value as their fee.

T

Tax Bracket

The range of incomes that are subject to a certain income tax rate. The result is a progressive tax system where the amount of tax grows as a person’s income grows.

Tax Deduction

An item you can subtract from your taxable income to reduce the amount of taxes you owe. Be sure to keep receipts to verify your expenses.

Traditional IRA

A traditional IRA allows you to invest cash pre-tax, meaning that you may be able to avoid paying taxes on any contributions. When you withdraw your money at retirement, you’ll pay tax on the withdrawals at ordinary income rates.

Tax Credit

The amount of money a taxpayer can subtract from their tax bill. Often governments offer tax credits to encourage certain behaviours, such as buying a first home or paying for child care.

Tax Deferral

When a taxpayer delays paying their taxes to some point in the future.

Trial Balance

A trial balance is a report of the balances of all general ledger accounts at a point in time. Accountants prepare or generate trial balances at the conclusion of a reporting period to ensure all accounts and balances add up properly. In professional practice, trial balances function like test-runs for an official balance sheet.

U

Unearned Income

Personal income that isn’t related to employment, such as taxable interest and unemployment benefits.

Use Tax

A tax on a purchase made outside a jurisdiction, then brought into a new jurisdiction for consumption or resale.

Unsecured Debit

Debt that is not secured by collateral that could be repossessed if the loan isn’t paid back. This includes credit card debt and student loans. Because there is nothing to be repossessed if the loan is defaulted, an unsecured debt is considered riskier.

V

Venture Capital

A form of private equity and type of financing that investors provide to startups and small businesses they believe to have long-term growth potential.

W

Working Capital

The total of the cash and the liquid investments a business has available to pay for its day-to-day operations. This usually means a company’s current assets minus its current liabilities.

X

Y

Year to Date (YTD)

The period of time beginning the first day of the current calendar year or fiscal year up to the current date.